Cash, inflation, and worry season

It’s that season, again.

Oddly, I’m not referring to a “season” in the more traditional sense of the word. Say, spring, fall, or football season.

I’m referring to “Worry Season.”

Let me clarify.

Many of the major indices are either at or near all-time highs. And record market highs, perhaps understandably, tend to make some people uneasy. (Some of my closest friends are those types of people.)

The thinking is, that what goes up, must come down.

It’s in our nature – a vestige of a survival instinct – to worry when things go almost too well.

And absolutely no one that I know wants to lose money.

As I write this, the markets are generally up. Which motivates me to again dispense a reminder: You need to avoid behavioral (emotion-based) financial decisions, and almost always stay invested. Yes, based on your risk tolerance, age, and proximity to retirement (when you’ll need the money), among other considerations, your investment allocation should change over time.

Absolutely.  

But it should not change day-to-day, or week-to-week.  

With inflation over 5 percent, not only is cash not king it isn’t even royalty.

Okay, inflation. We see you. We get it. Despite a hiatus, you’re still a major player in the bigger economic picture.  

Inflation is a measure of the rate of rising prices for goods and services. If higher inflation is occurring, and prices for everyday items such as groceries and gasoline rise, consumers will have less money to spend elsewhere (say, on new cars or clothes). And this could eventually cause a domino effect and hurt the economy by increasing unemployment, which then exacerbates the cycle.  

The fact is, that inflation had been so low for so long, there is a generation of young adults who had never even had to consider it.

Which brings me to cash.

While there are other occasions, there are two distinct times when I receive an uptick of people inquiring about moving their investments to cash.

The most common of these, is when the market hits a rough patch and starts to slide.

While the urge to bail out of the market is perhaps understandable, it’s a bad idea.

If the market were to dip by 10 percent tomorrow, and you cashed out of your investments the next day, the only thing you will have accomplished is to lock in that 10 percent loss, and to strand yourself on an island with no access to the potential recovery and growth.

Remember, key point here: If the market goes down, your losses are only realized if you sell. Otherwise, the results of the stock ticker turning red are little more than numbers on a screen.

Though much less common, another time I see an uptick in the number of people asking me if they should move to cash, occurs when the markets hit record highs.

Of course, I can’t tell you what the markets are going to do tomorrow, but I can say with confidence, and, with history as my guide, that over time, markets tend to rise.

How much?

$1 invested in the S&P in 1927 (which would encompass a three-year period of the Great Depression, wherein some indices lost more than 80 percent of their value), would, today, be worth over $7,000.¹

Now, back to cash.

Even more than the historical rise of the markets, for the first time in a while, we now have rising inflation.

But, as much as I dislike it, dreaded inflation only helps to make my argument to stay invested.

That’s because again, with current inflation at roughly 5.4 percent (up from roughly 2 percent last year), holders of cash are financially being swept downstream as rising prices for consumer goods cost more and more and eat up value.

Simply, if you hold a lot of cash, you’re falling behind, and, unlike in recent years, where you might only be losing a tad of purchasing power, at over 5 percent, today’s inflation insists that you be proactive when it comes to your investments.  

What if you’re already holding ample cash and worried the market can only go south?

Lastly, let’s say you are sitting on a lot of cash, and the bull market has you thinking: “Maybe I should wait until after it corrects to invest?”

Here’s my advice: Think long-term. Always. Be careful but think long-term and work with your 100 percent fiduciary advisor.

As difficult as it is to visualize, market movements are short term. Simply, they typically don’t mean that much over time.

Just because the market is at (or near) an all-time high, doesn’t mean it’s summited and will go no higher. Conversely, the same applies for corrections. If the market fell next week by 20 percent, that doesn’t mean it won’t go any lower the following week.

When it comes to the market, neither tomorrow nor next Thursday should be your focus.

Staying in cash when the markets are up, or getting out (or even jumping in with both feet) when the markets take a big tumble, are the epitome of trying to time them.

My 30 years of experience as an advisor has repeatedly shown me that even most experts, those people who spend their lives chasing returns and studying trends – and who, remember, have access to the most expensive and advanced software money can buy – they swing and miss more often than they hit grand slams.

If you’d like more information or clarification about behavioral finance, the impact of inflation on cash, or your current investment allocation, contact your advisor today.    

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¹ https://www.thestreet.com/investing/why-investors-should-stay-in-the-market