Safe Investments: Can Cash as an Asset Beat Stock Returns?
By Dr. Steve Sjuggerud, Chairman, Investment U
Thursday, August 18, 2005: Issue #462
“Historically, [quick rising interest rates on cash] have been a reliable signal that cash might outperform stocks.”~Richard Bernstein, Merrill Lynch
In my world, I’m free I can write about anything, as long I think it can make you money.
I don’t have the pressures of a stockbroker, or a magazine that relies on advertising from the investment industry. I write what works in investing, period. And these days, it’s mostly about safe investmentsas opposed to making an improbable killing in the stock market.
For example, I’ve been saying for years now that stocks have been bad investments, and that you need to be diversifying into commodities. And for years I’ve been right.
Meanwhile, no stockbroker in America would have told you to sell stocks for the last few years.
Why Don’t Stockbrokers Tell You To Sell Stocks?
Because if you listen to them and sell, then you’ll take your money elsewhere, and they’ll lose your business. That’s why it’s up to you, during these choppy stock market times, to make sure your portfolio includes the right mix of safe, reliable investments and assets.
I can write about investments like real estate, stocks, bonds, commodities, gold coins, timberyou name it. And I can give it to you straight But there’s one thing I can’t write you about and that’s c-c-c-ash. Yes, cash.
Well, I could write about it. But I generally avoid it because it’s hopelessly unsexy as an investment. It’s not something I can easily keep your attention with. However, today cash as an investment is both safe AND attractive.
Here’s exactly what I mean…
How to Beat Stock Returns… Just Hold Cash!
Merrill Lynch’s strategist Rich Bernstein, who just increased his recommended allocation to cash this week, says that stocks have returned just 2.7% a year over the last seven years, which is worse than the return you can get on your cash right now.
Your cash returns are about to get even better According to The Wall Street Journal’s survey of economists earlier this week, short-term rates (rates on cash) will hit 4.42% by mid-2006 as the Federal Reserve keeps raising short-term rates.
Everyone has their money in stocks and real estate. But these investments are overpriced. Stocks are expensive (with a P/E of 20 and a tiny 1.8% dividend yield). And real estate, come on everyone, from doctors to plumbers to bagboys is talking real estate where I live. (I’m not kidding.)
Cash in the bank paying 4%, with basically no risk, sure isn’t ugly. It’s among the safest, most prudent investments around. And, we’ll see 4%-plus on our cash around the first of the year.
The old standbys lately – stocks and real estate – aren’t looking so hot when you look out over the coming years. In comparison to risky stocks and real estate, 4%-plus on a basically risk-free asset is competitive right now.
A Valuable Predictor of Cash as Safe Investments: Short-Term Interest Rates
Earlier this week, Merrill’s Bernstein described in a research note how short-term interest rates were rising fast relative to dividends on stocks. His conclusion? “Historically, this has been a reliable signal that cash might outperform stocks.”
That’s about the clearest message you’ll hear from a brokerage firm that you should sell some stocks and hold more cash. In fact, Merrill upped the cash portion of its recommended allocation to 15% of your financial assets.
What’s your cash level relative to your other risky assets? If it’s extremely low, ask yourself why and then determine if you should consider looking into safe investments like increasing the cash position of your portfolio for added security.
Cash is the four-letter word in the investment world. Brokers don’t get rich pitching you cash. And CNBC doesn’t sell advertising talking about cash.
But a safe, dependable 4%-per-year investment return is nothing to sneeze at. Not when you compare it to a world of risky, overpriced investments and assets that may not be able to beat that over the next five years.
Cash is good. There, I said it. Hope they don’t ban me from the financial airwaves.
Good investing,
Steve
Today’s Investment U Cribsheet
- To read more about safe investments designed to combine the best aspects of both cash and stocks, read Investment U #448: The MarketSafe CD (SM): A No-Downside, Unlimited Upside Stock Investment in a Certificate of Deposit.
- Auction-Rate Securities: Just How Safe Is This “Safe” Investment?
- Money Markets With Negative Returns
- Stock Dividends: The Difference Between Success and Failure
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