Moving to Cash?

Moving to Cash?

June 15th, 2022

One of the things I’m always asked during volatile markets is- “when is it time to move everything to cash?” It seems like a very tempting and logical solution to implement. It seems even more logical when there is no end in sight.

The great unknown for all of us is how long the down market will last. In our minds, while in the midst of market turmoil, we play out the worst possible scenario. Here are some of the things I’ve heard people say:

  • If it keeps going down like this, I’ll run out of money.
  • I can’t lose money like this now, I’m retired.
  • I should have just kept my money in a jar or mattress.
  • I’m going to have to cancel vacations.
  • We’re not going to be able to pay our bills.
  • I just don’t trust this administration.
  • I’m not going to have anything left to leave my kids.

I get it. It’s rough right now. It really is. However, hitting the panic button and moving everything you have to cash because of market volatility is simply not the thing to do.

Why? There are a couple of reasons for this, when you sell, you lock in your losses. You’ve heard it 1000 times and it’s true.

I’m going to give you a brief illustration to make a point here. However, I am using sharing this in the context of a retirement account, and not a “non-qualified” or taxable account. (How these accounts are taxed make this a completely different scenario.)

Let’s say you have 100 shares of the very popular “widget”. Let’s say each share of the widget is worth $10 so your account value it $1000. Let’s now assume the market experiences volatility and the value of that widget drops to $9 per share. You log into your account and see that the account value is now $900 and you start to get a little nervous but you tell yourself that you are in this for the “long haul.”

Over the next few weeks on the news, all you hear is bad news. In your mind, everything our politicians do seem to have a negative impact on the stock market so you decide to check your account again. The balance has dropped to $800. Your tempted to hit the panic button and sell, but the next day the market is good and the value goes to $850. You then begin to get anxious and look at the market multiple times a day to see if you are up or down. 3 days later you log in and the value is $750 and you tell yourself that you can’t do this anymore and you move to cash “until things get better.” You sell your widgets for $750.

Guess what happened? Someone got 100 shares of widgets for $750. Yes, someone bought what you had that was worth $10 per share at a discount of $7.50 per share.

Remember the whole adage of buy low and sell high? We’ve heard it, but do we believe it? I think most of us do, but in times like this, we lose sight of that one key principle and we are tempted to sell low.

If you sell your widgets for $750, you have done the exact opposite of what you know is the right thing to do.

Here’s another way that I hope will illustrate this. Think of your home’s value right now. It’s likely worth more right now than it has ever been. There is a real temptation for us to sell our house right now because of what you can get for it. I’ve had this conversation a hundred times in the last year and a half. It’s tempting because the value is high. If you had somewhere else to go, you’d likely sell. If you had 2 houses, you’d almost certainly sell one because of the increase in value. You would sell high.

But what if the housing market wasn’t hot? What if the value of your house was down 30%? Would you just get rid of it? Chances are you would not.

So let’s get back to our widgets. We like them, we believed long term that the widget was a good investment, but we just couldn’t stomach the losses in the short term. So how do we own widgets in the future without taking a loss?

Let me propose to you a bucket strategy.

I’ve talked about this many times before, but I’m going to attempt to explain it again in a way that ensures we don’t have to sell our widgets for $7.50 again.

In the past, I’ve talked about the financial house. Foundation, walls, and roof. Most of you have seen it and understand it. The bucket strategy is similar, but in volatile markets, I think this may be a better way for my clients to visualize this. Especially when taking income from your accounts.

I want you to picture 3 buckets. Each of these buckets will contain money and each bucket of money has a different job.

Bucket 1- War Chest
I talked about this bucket in the March 2nd Client Connection in detail so you may want to go back and read that. This bucket will mean different things for different people, depending on if you are taking income from your assets or not.

If you are taking income from your assets, you can put 2-3 years of income in this bucket. For some people it’s more, for some it’s less. If you are not taking income, this could include your emergency funds and your “spend on something” fund. (home repairs, trips, etc.)

So what’s in the war chest? Your war chest should be a mix of cash and bonds. Your war chest should not include widgets. Here is the what the war chest will do for you:

  1. It will not earn much money.
  2. It can provide you short term income for the period of time you have in mind (2 to 3 years)
  3. It will keep you from selling your widget at $7.50 per share when the market is down.
  4. It will keep you from guessing when you should get back into the market.
  5. It should provide you more comfort that you have the time to wait out volatile markets.

Bucket 2

Bucket 2 is structured in a way to provide you “mid-term” income…approximately years 4-8. This bucket would have a traditional mixture of equities, bonds, and possibly a fixed index annuity. Overall, this bucket is set up to grow more than bucket one, and if you are taking income, it would provide what I would call mid-term income. This bucket can go up and down, but it’s not going to be as volatile as bucket 3. (The fixed indexed annuity is not subject to any market risk)

Bucket 3

This bucket is structured as a growth bucket. This is a long term bucket. 9 or 10 years plus is the time horizon of this bucket. This bucket contains- widgets. Over time, this bucket will go up and it will go down. Since the beginning of the stock market, this bucket has gone up and it has gone down. Every single time, without fail, when it has gone down, it has always come back up. In the last 42 years, this bucket has gone up 32 times. I’m referring to the S&P 500.

We are in a period of historically high inflation right now and the best way to combat inflation is with equities. In my opinion, even if you consider yourself to be “too old” for a growth bucket, you still need equities.

In Summary

I want to wrap this up by saying that none of these buckets are perfect. This is simply because there is no perfect investment. Each bucket and every single investment available has its’ pros and cons. What I do know is that the markets will always rebound, we just don’t know when.

So if you are tempted to hit the panic button and move everything to cash, I would tell you to reconsider. In the year I was born, 1970, the DOW was at 753. In the year 2000, the DOW was at 10,700. As I type this at 10am this morning, the DOW is very green and is up over 359 points for the day and is at 30,723.

In the future, I have confidence it will cross 40,000, then 50,000. And at some point, it’ll probably cross 60,000. We may not be able to imagine it, but markets work over a long period of time and it’s important that we keep that perspective.

I hear you loud and clear…”but I don’t have that much time.”

You may not, and I may not. None of us know for sure. But what I do know is that if you are scared to what is going on and feel like you need to move everything to cash, resist the urge. Instead, the better thing to do is for us to discuss your situation and determine what is best for you.

Hang in there, this too shall pass! But If you are super nervous about things, a bucket strategy could be a great option for you.