Lately, investors seem to have several questions about moving to cash. Many feel the market peaked during this cycle, and with the “Fiscal Cliff” escapades in full force, now may be a good time to get out while still ahead. However, CLS generally suggests that investors stay committed to long-term investment goals, unless there is a significant change in a person’s life or liquidity needs.

According to a study by Blackrock, the average return for cash from 1926 to 2011 was 3.5 percent. After inflation and taxes were taken into account, the return dipped down to -0.8 percent–moving to cash has the potential to actually earn less than nothing!

Currently we’re not in a typical economic cycle. For example, housing is usually the first to take off during the early phase of an economic cycle; yet, we’re experiencing a unique phenomenon in that housing was late to the game. This, coupled with the fact that monetary policy will continue to remain easy for the foreseeable future, will likely expand this phase of the economic cycle. CLS believes we will be reaping the benefits of pro-longed expansion and ultimately avoid the “Fiscal Cliff.” If this proves true, anyone who moves to cash now could miss out on significant price appreciation.

Now let’s take a look at some data from Fidelity Investments comparing an all-cash, all-stock, and a diversified portfolio.

Diversification helped limit losses and capture
gains after the market bottomed out

Diversification-Chart

Source: Strategic Advisers, Inc. Hypothetical value of assets held in untaxed accounts of $100,000 invested in a portfolio of 100% cash; 70% stocks, 25% bonds, and 5% short-term investments; and 100% stocks, respectively.  This chart’s hypothetical illustration uses historical monthly performance from January 2008 through March 2012 from Morningstar/Ibbotson Associates; stocks, bonds, and short-term investments are represented by the DJ Wilshire 5000 Index, Barclays Global Aggregate Bond Index, and U.S. 30-day T-bills, respectively.  Chart is for illustrative purposes only and is not indicative of any investment.  Past performance is no guarantee of future results.
 

Let’s say an investor moved to cash at just the right time, missing the severe market decline during the first period shown. The investor likely felt great about the decision at the time. However, when the market started to rebound, do you think the investor suddenly felt confident enough to move back into the market at the right time? Probably not. As shown, a diversified portfolio typically generates the best performance over the long-term.  Fear and emotion run high during times of uncertainty, and it’s important for investors to remain disciplined and focused on long-term investment goals. If a move to cash is ultimately warranted or desired, it’s important to have a defined plan for re-entering the market – learn more.

Comments provided by guest writer Paula Wieck, Manager of Investment Research

1994-CLS-12/4/2012