Ep. 159 – When is Cash Good?

Why would cash be able to beat other types of investments? When dealing with a volatile market like we’re currently experiencing, cash can become an important asset class.

Going to cash means selling investments and putting the money on temporary hold as you evaluate the markets. It’s basically a movement to a safety method as you evaluate the market, waiting to redeploy your money when the markets start looking good.

In this episode of the Secure Your Retirement podcast, we explain the benefits of going to cash and share examples of when it has worked out for our clients. Listen in to learn why you shouldn’t be worried about not earning anything when sitting in cash because the purpose of it is to not lose money.    

In this episode, find out:

  • The difference in the cash conversation between an active and a passive money manager.
  • The meaning of going to cash and why it’s a movement to safety strategy.
  • Cash is king when other assets are going down and cash remains neutral.
  • The power of cash in protecting you from losing money even though you’re not earning.
  • How we went into cash and then back into the money markets safely during the 2020 pandemic.
  • The dates on the recent market volatility and our decision to go fully in cash.
  • Our objective of buying when we see demand and selling when the demand goes away.

Tweetable Quotes:

  • “You’re either risk-on, and you’re fully invested in the market, or you’re risk-off, and you’re fully in cash.”– Murs Tariq
  • “If cash is neutral and it’s not going up or going down and if other assets are going down and cash is not, then cash is king.” – Radon Stancil


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To access the course, simply visit POMWealth.net/podcast.

Here’s the Full Transcript:

