Don’t Bail Out of Stocks & Pile Into Cash – Here’s Why

Don’t give in to your flight instinct in response to the latest stock market volatility. Running for cover in cash right now promises to be the worst possible move. I know, I know. Cash is supposed to be the ultimate safe haven. A riskless investment, if you will but, in truth, cash is the proverbial “Death Star”.  [Let me explain why and show you some irrefutable proof.] Words: 544; Charts: 3

So says Louis Basenese (www.wallstreetdaily.com) in edited excerpts from his original article* entitled Charting the Most  Dangerous, Wealth-Destroying Investment in the World.

[The following article is presented by  Lorimer Wilson, editor of www.FinancialArticleSummariesToday.com and www.munKNEE.com and may have been edited ([ ]), abridged (…) and/or reformatted (some sub-titles and bold/italics emphases) for the sake of clarity and brevity to ensure a fast and easy read. This paragraph must be included in any article re-posting to avoid copyright infringement.]

Basenese goes on to say in further edited excerpts:

When investors worry  or panic, they scurry into cash like a toddler into their parent’s bedroom  during a thunderstorm but, as Warren Buffett said, it doesn’t do a portfolio any good. Not if you hold on to it for more than a few months and here’s the  irrefutable proof…

Every year since  1926, cash averaged negative returns when we factor in inflation and taxes. That warrants repeating. Cash averages negative real returns on an annual basis…That means the more cash you hold, the poorer you can expect to get over time, which essentially makes it the “Death Star” of the investment world.

The dangers of cash are particularly troublesome if you’re in (or close to) retirement because at that stage of the game…doing so actually increases the odds of outliving your assets thanks to longer average lifespans.

Consider a $500,000  portfolio, with 5% inflation-adjusted withdrawals each year.

As you can see [from the chart above], an  investor who’s 100% in cash (or even 100% in bonds) runs out of money about 10 years before an investor who’s 100% in stocks or in a diversified portfolio  (50% stocks, 30% bonds, 20% cash). Clearly, Buffett  knew what he was talking about when he said cash is the “worst investment.”

Maybe you think you  can overcome the pitfalls of cash by only holding on to it for a few months and then buying back into stocks. In other words, maybe you fancy yourself a savvy market timer.
The numbers suggest  otherwise, though.

[The truth is, unfortunately, that] the average investor sucks at investing. Sorry to be blunt about it but it IS true [as the research shown in chart form shows below]. Research from  BlackRock shows that…[the average investor has] underperformed every major asset class for the  last 20 years.

How could that be?  Blame it on making knee-jerk reactions during volatile times or, as BlackRock says, “Amidst difficult financial times, emotional instincts often drive investors to take actions that make no rational sense but make perfect emotional  sense.” I’d say bailing on  stocks and piling into cash qualifies as a purely emotional response to the latest volatility, wouldn’t you?

Bottom line:

If cash had a tagline, it’d be the opposite of Nike’s… Just don’t do it! Although it might seem like a safe investment, particularly when stocks start selling off, it’s  anything but.

Ahead of the tape,

[Editor’s Note: The author’s views and conclusions in the above article are unaltered and no personal comments have been included to maintain the integrity of the original post. Furthermore, the views, conclusions and any recommendations offered in this article are not to be construed as an endorsement of such by the editor.]

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