Siriluck Srikumbang / EyeEm
Perhaps you are approaching retirement and getting a bit nervous from these wild market swings.
It has, after all, been an emotional ride lately, and there are no signs of it letting up soon. You may be thinking: Is it time to “de-risk” your portfolio by dumping stocks and seeking the apparent safety of cash? Fair enough, but here’s the problem – what then?
Let’s assume, just for a moment, that you actually took the plunge and sold all your stocks. Now, you can finally go to sleep at night without a worry in the world about what the markets are going to do next. You’re out of it. But as you gaze on that mountain of cash you just created, the questions arise: What’s the next step? What are you going to do with all that cash?
You might, of course, ask yourself: “Why do I have to do anything at all with it?”
Well, by doing nothing you are, in fact, doing something. You are choosing to be invested 100% in cash (or in certificate of deposits, or Treasurys, or whatever option that “doesn’t have any risk.”) Is that really where you want to be? Have you really reduced your risk, or have you just traded one risk for another?
While holding or moving to cash might feel good mentally and help avoid short-term stock market volatility, it is unlikely to be wise over the long-term. Cash doesn’t earn any return and does not grow in value, so inflation erodes its purchasing power over time.
Let me share this story. I know a man (not a client) from a wealthy family and, back in 2000, his mother gave him $1 million. He thanked her and promptly deposited it in the bank. It’s still there.
When the financial crisis hit in 2008 and the markets plunged 40%, he felt rather pleased with himself for having avoided that plunge. However, fast-forward to today and, even with our current low inflation rates, that $1 million has lost 33% of its value. Meanwhile, others who remained invested after the Great Recession have done just fine. Had this man owned a portfolio, sold his holdings and gone straight to cash with the proceeds, the results would have been the same.
So, is cash actually a risk-free asset?
The answer is no. There is no such thing as a truly risk-free asset for long-term investors. When it comes to investing, we don’t live in a risk-free world, and there really are no risk-free investments – even cash.
There are only investments with different kinds of risks. The challenge for investors, and especially for retirees and near retirees, is not to try to avoid risk — because you can’t — but to have a reasonably balanced approach to all the risks you face. Simply ignoring one risk to help you avoid another risk does not mean you are “playing it safe.”
You are kidding yourself if you believe you can avoid any risk when it comes to your money and investing.
There are also those who believe they can safely stay in cash for now and wait for things to quiet down. Quite simply, you cannot time the market. Why? Because the odds are very good that you would sell too early and buy back in too late. That means you would expose yourself to the risk of missing the market’s biggest gain.
While these are very difficult times for everyone, things will get better.
For now, resist the siren call of market timing or of those so-called safe investments. If your holdings are good ones, hold on to them. If they are not, make sure that they are, but don’t fool yourself by seeking “safety” or thinking you can call the next market turn. You simply can’t do it.
As the famous physicist Richard Feynman once noted: “The first principle is that you must not fool yourself — and you are the easiest person to fool.”