On March 21, 2017, the S&P 500 dropped 1.24%, ending a history-setting trading streak. Not a good day for most, but because my money manager saw the trend, sold my positions and moved to cash, my personal account only declined by 0.13%.
Even if it’s boring and doesn’t pay well, cash is a legitimate asset class.
People often treat cash like the loser option. They worry about missing big moves and chasing hot stocks, expecting their advisors to stay fully invested 24/7. That may work when the market goes up. But on down days, it can be a disaster.
I lost less by moving to cash. Instead of riding market positions down, we protected capital, avoided risk and gained time to wait for clarity and opportunity.
Cash gives you the option to buy when prices are lower.
After a market downturn, companies go on sale. You can pick up quality holdings at a discount if you have the available cash. Capture these opportunities often enough, and it can make a real difference in your portfolio returns.
In my case, once a new direction emerged, we reentered the market at better prices. Our strategy isn’t to buy and hold, and we don’t try to catch lowest lows or highest highs. We aim for the middle of any meaningful move.
Cash reduces volatility in your portfolio.
The more cash you keep in your portfolio, the less wildly it swings. So if you put 100% of $100,000 into the market and it declines 5%, you’re looking at an account value of $95,000. But if you kept $75,000 in stocks and $25,000 in cash, a 5% downturn would translate to an account value of $96,250.
In an aging bull market loaded with risk, strategic deployments of cash may help prevent significant downdrafts. You just need to know when and where to execute.
What about inflation devaluing your cash?
Yes, this is a factor. But using our $100,000 example above, consider what’s worse: Losing $5000 in a 5% market correction because you’re 100% invested all the time, or losing $3750 (5% of $75,000) with perhaps $600 (2.4% of $25,000) to inflation?
Personally I prefer to delegate these worries to a money manager with fiduciary responsibility to me as a client. Someone who sees the downtrends ahead of time and moves me to cash while I’m out on the beach or hiking the PCT.
Sidestepping disaster by moving to cash, what’s it worth to you?
If you’re invested in mutual funds, quick moves to cash aren’t really an option. Whenever you place an order to sell, you’ll have to wait till the end of the day for the fund to recalculate its daily value before settlement. If the market is down and a lot of people sold that day, you’ll have ridden the price down along with everybody else.
Can you count on your mutual fund managers to see the trend and go to cash for you? Probably not. Most funds are chartered to stay fully invested, with just enough cash to ensure they have the required funds for redemptions.
If you’ve hired financial advisors to manage your money, they can sidestep trouble when they see it. Are you paying them to be fully invested? No, you’re paying them to get better performance, which sometimes means holding cash.
So how did my money manager know to go to cash that day?
An astute analyst, he saw the change in direction, knew what it meant and took immediate action to minimize potential losses across all client accounts.
Can your advisor steer you clear of the next crash?
About Diane Cohn
Diane Cohn is a seasoned marketing professional with a background in real estate, finance and tech. She is currently consults with a focus on content marketing and has some availability for new projects.