Modernist Portfolios: Why We Don't Go to Cash in Downmarkets
In December 2018, we heard from several people about friends’ advisors who are recommending that they go to cash. People are nervous - and not without reason: most equity-oriented portfolios are down 12-15% in Q4, while balanced portfolios are down 7%. Behavioral finance tells us that the temptation to “do something” is undeniable in situations where we feel a loss of control.
But history is on the side of those who don’t let short-term news events scare them out of staying invested. Every generation of investors has had its reasons to worry and pull out of the market: from the Great Depression, WWII, and Vietnam, to the dot com bubble, Great Recession, and now the Trump presidency. And, unfortunately, financial media sensationalism doesn’t help us make long-term investing decisions.
Check out the image below: If you’d invested $100 in the U.S. stock market back in 1972, and left it alone until 2017, that $100 would have grown to $11,086 (dark blue line). The key here is that treasury bills’ returns (aka cash - the purple line) are pleasantly steady, but they don’t rise nearly as high!
Bottom line: decade after decade, markets around the world have been significant generators of long-term wealth for patient, diversified investors.
This is why we don’t go to cash during down-markets (aka try to time getting in and out of the market). Your portfolio and financial plan should be built to withstand changes in the market. This is why we talk so often with clients about recession-level returns in meetings.
While the markets do their thing, we hope you will find time for rest and restoration this holiday season. You are also welcome to check out this recent essay about behaviors that can help support your long-term financial well-being.