20 years of finance experience and obsessed with getting you to Financial Freedom.
Happy Halloween! What’s Scarier: Sitting in Cash or Investing in the Stock Market?
These days they can both be pretty spooky. Sit in Cash and miss out on a big market gains, like the 21% we’ve seen year-to-date, or Invest in the Stock Market and risk watching 20% of your hard earned cash disappear, like this time last year (Oct 3 – Dec 24, 2018).
(P.S. I’m writing this for the many people I know that are hoarding cash…it’s a real thing).
So what to do at the end of a 10+ year long US Stock market run of 350%? (BTW, that means $100,000 invested 10 years ago at the low would be worth $450,000 today. see graph below)
Cash vs Stock, always resurfaces when the US Stock market is experiencing a long rally, like the 10+ years going now. Many believe it’s time for a pullback, so better to wait and invest in the dip. The problem is that nobody can predict the highs, lows, dips, peaks, bear or bull markets.
Nevertheless, downturns and corrections will occur. So perhaps with crystal ball in hand you Sit in Cash determined to “Buy low” when the market turns. But here is where it gets spooky:
What if the big dip never comes? What if stocks continue to slowly rise for years? When will you give up and jump in? Or, more likely, when the dip comes, how do you know when to buy in? Missing even a day of big gains can have monumental effects on the size of your portfolio years down the road. Take the example above where the recent dip was Christmas Eve 2018. The market jumped 5% the day after Christmas, 15% over the following month and has been steadily rising since.
Could you really have timed that? See Graph below for the effect of missing 2 weeks!
You should expect to double your money every 7-10 years, on average and over time. This surprises most people. Compounding Interest – the 8th wonder of the world. To do this you need to attain 7-10% annual returns, which are very reachable over the long term. However, sitting in cash and missing the 5% up days (see previous bullet) will erode your long-term strategy and returns.
The alternative is Investing in the Stock Market, which admittedly can also be scary because you can lose a lot of money fast. Just ask anyone who lived the most recent crash from Oct 2007 to March 2009, an 18-month period where the market fell over 50%. But, and more important, is to keep in mind that it has since rallied over 350%. The stock market ALWAYS bounces back.
So if you had $100,000 in the US stock market on Mar 9, it would be worth $450,000 today (Oct 29, 2019). BUT and even more shocking…. if you waited just a couple of weeks to put that money to work in the market it would only be worth $370,000.
So what is one to do? If you are working, with every paycheck you should be adding to your retirement savings in a diversified tax efficient portfolio of stocks and bonds.
The more difficult question if you’ve been sitting on the sidelines, is how to move your cash to the stock market. Assuming you agree with premises (a) you can’t time the markets and (b) the markets will trend up over time, then you should invest now. If you want to assuage the potential psychological pain, you could adopt a strategy to move your cash to a diversified portfolio incrementally over the next 12 months. If the stock market turns up quickly, you’ll be happy you jumped back in and if the stock market declines over those 12 months, you’ll be happy that you caught some of the low points.
Sean Hathaway is a Financial Advisor and can be reached at email@example.com
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