Here lately our markets have been in a tailspin with little reason to “pull up” and get us out of this dive. It seems like there has been one negative bit of financial news after the other for weeks. Many economists and politicians are fearing a recession, or worse. In times of market turmoil I hear many pundits tossing around the phrase, “Cash is King!” When stocks are losing money, 401(k) funds are being obliterated, and even the rock-solid money market mutual fund accounts were on shaky ground for a while, cash looked like a pretty good investment. After all, a 4% interest is better than a negative 20% loss.
If You Are Not In the Market, Consider Cash
I’ve never been much of a stock market guy. Most of my early career I barely made enough money to pay for school and a few miscellaneous expenses. I did contribute to a 401(k) early, but only because my employer automatically enrolled us and made a matching contribution. Over the years, I have learned more about the various types of mutual funds and am comfortable making investment elections for both my 401k and Roth IRA. However, as I begin to dabble with savings outside of retirement plans, I can’t help but wonder if cash really is king. Maybe an ultra-conservative mix of high-yield savings accounts, CD ladders, and treasuries really is the way to go.
It is easy to look like an expert by recommending cash in a bear market, but what about when times are good? In years past where stock mutual funds were averaging 25% growth it seemed ludicrous to keep cash on the sidelines earning 4%. However, when stocks are down 25% the idea of earning a guaranteed 4% is attractive. We know historically that the market will go up over the long term, but it is these short-term sell offs that make stock market investing so painful.
If You Are Already In the Market, Stay the Course
I do not believe in pulling all long-term investments out of the market. Jim Cramer recently took some heat for suggesting that investors take money out of stocks if they will need access to the money in the next five years. On the surface, his comments sounds pretty gloomy for the immediate future of the market, however what he suggested is what virtually all financial planners suggest. It is generally a bad idea to invest money in the stock market if you plan to use it within the next five years. This recent downturn is a good reason why that is sound advice. Five years simply does not allow enough time to recover from these types of hits.
So how does one ultimately decide whether or not to invest in the market, or in cash? The answer lies in determining your tolerance for risk. If you are a risk-taker, and have time on your side to ride out some of these short-term storms, then you are probably safe to invest in the market. However, if you are not a big risk-taker, or are already nearing retirement, cash may be the most attractive option. Of course, you may miss some growth when the market rebounds, but at least your capital will be relatively safe in the short-term.