Is Cash Still King?

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.


Comments

  1. Cash was King. Now that the market is down roughly 40% from it’s high, stocks are looking mighty nice. I will take a little risk in exchange for a chance of economic freedom someday.

    I will be putting some of my cash to work today, and slowly get in over the next few weeks and months.

  2. I’m really glad you wrote this post. I have been struggling with this exact scenario. I’m reasonably young so I’m going to take a risk and invest. Like you said, I’d miss out on some growth when it rebounds. Thanks!

  3. Your comments on earning a “guaranteed 4%” are misguided. Nothing is guaranteed, and I would love to know where you’re earning 4% interest at (unless you’ve locked your money up in CDs). Additionally, index funds bought now and held till the market has simply recovered could earn a fantastic 52% return! Will it happen tomorrow? No, but the market will recover – it always has.

    Additionally, look at what the big spenders are doing in this market – Warren Buffett isn’t liquidating his assets and holding cash, he’s taking the cash he does have and buying more. We may never again be presented with the opportunity to buy these stocks as cheap as they are now. If you have a tolerence for risk, now is the time to increase your contributions to your 401(k) and other retirement savings, not hold on to cash (unless you will need the money in the short-term, but this is not a change. The market is not where short-term money should be held).

  4. @Ross: Yes, I was referring to CDs or other cash-based investments that were earning close to 4% (before this latest round of rate cuts). We agree that if you have a tolerance for risk, this is a great time to find value in the market.

  5. It’s true, cash it king right now. But, that could also change very quickly if the dollar starts to lose value around the world – which is very possible over the next year because of the trillions of dollars that the government is printing to try and prop up the economy.

    Selling stocks might be a bad idea now that the market is so far down, but I wouldn’t add anymore money to your positions until the market find a bottom – which may not be for another 6 months.

  6. I’ll agree that as you near retirement you should be somewhat more conservative. But you still want enough long term growth to cover inflation and withdrawal. If inflation is 3% and you withdraw 4%, you would want at least 7% growth long term. If you are too conservative you would lose money.

    In your case where you have a long time to retirement, a 4% return means you are only staying even at best, not creating any wealth. May be OK short term. But as Chad and Ross said, the smart folks are look for bargains right now.

    Try to look for solid funds or stocks that will give you growth, but have avoided the dumb moves that created this mess.

  7. I’m also moving into the market. I will be increasing and taking new positions in Canadian bank stocks (recently voted the strongest banking system in the world)over the next few months.
    I have 20 years until I will officially retire and buying now just might shave a few years off of my projections!

  8. I apologize in advance if this is too long.

    Clearly our government can’t save us. Neither can the stock market, big business, Big Brother, or Santa Claus. Clearly if someone’s going to save the nation it’s got to be us, because there is nobody else.

    Now I’ve been through something a lot like this crisis before in the past, since I spent 22 years outside the USA. I’ve identified a way out. It won’t be easy and I guarantee we’re all going to have scars on our backs before we’re through. Also, not all of us are going to make it. Those who don’t pull their own weight are almost certain to be left behind. It’s not a perfect plan and it can probably be improved, but here are the bare bones.

    None of this is going to be a national policy, unless Congress chooses to act responsibly and actually balance a budget and reduce debt. That is very unlikely to happen because this is America. Our elected officials are too used to acting irresponsibly, and we’ve abrogated our duty as citizens and failed to hold them accountable, so they’re not afraid of us and they do not respect us. It’s very unrealistic of us to expect whoever sits in the next Oval Office to actually act with financial responsibility. So all of these things are actions we can (and must) take as individuals.

    1. We shall kill debt, especially high interest debt. Those of us who have significant debt (more than twice the household annual income after taxes) must make debt-killing the top priority.

    2. We shall invest in one another by a strategy I call Mindful Spending.

    Each person who has necessary expenses such as car maintenance, food purchases, and the like will identify some recipient of their business, and target that business with all the trade at their disposal, and convince their friends and neighbors to do the same.

    Those of us whose debt is under control and whose income is not threatened by layoff shall spend a reasonable part of their surplus, instead of hoarding the whole. Each of us shall select a handful of worthy businesses and target them for regular, sustained transactions.

    If we should happen to buy more necessities or luxuries than we need, we shall distribute them to others whose need, through no fault of theirs, is greater than our own. Each person must use his or her own individual judgment as to who is worthy of such support, and how that support should best be delivered.

    In this way, a handful of businesses (preferably those who have shown their worth through years of honesty and customer service) will be saved. Others will die out quickly. The alternative is for everyone to die out slowly, after which point we will have no healthy businesses to employ our children and to provide us with the goods and services we need.

    Frugality and self-sufficiency are virtues, yet so is social responsibility. If all of us keep our purses closed, pretty soon there will be no income for anyone. We must therefore practice Mindful Spending as a way to care for others, so that they may likewise care for us.

    None of this should be construed as license to not set money aside for a cash cushion or retirement, or to not provide for oneself or family.

