In 2022 many investors became interested in cash. With both stocks and bonds experiencing negative returns, the manta of “Cash is King” was back in the minds of many investors. This was the case in 2022 as nominal yields have been rising to levels we hadn’t experienced in many years. At times like this, it is important to compare the pros and cons of making any change to an investment strategy before acting.
The Pros of Cash
Cash is great for short-term needs such as paying for a vacation or covering your monthly expenses. Having an emergency fund or money set aside in a checking account is a great way to help when unexpected emergencies arise. This idea is not about the return but about the accessibility to cover a short-term need.
Having cash in an emergency fund or money simply saved for upcoming expenses reduces the risk of needing to sell investments that may be down in value to cover those obligations. Having some cash should be part of any investment strategy for this reason.
The Cons of Cash
While cash offers a positive nominal yield, often it produces a negative real return (Interest rate minus the rate of inflation). 2022, showed us just how true this is. With cash receiving very little interest, the everyday consumer saw their purchasing power shrink to its lowest level in over 40yrs. Due to its negative real return, cash is not a sustainable long-term investment strategy.
Some are tempted to use cash as a place to “park” money when they are experiencing losses in their investments. Moving to cash can remove the sense of any immediate risk in the short term while providing instant emotional relief, it introduces a new risk to the future returns to those funds.
We’ve had this conversation with many of our clients when different events have happened causing the markets to turn negative. This action causes a few problems. The first is that we don’t know if “now” is the right time to go to cash. What I mean by this is, what if we are at the “bottom” and the market is about to turn around? I compare this to catching a falling knife. You must hope you’re going to catch it at the handle.
Another question is, what is the plan to get back in? When is the “right time? When the market goes up 10%? 20%? 30? What happens if the market goes up, the investor gets back in, and then it goes back down shortly after? Do we go back to cash? When do we realize that the bull market is running, and we’ve missed it?
I think I’ve made my point. Going to cash can provide a temporary band-aide and emotional relief but it adds more risk as the investor has now become a speculator. Trying to figure out when to jump back in and for how long.
Investment advice offered through OneAscent Financial Services, LLC, d/b/a Provident Oak Financial, LLC, a Registered Investment Adviser with the United States Securities and Exchange Commission. Registration as an investment adviser does not imply any certain degree of skill or training.