We've recently been approached by a few nervous investors, who, thanks in part to Election Day jitters, are considering cashing out a sizeable portion of their portfolio. While this may seem like a good idea at first, there are more downsides to cashing out than you might think. A sounder course of action is to stick to your long-term plan and not let Election Day distractions disrupt a sound investment strategy.
Certainly cash is becoming more popular these days. According to the most recent Wells Fargo/Gallup Investor and Retirement Optimism Index survey, 43 percent of investors reported having moved their money to cash or cash equivalent savings over the past year — far more than those moving money to stocks or bonds. Investors also revealed they have an average of 19 percent in cash savings and 11 percent in CDs or money market accounts.
But while some people view cash as king, there are several reasons why it may not be as desirable for long-term investors. For starters, unlike the 1980s when you could earn savings interest rates of 14 percent or more in CDs, today's rates are only a small fraction of that. Stocks, on the other hand, have a well-documented history of outperforming the major investment choices, including gold and bonds. What's more, when you factor inflation into the equation, you lose even bigger with cash because it erodes your purchasing power, meaning you can actually end up with negative growth. Some savvy investors call this "going broke safely".
Here's another problem with taking a cash-heavy position. Nobody can time the market effectively. Even professionals often fail miserably when trying their hand at market timing. So, by cashing out, you take on the new risk of earning a substantially lower return. The more often you switch in and out of cash, the more risk you pile on. It's a loser's game.
Remember, that, over time, the stock market has a strong history of rebounding, even after significant corrections. If you are investing for the long-term, you'll most likely have time to ride out market fluctuations and still come out ahead. Jumping in and out of cash positions makes long-term growth even harder to achieve.
Certainly there are reasons an investor would want to keep a portion of his or her portfolio in cash—such as short-term needs and goals—and we even advise it in some instances. However, we don't recommend most investors keep a high portion of their portfolio in cash for the reasons stated above.
While cash may seem to perform better in the short term, research supports the importance of sticking to your asset allocation, which is specifically tailored to your age, your risk tolerance and investment goals. We know staying the course may seem scary in light of Election uncertainty and other outside pressures, but we urge you not to let unfounded fears topple a sound investment strategy.
At Align, we help you craft a portfolio that's best suited for your particular needs. Please don't hesitate to reach out to us if you have any questions or concerns.