Dow Jones Industrial
Standard & Poor’s 500
For years, going all the way back to the 2008 financial crisis through the beginning of 2022, savers earned almost nothing. Banks paid extraordinarily little on time deposits, and Certificates of Deposit paid little better. This was due to the exceptionally low short-term interest rates set by the Federal Reserve to cope with two crises, the financial crisis and the Covid pandemic. This was the time of TINA – There Is No Alternative (to stocks). It almost seems like ancient history, with banks now paying over 5% on deposits. It may be tempting to now put a substantial portion of assets, perhaps all, into cash. Why risk stock or long-term bond price volatility if 5% to 6% is available with no price risk, credit risk OR inflation risk? With a Consumer Price Index of 3.2%, cash is paying better than 2% over the rate of inflation.
To do that would be “timing the market,” something no one has ever done successfully over time. The challenge is when to get back into the market, not an easy thing to do. For example, earlier this month a client sold a substantial amount of stocks, for tax purposes. The client did not want to reinvest the resulting cash into other equities, being uncertain about what stocks would do. Since that very short two-week period of time, the S&P 500 advanced 9%, and that cash did not participate in the rally.
This is what investing in cash looks relative to stocks over various lengths of time:
Even over a period as short as three years a cash investor will underperform a stock investor by a quarter; over five years by more than half. No one can predict with any certainty what stock and bond markets will do in the short-term, but history tells us that building and holding a portfolio of quality stocks is essential to building wealth.
Have a Terrific Thanksgiving Holiday weekend,