Radon Stancil:Welcome everyone to our Secure Your Retirement podcast, Murs and I are certainly happy to have you with us today as we talk about something that you may or may not really think about when it comes to investing, but it’s cash. You might think, “Wait a minute. I don’t want to be in cash. Cash doesn’t earn me anything, so why would a person ever go to cash?” Well, we’re going to talk about this a little bit today and give you some context of what that means, what it doesn’t mean, why we believe it is an important tactic to use and a little bit about how we use it from a few times throughout the year. First of all, I think there’s a big difference in this cash conversation between an active money manager and a passive or buy and hold money manager.  
 In a passive approach or a buy and hold approach, you would never hold cash. You are always invested. You might change your allocations, but your allocation, very likely, will not be to hold cash. Why? Because that would be a long term buying of something that does not produce any return, which is cash. Now, by the way, before I go much further, I’m going to go back over and turn it to you, Murs, just so we can have this conversation. When we used the word cash … Sometimes we’ve been in a meeting before, and we told somebody that we went to cash, and the person goes, “Wait a minute. You went to cash. How did you go to cash?” Almost the brain’s going did you get actual cash in your hand, like green dollar bills, or did you cash out the account? Could you give us a little bit of an overview of what that means before we go too much further down this road?  
Speaker 3:Yeah. That is a common question. We do this every day and so maybe we are so used to it that we just say we’re going to cash, right? What that actually means is we’re selling, in our case, we’re selling some ETFs, whatever we’re invested in. We’re selling them, and they are going to cash in basically a money market that is held within the construct of the brokerage account. IRA, Roth account, taxable account, whatever it is. All of those are going to have a cash element to it. Just like when you make your IRA contributions throughout the years, typically around tax time, you write that check for say $7,000 to go into your IRA to get that tax deduction. It goes into the cash portion of your brokerage account. Then it’s up to you to decide what do I go and buy.  
 Same deal. We’re selling in this case, and we’re putting the money into cash as a temporary hold for us to evaluate what is going on with the markets, but let’s be protected while we’re making this evaluation. Then it’s sitting there ready to be redeployed when we decide, “Hey, the markets are looking like they’re okay again. Our numbers are telling us that it is safe to reenter.” We will redeploy and go back into some securities. But it’s not the case of getting some money in your pocket or getting it even sent to your bank. It’s not anything like that that’s going to generate any type of … Well, could generate some tax deals, but in most cases, in IRAs and Roth’s, is not going to give you any issues like that. Is purely just a movement to safety.  
Radon Stancil:All right. We understand now when we use this terminology cash, it could be something that is not going to give us a lot of return, but it’s not going to be correlated to the stock market nor the bond market. It’s just going to sit there in neutral. Why is it that we would ever go to cash? Why would cash be able to beat other investments? Well, think about it. If cash is neutral, and it’s not going up, and it’s not going down, if other assets are going down and cash is not, then cash is king right? Cash is going to be the best place for us to be.  
 Now I’m going to help you to imagine a scenario and then Murs is going to take you through some specific dates. All right? Now imagine that you’re invested and the stock market that you’re invested in, or the bond market, either one, is going up. You’re making, let’s say 6, 7, 8, 10% in a year. Well, that’s great. You’re beating anything you could do at the bank and a CD or the money market or in cash. Now let’s suppose that the stock market starts to decline. You might think about something like a 2008. We use these numbers and just think about this for a second. If you have a $100,000 invested, and you lose 50%, how much money do you have? All right, you did the math. You got $50,000. Now, if the next year I make back 50%, have I broke even? No, I have not. That’s right. I’m only back at 75,000. Think about it. If I lose 50% of my money, I have to make 100% return to get back to a break even.  
 Pretend that in 2008, when the stock market did drop over 50%, suppose you had a mechanism or a strategy in place that you would’ve sold and went to cash and you just set in cash. Maybe let’s just pretend you were only down 10%. The stock market drops 50%. That cash has made you the equivalent of 75, 80%. Why? Because remember, if you dropped another 40, you’re going to have to make a lot more to make back to a break even. That cash protected you. Now, if you go back in after that downturn is done, maybe you don’t get it at the bottom, but maybe again, you have a good strategy to get you in after the market starts to recover. You get now all of that power of the money that you save going back into the market, you don’t have to make 100% rate of return. You just got to recoup maybe that five or 10% down that you were at in that significant downturn.  
 Now, have you started to visualize the power of cash? Cash money market positioning can be extremely powerful. One little side note, before we start going down the dates. You are not worried, or at least let me say this. You should not be worried that the cash, while we’re sitting in cash, is not earning anything. Why? Because that’s not the purpose of it. The purpose is to not lose by the way. Very rare, very rare are you going to ever just go to cash and sit there for months on end. That is not the positioning of cash. We’re going to use an example. So Murs, could you take us through a real life example of when we used cash and it protected against significant loss?  
Speaker 3:Yeah. There’s several that we can pick and choose from, but I think the one that’s going to hit home very well is March of 2020. We know that is when the beginnings of the … Really in February of 2020 is when the beginnings of the pandemic came about, and we’re still in it and dealing with it two years later. But really, if I paint the picture for you, January of 2020, the markets were doing just fine. We knew nothing about this thing called coronavirus. February comes in, still doing okay. The markets are actually in a positive. Then we start to see things happening. We start hearing reports of what’s going on overseas, and the pandemic begins. The market starts to fall at the end of February into March.  
