When is Cash Good?
“Cash is king” is a phrase that many people say. And while many people put their money into investments to grow, there are times when cash is a good asset to have. For example, we’re five months into 2022, and with the way the markets have played out this year, cash may be a good option for you if you’re trying to secure your retirement.
Investor concerns this year have shown a lot of people who are getting into retirement planning that there are times when holding cash is good.
When is cash good?
We’re going to dive into this topic and explain why active management is so important and when you may want to hold cash rather than put more money into the market.
When is Cash Good?
Cash doesn’t grow on its own, but it’s a strategic asset that everyone needs to utilize. It’s crucial also to understand that there’s a difference between a passive and active money manager.
- Passive money managers use a buy-and-hold strategy that doesn’t take the ebbs and flows of the market into account. In a passive scenario, you never hold cash because it doesn’t produce a return.
- Active money managers continually work on readjusting your portfolio and making changes to negate potential losses due to market fluctuations.
Wait. What Does Going Cash Really Mean?
Before we go any further, it’s crucial to grasp what “going cash” really means. When we go cash for our clients, that doesn’t mean that we have a pile of cash that we tell someone to put under their mattress.
Instead, the cash remains in the person’s brokerage account (IRAs and Roth accounts), but it’s not invested in anything.
So, we may sell of a bunch of stocks and keep the cash in the account until the market corrects itself and you can go back to investing the money. Cash is kept in a temporary hold and can be redeployed when the numbers tell us that it’s safe to go back into securities.
Why Would We Ever Recommend Going to Cash?
Why would you ever go to cash if you’re trying to secure your retirement? Because it’s neutral. Cash is king when other assets are going down and cash remains neutral. For example, let’s imagine that your investments are making 6% – 10% returns per year.
In this case, your investments will beat out CDs and other short-term investment vehicles.
However, let’s imagine a 2008 scenario when the market busted. If you had $100,000 in investments and lost 50%, then you would have $50,000 left. The following year, if your investments were up 50%, did you break even?
You’ll have $75,000, or 25% less than you had initially. If you lose 50% of your money, you need a 100% return to break even. Many investors lost over 50% in 2008, but they would have made money if they had pulled their money out of the market and sat in cash when it was down just 10%.
Because they would have had $90,000 left rather than $50,000 if they kept their money in the market. In this case, cash protected these investors. You also have $90,000 that you can put back into the market, earn a little over 10% returns, and you’ll be back to even.
For people who left all their money in investments during this time, it took years to get their portfolios back to what they were before the 2008 crash.
Holding Cash is Short-term
When you hold cash, it’s a short-term strategy to protect against losing money. It’s very rare that you’ll sit on cash for months on end, but if the markets continue falling rapidly for many months, holding cash for this duration is a possibility.
The positioning of cash should be used to protect against a significant loss.
In fact, let’s look at an example of holding cash in a real-world scenario.
March 2020 Example
March of 2020 is a prime example of going to cash, and it’s a date that is still fresh in everyone’s minds. The date is when the coronavirus first appeared around the world and really started disrupting the world’s:
- Supply chains
In January 2020, the markets were doing fine, and we really didn’t know a pandemic was heading our way. Sometime in February, we started hearing about a virus popping up overseas, but the month started well. Then, near the end of February, the markets started to drop a little before March, when they really took the market into a downward spiral.
It took just a matter of a few weeks before the S&P 500 fell 34% in March.
Markets hadn’t seen such a steep decline in decades. Many people saw their 401(k) and IRA accounts lose over 34% in value in weeks. What we did was go 100% cash for all our clients. We didn’t hit it perfectly and protect against all losses, but we went fully risk-off by going cash.
The S&P 500 fell 34%, while our most impressive portfolio fell just 9%.
Putting this into real-world figures, if you had $1 million in your investment accounts, you would have ended with:
- $760,000 if you didn’t do anything
- $910,000 by going cash
Our data showed that after about 35 days, the markets started to recover, and with $910,000 in cash rather than $760,000, it’s easier to get back to the $1 million, pre-pandemic funds in your account.
Going back into the market was difficult because the news didn’t look good, yet our numbers told us it was time to go back. For our clients, they didn’t suffer from the anxiety of a 34% loss and made a great return on their investment in the interim.
The start of 2022 was also difficult for investors because we started off with a sell-off at the beginning of the year. Then, things started to go sideways for a couple of months. Next, the reality of inflation hit us, and the market became even more volatile.
The Fed also came out and told us that they were going to raise rates, which also caused volatility.
On May 4th, the Fed stated that they were going to raise rates by 50 basis points. That day, we decided to go 100% cash, but the decision was based on indicators rather than the rise in interest rates.
On May 5th, the market fell over 3% and over three trading sessions, the market dipped 6.5%. Our clients sat in cash, didn’t lose 6.5%, and when the data shows us it’s time to go back into the market, we’ll go back in.
We buy when we see demand and sell when the demand goes away. Cash positioning allows us to pad against significant losses in the market.
So, when you’re trying to secure your retirement and are during retirement planning, don’t forget that going cash can be beneficial for you. It’s better to protect against significant losses rather than keep your money in the market when it’s rapidly declining.
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