When Is Cash An Investment?
By Derek Carawan
Almost every day on the radio, television, newspaper or internet, we hear something about the market. You know, the market is up, the market is down, and investors get jittery because of Europe or the Middle East. You name it, there is a different crisis or event that is influencing the financial world almost every day. History has demonstrated that the stock market may provide good returns over 5 year, 10 year or longer periods. But, you have to endure some wild rides (especially in the past few years) to get decent returns. If you look at market movements over several one year periods, you can see that in many of those years the market may have dropped 8% or more before rebounding to end up positive. We saw a 9 % drop from the end of April to the first of June this year in the S&P (an unmanaged index), yet it is still up 11.5% for the year (as of August 9, 2012 according to Google Charts). As the market rises to new highs, political uncertainty and market volatility may persuade some investors to look at positioning more of their portfolio into cash. WHAT! You cannot earn any interest on cash in this environment! That’s right, but having some cash available gives us the opportunity to move into other positions if the market drops. Don’t get me wrong, I am not saying that market is going to drop tomorrow, next week or next month. However, we are seeing some forces that may cause it to do so temporarily. If you have cash that you moved from a market position before the possible drop, you have the advantage of “getting back in” at a more favorable price. I am not advocating market timing. What I am advocating is staying in tune with your risk tolerance, investment time frame and your overall objectives. Reasonable cash positions can help you manage this.
This “barbell” strategy allows you to have aggressive and conservative positions in your portfolio. Of course, if the market doesn't drop and you have established a cash position, then you have missed out on some return, but you have reduced your market risk. Again, you have to employ the philosophy to compliment your goals. You may not want to stay in cash for long periods of time due to inflation risk (having too much cash on the sidelines for long periods of time).
You might also consider how the “Fiscal Cliff” might influence things. Here are a few points relating to the Fiscal Cliff:
- The famous Bush tax cuts expire this December.
- Due to the Budget Control Act, mandated government spending cuts will go into effect in 2013.
- $55 billion in defense cuts go into effect in 2013.
- Other programs will be cut by $55 billion.
- Personal income taxes are slated to rise.
These are a few factors that can put downward pressure on the markets. A little cash may go a long way.
These views are those of the author and should not be construed as investment advice. All information is believed to be from reliable sources; however we make no representation as to its completeness or accuracy. Please consult your Financial Advisor for further information. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. This information is not intended to be a substitute for specific individualized tax or legal planning advice. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly. Tracking #1-091247