    3. We shall give one another the gift of work.

    There’s a great deal of work available in this nation, chiefly in poor neighborhoods, but not a lot of *paid* work. Ask any homemaker whether he or she works, and you will get an earful. Yet many of us shy away from doing work for ourselves, or others, because that work is not compensated financially, or because the compensation available is less than that to which we feel entitled.

    We shall therefore clean up our own neighborhoods. We shall pull weeds in our public parks, or we shall help out for a few hours in a local business without thought of compensation. We shall give a portion of our spare time in labor for our churches and our volunteer groups. This will allow our public, private, and not-for-profit organizations to continue providing their services to those who need it, while reserving their resources to ensure a reasonable level of income to their employees. As always, each individual must use his or her own judgment as to how best to assign his or her precious hours of labor.

    This gift of work must be in addition to, not as a substitute for, our regular income or our side hustles.

    For an entrepreneur, this strategy may take the form of writing off a debt or waiving payment for a worthy and struggling long-time customer.

    None of this should be done in such a way that the recipient of the gift of labor uses it to relieve himself or herself of the obligation to work, or to give the gift of work to others. Those who pass on the benefit will therefore tend to continue to receive the gift of work.

    4. We shall reconsider our notions of entitlement.

    This notion of entitlement to compensation, or to a specific level of compensation needs to go. So does the notion of entitlement to recreation or entertainment. As a nation, we’ve allowed ourselves to believe that the word “vacation” is a verb, that a forty-hour work week is more than enough, and that each of us deserves to live for twenty or more years in active retirement at the standard of living to which we’ve become accustomed.

    Similarly, we’ve talked ourselves into the idea that we “need” exclusive private access to an entire apartment or house, or a certain amount of living space. These things are luxuries, and we need to learn to evaluate them as such.

    Assuredly human beings need rest, relaxation, and a safe place to sleep at night. Yet most of us do not need all four bedrooms of a four-bedroom house. Those of us who are in a position to free up a bedroom must do so, in order to either take in a family member or to create a new income stream.

    5. We shall each keep the promises we’ve made as individuals, customers, and vendors.

    This means we deliver the goods or services we’re contracted to deliver. We must pay for that which we consume.

    6. We shall expand our skill set to give us the opportunity to move into other sectors.

    Producers and vendors of necessities, especially low-cost necessities, are about to do very well. So are people who build or sell items that help other people become more self-sufficient. There must and shall be an upheaval in our economy, such that old businesses (and sectors) die out or are greatly reduced, and new ones prosper. Those of us who are in line for downsizing must therefore seek education.

    Each person will like some of the above options better than others, and may reject one or two outright. Those who reject all of them will invariably shut themselves out of the economy, and will be left behind. Since this really is a crisis, we (as a community, a nation, a family, or a group of individuals) cannot afford to make the slightest effort to help or spare those who refuse to do what they can to help themselves.

  9. Ok, Squeaky – I’m already there!
    Except I never had #4…

    I think you also need to add that we need to mentor others in #6…be willing to teach our survival skills and self-responsibility skills.

    Dad – Cash/CD’s/treasury bonds have always been my king… maybe I don’t grab the great profits, but I sleep well at night. My portfolio is down less than 10%, mostly because I’ve been a very conservative investor. At my age – close to retirement – I won’t be grabbing onto aggressive stocks, but I did jump in any buy some of my favs this week, plus upped the 401K contribution. Ride on!

  10. Marci, you’re right. The trouble is, people who think the way you do are in the minority and not the majority.

    In any social group there are always a few people who believe they can get away with doing less than their share. They take pride in gaming the system instead of producing value for other people, and a few people who lose sight of what their customer needs and wants. That works as long as enough other people are basically honest and hard-working. But as soon as the balance shifts, everything collapses like a house of cards. A system, no matter what system it is, can only afford so much corruption and graft before it stops working. We just hit that wall. The USA, and to a lesser extent the world economy, has been running on hype for a long time. This is our wake-up call.

  11. I went through the “TechWreck” bubble earlier in the decade and lost more than 60% of my liquid net worth. I vowed “never again” and subsequently developed a mathematical model by which I manage all my family’s investments. Not only has the model allowed us to avoid losing money over the market downturn of the past year, but we have actually made money with low volatility to boot!

  12. @WealthSISTM
    Let me guess, you are selling this “great” system. Thank you for giving me the chance to give you money, so I can make money with your “magical” formula. There is no such thing. However, if there were you would have a few billion dollars under your management in a hedge fund…and you would be guarding the formula with your life.

    Now, I do have this great potion that will cure cancer, heart disease, arthritis, and even help you lose weight…

  13. Chad, I can understand your skepticism. Go to my website or read my blog. There you’ll find a link to Mebane Faber’s white paper on Global Tactical Asset Allocation. You can download his white paper for free and create your own system to manage your investments – just like I did. Yes, I provide a service to subscribers who would rather pay someone a a small fee to do the work for them. If I was in this solely for the money, I certainly wouldn’t tell the do-it-youselfer where to get it for free. Best wishes. Paul

  14. I wish I was taking a negative 20% loss. I’d be doubling my money every 3.5 years!

    My current positive 30% loss is killing my portfolio.

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