A Rough Start Begs The Old Question

2022 is, from an investing standpoint, off to a horrible start. Nearly everything, apart from commodity sectors, has plummeted since January. We’ve written about how diversification didn’t help much as inflation ate away at asset prices from home value to bonds. A classic 60% stock and 40% bond portfolio is down roughly 15% to start the year. When panic rises, so does the seduction of moving everything to cash.

The phrase “Cash is King” was popularized by Volvo’s CEO Pehr G. Gyllenhammar shortly after the stock market crash of 1987. The expression explains a time when a high percentage of cash can be a buffer against losses, and is available for buying assets at a discount during a market decline.

The expression often resurfaces during market crashes and recessions, which is as surprising as people avoiding the water after a shark week marathon. Google trends shows searching “cash is king” peaks around every bear market:

If you’re tempted to go to cash during this bear market (like the rest of us humans), consider the following:

It’s Rare For Cash To Outperform Stocks and Bonds

3 years out of 10, cash (and its minimal yield) has higher returns than stocks or bonds.

Only 1 year out of 10 (11% of the time) it outperforms both. Per Fidelity:

Unfortunately, 2022 (so far) is one of those exception years. Looking at history though, I wouldn’t bet on it continually outperforming.

Investing Can Help Maintain Purchasing Power

Most of us WANT to invest in order to make money. Over the long run, we NEED to invest to preserve our purchasing power. Inflation rebounded in a big way this year, which reminded us that the prices of everything we need are usually heading upwards. Stocks are risky in the short run but in the long run? I’ll let the chart share the rest:

How Much Cash Is Enough?

For investors, having some cash is necessary. Everyone is different and has different comfort levels regarding how much cash is enough. We always recommend having a rainy day fund, and if you’ve got a planned expense coming up, there’s no need to take short-term market risk.

But over the long run, having too much cash has actually been riskier than investing it:

In short- it’s always tempting to try and avoid market losses by selling investments and moving to cash. However, the risks of not investing by holding cash can outweigh the risk of market volatility 10-1 when all the bets are settled.

If you’ve got questions about your investment strategy or how much cash to hold, give us a call. We’re happy to discuss some strategies that might work for you.