Don’t be in cash for the wrong reason, be cognizant of all the risks you can, but avoid making investment decisions until they start to materialize…
Investors are
holding cash. Not only that…
- They are holding more than they were a few years ago
- This is a global phenomenon with the US being somewhere in the middle at roughly 36% of assets in cash (40% Global average)
- This is true, regardless of age and wealth
- Paradoxically, younger investors who have a longer time horizon are increasing their cash holdings as much as older investors
(Source: NYT)
Why the apprehension?
Fear makes the most sense. The
amount of things to worried about seems to be endless and evolving, off the top
of my head: high frequency trading, Iraq, Iran, Afghanistan, let’s just call it
the whole Middle East, Europe is on the brink (as always), Russia is being
mean, China’s real estate bubble never goes away, the Fed will tighten and the
market will drop, the Fed will stay easy and inflation will be a huge issue,
stock valuations are high, we just had a negative Q1 GDP print, Game of Thrones
is gone for a year, the Cavs will blow another top pick, etc.
But despite all that, the S&P 500 is up almost 40% since
the start of 2013 and positive this year.
Just my guess, but those who have been invested in cash have maybe
earned 1%? I would guess cash people at
the start would list those risks as why they are in cash. Now they would mention those reasons and a
rising equity market as to why they should stay there.
Admittedly this is easy in hindsight. Further, there are legit strategic investment
reasons to hold cash, many investors psychologically can’t handle the
volatility of the markets (and that’s okay), and/or who is to say that some of
those fears won’t materialize? What is
of concern is how those decisions are made, if reading headlines, watching the
News, looking daily at your portfolio values, or listening to a Gold
infomercial has you moving to cash there is a high probability this move(s) was
made for the wrong reason(s).
Naturally, this begs the question of what to do. I will tackle this working backwards, here is
a list of don’ts:
- Don’t take on more volatility than you can handle – too much risk means you will likely move to cash as soon as the market moves against you, but most of the time this will be noise
- Don’t be overly reactive – going to cash because XYZ just happened, again most of the time this will be noise
- Don’t be overly proactive – dismissing everything as noise, when sometimes there are signals that indicate a market shift
- Don’t Not Have a Plan (sorry for the 2x negative) – pretty much encompasses the prior three
My approach is simple – be cognizant of all the risks you
can, but avoid making investment decisions until they start to materialize and
always stay hedged against the unknown and those risks which occur
quickly.
Side Note: We are
working on a way to shrink the disclosures.
Hopefully in the future they won’t be as overwhelming.
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