The Most Popular Way to Lose Money
My disdain for cash is no secret.
I’ve shared my opinion on the subject numerous times. In articles... in newsletter columns... even standing before hundreds of investors. I simply can’t stand lazy money.
If it’s sitting in a checking or money market account - or under your mattress - it’s not earning. It’s not doing anything. It’s just... freeloading.
I will admit that after the market collapse in 2008, I left a little more cash on the sidelines. But it wasn’t out of fear. I wanted to be able to pounce on emerging opportunities...
I was willing to sacrifice short-term returns for the outsized gains I would make during the inevitable rebound. And when stocks took off in 2009 - rocketing 60% from their bottom in March to the end of the year - I was certainly pleased with my decision.
Why Are You Missing Out on Double-Digit Returns?
For a more recent example, think back to last year - specifically, the chaos of Q1 2016. In the first three months of the year, the Dow made 21 200-point moves.
At the end of the span shown in the graph above, the Dow and S&P 500 were still down around 2%. But at its lowest level on February 11, the Dow was down 11.2% (or 2,000 points).
Before the end of that quarter, blue chips had gained 10.5%.
The Nasdaq, the hardest hit and worst performer, declined 14.8% from the start of 2016 to its low. From that bottom, it gained 11.8% in a matter of weeks.
And yet, nervous investors remained sitting on huge piles of cash.
This isn’t a new trend, either. Late in 2015, a survey conducted by BlackRock Global found Americans are extremely overweight in cash.
A mind-boggling 65% of portfolios are dedicated to cash - an asset that earns practically nothing. Meanwhile, just 18% are in equities.
Now let’s take that and compare it to the Capgemini and RBC Wealth Management study of high net worth individuals (those with $1 million or more in investable assets)...
The percentage of cash in portfolios is much lower (though still a bit high for my liking), at 23.7%. But the HUGE difference here is that equities make up the largest share - nearly 35%.
This is part of the reason why wealth inequality continues to expand.
Cash Is NOT a Risk-Free Investment
To be clear, cash does have its uses. You should always have some stashed away for emergencies. A good rule of thumb is to hold enough to cover six months of expenses.
But for investors, if you’re holding on to a considerable amount of cash just because you’re afraid... you’re making a mistake. Twenty-five percent, 30% or more harbored in cash? You’re going to have to deal with that drag on your returns.
It isn’t a risk-free investment, either. Inflation eats away at cash. It has a negative return.
At some point, those investors sitting on mountains of cash will plow back into the market - once again driven by fear. Only this time it will be the fear that they’re missing out on the upswing.
Either that or they’ll simply never get back in. I’ve talked to investors over the years who’ve been sitting on cash since the financial collapse, waiting for a pullback to jump back in. Years later, they haven’t moved.
It’s a never-ending cycle that many can never seem to break free from. They believe they haven’t lost anything by staying in cash... but they have.
And the longer they clutch it, the wider those losses will become.
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