What You Must Do in 2013 (Even if You Don't Want To)

The financial crisis four years ago wiped out trillions of dollars in wealth. Yet even though the stock market has recovered nearly all of its losses from its pre-crisis highs, the real damage has been done in the time since stocks started recovering from their 2009 lows.

As bad as the economic losses from the market meltdown were, the more lasting impact has come from the loss of confidence among investors in stocks. With some investors staying out of the stock market entirely and many more reducing their asset allocations to stocks, investors on the whole haven't taken full advantage of the massive recovery in the market over the past four years.

You can't afford to make that mistake. No matter how scary the market may seem, coming up with a plan to get into riskier assets like stocks in 2013 is essential if you want to reach your financial goals.

Locking in permanent losses
In the aggregate, the price tag of that loss of confidence is staggering. According to figures from Bloomberg, U.S. investors have left a whopping $200 billion on the table by retreating from stocks at exactly the worst moment. With the S&P 500 having gained 94% since its March 2009 lows, assets in funds that invest in equities have only seen an 85% gain. Moreover, despite the fact that stocks have risen so far in so short a time, overall allocations of retirement-oriented funds to stock investments actually declined by half a percentage point -- suggesting that investors were far more active than usual in rebalancing to lock in gains on the way up in order to protect the money they'd recouped from their past losses.

Meanwhile, investors are gravitating toward fixed-income investments. Despite the fact that bond funds have produced massive returns in recent years, nearly all of that performance has come from capital appreciation as bond rates have continued to fall. With 10-year Treasury bonds having been locked below the 2% mark for most of 2012, income will play only a tiny role in overall bond returns. Moreover, if rates start to rise, then capital losses will become a definite possibility for the future, which has prompted some investors to make bets against bonds using the ProShares UltraShort 20+ Year Treasury ETF (TBT 0.02%).

Bucking the performance-chasing trend
Interestingly, the refusal of investors to get back into the stock market flies in the face of past behavior. Usually, after several years of market gains, investors would be clamoring to get into stocks as they rise toward new highs. But even recently, fears about the fiscal cliff, Europe, and other global macroeconomic concerns have kept investors on the sidelines. Bloomberg cited figures showing that the bull market is the first in 20 years in which investors have cut back on stocks, and the percentage of households owning mutual funds has declined as well.

Part of the issue may be that pockets of the market are still seeing huge levels of volatility. For instance, in 2011, financial stocks Bank of America (BAC +0.00%), AIG (AIG 0.01%), and Citigroup (C +0.00%) all plunged on worries that their attempts to sell off non-core assets and retrench their core businesses would fail, exposing investors to further dilutive capital-raising methods and leaving existing shareholders without any future growth prospects. Investors like Fairholme Fund's Bruce Berkowitz were ridiculed for buying financials and suffering huge losses for fund shareholders.

Yet in 2012, after many had abandoned the fund and financial stocks more broadly, B of A, AIG, and Citi all rallied. Those gains, combined with a bounce-back in shares of Sears Holdings (SHLD +0.00%), helped vault Fairholme to the top of the performance charts this year. Those who sold at the lows again suffered those losses while missing out on the subsequent gains.

Don't wait any longer
Of course now, with stocks already having risen so much, you might be reluctant to get in at what could be the highs. Yet even if you don't commit all your spare cash to stocks right now, what you need to do is recognize the necessity of committing some of your current and future financial resources to risk assets of some sort. Whether you think stocks, real estate, or other productive assets are your best bet for financial success, get a strategy in place now that will help guide you toward putting more of your money where it can work harder for you.

2013 will be just as unpredictable as 2012 was. But to succeed in the long run, you must put together a strong investing strategy. Even if you don't want to, buying stocks will most likely be a key element of that strategy going forward.

Tune in every Monday and Wednesday for Dan's columns on retirement, investing, and personal finance. You can follow him on Twitter @DanCaplinger.