Two years ago, amid rising interest rates, trade wars, and concerns that the longest economic expansion in history had to come to an end sometime, market volatility made a comeback. At the time, many investors thought about going to cash as a means of staving off losses. But let me explain why the “cash couch” isn’t the place to settle.
At that time, I wrote this blog post about how going to cash is like settling into a big, comfy-looking couch. From a distance, the couch appears to be soft, supportive and a great place to rest and recover. But when you settle into that cash couch, you learn the hard truth: It’s much too soft and squishy. It’s not at all supportive. And now that you’re there, it’s going to take a lot of extra effort to get yourself up and out.
I had the opportunity to speak with a reporter from The New York Times who interviewed me for a story a couple of weeks ago. As the story reported, after COVID-19 began to make its impact on the economy and the market in March, many investors worried. But many who stuck to their plans and rode out the volatility in a diversified manner were rewarded as the Standard & Poor’s (S&P) 500 has rebounded well. Had they converted to cash to try to time the market, they likely would have missed out on substantial gains.
So, I thought this was a good time to revisit this subject—and update this blog post—according to today’s circumstances. While there is still uncertainty around COVID-19, the soft couch analogy remains accurate. The longer you sit on the cash couch, the more you may erode your own financial security.
Moving to cash undermines your financial peace
While cash looks like the safe move at first, interest rates are back at historic lows. So-called “safe” investment options could be losing ground even as they appear to be protecting your wealth. And now, every day, you ask yourself: Should I put my money back in the market today? Tomorrow? Next week? Next month?
During this downturn, two of my investors moved to cash. And both regret it. In fact, every time I’ve had an investor move significant assets into cash, they later experienced a sense of destroying their financial peace. They could never fully relax. They anxiously watched economic indicators, trying to decide on the best time to jump back into investing. It accomplished exactly the opposite of what they were trying to do. It’s the financial equivalent of trying to ease your way from the shoulder back onto a busy highway. You’re tense and nervous, searching for the perfect window where you can begin moving forward again without crashing.
It can be part, but not all, of your investment plan
It’s never been truer: The only way to maintain a long-lasting sense of monetary well-being is to have a long-term financial plan. Your plan factors your risk tolerance, goals, and even market volatility. It’s designed to weather market ups and downs without you having to make any impulsive moves.
Your plan includes an ideal asset-allocation approach. Asset allocation, as you know, is a fancy term for how you diversify your investments into the most common investing categories of stocks, bonds, and cash/cash-equivalents. Cash can absolutely be part of your portfolio, but rarely should it be the only allocation approach you choose for your money.
Of course, exactly how much of your portfolio you want to invest in cash is an individual choice. Some folks feel most comfortable having a year or two of living expenses in cash. Other people may feel that having more than two weeks’ worth of expenses sitting in cash means their money isn’t working hard enough. For those investors, less liquidity is the answer. But the key is that it’s a strategic part of their plan, and not a reaction to market conditions.
If you’re feeling nervous about the economy or the state of the markets, reach out to your Wealth Advisor. Now is a perfect time to review your plan and remind yourself why you made the asset allocation choices you did in the first place. Your Wealth Advisor can discuss your goals and determine if any changes need to be made. Then walk away from the lure of that cash couch. I’m willing to bet you’ll be glad you did.
Important disclosure information
Please remember that different types of investments involve varying degrees of risk, including the loss of money invested. Past performance may not be indicative of future results. Therefore, it should not be assumed that future performance of any specific investment or investment strategy, including the investments or investment strategies recommended or undertaken by RegentAtlantic Capital, LLC (“RegentAtlantic”) will be profitable.
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