 What we know, the bottom, when the market was at its bottom from its top to its bar bottom. When I say the market, the S&P 500 fell roughly 34% in the matter of a few weeks. One of the sharpest declines we’ve seen in a very, very long time. 34% in the matter of a few weeks. If you’re sitting there looking at your 401k, your investments, you’re buying and you’re holding and you’re writing it out. It hurts. It hurts. What we were able to do because of our methodology, because of our ability to go risk off, in that period in March, we actually took all of our clients 100% cash. Now we didn’t hit it perfect. It’s not possible to hit it perfect, but we had enough signals go negative to where we said it’s time to go, what we call, risk off. You’re either risk on and you’re fully invested in the market or you’re risk off and you’re fully in cash.  
 We went to cash in March of 2020. Remember I told you the S&P fell 34%. Our most aggressive portfolio during that period of time bottomed out at a negative 9%. Go back to the story that Radon was just telling you, if you lose, if you mitigate how much you lose, then you’re preserving that buying power when it’s time to go back into the markets, which is exactly what happened. We sat in cash for say roughly about 35 days. Sat in cash, and what we saw happening was the market started to recover. We went back in. Did it feel good? No. If you looked at the news, everything that we saw on the news was negative, and it was just a very difficult thing to do would be go back in, but we had to, because of our discipline, because the numbers told us back to go back in.  
 What was nice about is that we were going back in not having lost 34%. We were going back in after preserving the assets. We were able to make a very nice rate of return at the end of 2020 and reduce the experience that all of our clients felt from what was a traumatic couple months from a market perspective. The numbers told us to get back in. The numbers had no idea what the government was going to do as far as the amount of money that got deployed into the markets to help keep the economy afloat.  
 The numbers had no idea as far as the checks that were going to be cut to American citizens to help them stay alive and stay fed and stay healthy. The numbers didn’t know that. They just knew that the market was going back up, and we had confirmation, so we went back in. That is a very, still very, relevant scenario where things like this happen in the market, and if you have a system in place to get you out, which is not perfect, but it gets you out and then gets you back in and avoid a lot of the heartache that the markets bring, that’s how we can have a comfortable retirement plan and investment plan that worked together really well.  
Radon Stancil:All right. Now we are sitting here recording this podcast about mid-April. We want to tell you about a recent scenario. Now this year, you’ve got 2022. Pretty much had a quick sell off at the beginning of the year, and pretty much went sideways for a couple of months. Then the talks of inflation, the reality. Let’s say it that way. The reality of inflation, the reality of what’s going on with different aspects of the economy right now, the markets picked up volatility. The fed has come out and said they are going to raise rates, and that they’re going to do so over a series of times through the next few months. Their goal is to go up significantly from where it was. Well, when that occurs, it can create volatility. I’m going to give you some specific dates so you can understand where we are. This is just to give you an example.  
 On May 4th … What did I say we were recording this? I said the middle of April. I’m sorry. I apologize. The middle of May is when we’re recording this. Scratch what I said earlier. That just lets you know that we don’t go in and do a bunch of editing on our podcast. We’re recording this in the middle of May. On May 4th, if you remember that day, that was the day that the fed came out and said we’re going to raise rates by 50 basis points or a half a percent. Right after that in the afternoon, the market took a big jump. Went up about two and a half percent.  
 Now I’m going to tell you, our decision had already been in play, had nothing to do with the fed announcement, had nothing to do with that occurrence. We had decided that day at around one o’clock that we were going to go 100% cash. We took all of our clients 100% cash. Now that looked like, in all honesty, if you were looking at it in a very short window, a bad decision, but we were not making the decision on a day. That’s not how we do this. We’re looking over a series of periods of different timeframes. We said, okay, it’s risk off. All of our indicators, every single one of them, was like red lights everywhere. Get out, get out, get out. We made that decision. Well then if you think back, and you might remember this or not, May 5th, the market fell by about 3%, and then it fell again the next day, just not as much. Then it went again, and over three trading sessions, the market fell six and a half percent in three days.  
 Now our clients were sitting in cash, and let me tell you, the cash sitting there earning nothing was not a problem. Now, how things play out after all of this stuff shakes out, after all the different aspects of things go, we have no idea. Now is that our intent that we’re going to sit in cash for months or for weeks? No, but the question people ask is when are we going to get back in? How do you do that? We always try to help people visualize that the market is working on what we call an S curve. Imagine an S turned on its side. You’ve got a bottom and then it goes up and you have a top. It just does that zigzag. Well, we are not trying to tell people we’re buying or selling rather perfectly at the bottom. I’m sorry, buying at the bottom and then selling at the top. We can’t do that. That’s impossible. What we can do though is buy when we see demand, and then sell when we see that demand go away. That’s our objective when using cash.  
 If you’re thinking about this and you go, “Wow, this is a lot.” There’s two avenues that you’ve got that you can go to. Number one, you can go to our website. We’ve got a blog article written on this idea of cash positioning. Second, you might think I just want to talk to you and see if I can understand how you do what you do. You can go to our website. You can go to the top right hand corner, go to where it says complimentary phone conversation. Click on that. We will schedule … You can schedule for yourself a 15 minute complimentary phone conversation. Myself or Murs will hop on the phone, will answer any questions you have about this idea of utilizing cash. It may or may not be right for you. That’s okay. We just want to make sure you understand that there are strategies to protect against significant losses in the market. We do that by using cash. We hope this has been helpful. We’ll talk to you again next week.