All Cash?

“Do I go to all cash?”

“Do I go to all cash at least until after the election?”

More than a few people have asked me this question over the past several months. Even more people have probably asked themselves this question. The answer, if historical data of the S&P 500 index is a guide, is a firm NO.

This chart illustrates the impact of missing just the 25 best days in the market, the 15 best, 5 best and 1 best day.

The chart above illustrates the impact of missing just the 25 best days in the market, the 15 best, 5 best and 1 best day. The days are NOT CONSECUTIVE, they are random best days. If missed, the majority of stock market gains are missed.

The following puts the chart in perspective:

Consider that by picking a few dates in 2020 and looking at where the S&P 500 index was, we can draw the conclusion that it is impossible to time the markets with any precision.

  • On February 19th, the S&P 500 hit its record close of 3386.
  • By March 23rd, the index was down 30.75% from the high to 2237.

REMEMBER: If a stock market index goes down, it needs to work even harder to get back to where it started. For example, if an index goes down 25% from 100 to 75, in order to go back up to 100 from 75 the index needs to be up 33%.

  • By June 2nd, the S&P 500 had recovered 38% from the low to get to 3080.
  • By July 21st, the S&P 500 went up 5.7% in those 49 days to 3257.
  • By August 13th, the S&P 500 went up 3.5% in those 23 days to 3373.
  • By September 2nd, the S&P 500 went up another 6.1% in just 20 days to a near-record of 3581.*

If an investor who on July 21st, when the S&P 500 was finally back on the upside for the year said, “The index is back to even for the year, the world is in the midst of the Coronavirus and the US election is heating up, so I am going to all cash,” that person would have missed out on 6% of gains from July 21st to September 2nd – which could be an entire year’s worth of gains!

There are two primary elements needing to be balanced in order to decide how and how best to stay invested –

A) The desire for stock market gains,

B) Fear of volatility and down markets.

Determining this balance is not easy. The amount of stocks in a portfolio can be adjusted without being moved to zero, or even close to zero. In the process of being honest with oneself about goals for the future and the investor’s timeline and risk tolerance (also called the “sleep at night factor”) balance can be achieved – and must be monitored. Last week’s TGIF 2 Minutes summarizedAsset Allocationwhich is key to balance as well.

If the next month or two (or the March-April time frame earlier this year) are any indication, the balancing act will continue to be difficult. However, balance is possible with the proper advice and information.

*note: The S&P 500 is down 3.5% to 3455 at TGIF 2 Minutes “press time”.

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