Why Holding All Cash Is Not Smart

We talk a lot about how cash is king, and we always want to have cash available to us. However, we do not suggest that you only hold cash. Cash is not a great investment strategy.

For the last several years, cash has earned next to nothing when left sitting in accounts like savings, checking or a money market. We have had lots of clients and users who complain about earning nothing on the cash… and they’re right.

There is a constant battle investors face of if they should get in the markets or if they should go to all cash. This is the reason we spend so much time coaching clients on the proper way to manage their cash flow and where to save. We talk a lot about Emergency Funds and Short-term cash, rarely if ever, do we talk about a 100% cash invested strategy…it’s all about balance.

Related: Where To Stash Your Cash

A while ago we saw an advertisement by PIMCO that said, “Sitting on the sidelines is not an interest rate strategy.” It got us talking about why sitting on the sidelines is not a good investment strategy in general.

To be clear, sitting on the sidelines is effectively sitting on all cash… generally speaking.

So what is a good strategy to employ? At Wela, we help manage clients’ money according to a philosophy we call OYA. It stands for Own Your Age and is specific to the income bucket of your portfolio. So if you’re in your 40’s, you’d want to have about 60% in growth and 40% in income-producing investments. This isn’t a hard and fast rule but it is a guideline for where to start. We build these strategies using ETFs, which are baskets of securities that track an index.

Related: Why You Should "Own Your Age" In Your Investment Portfolio

We pulled a research piece that was produced by Putnam Investments recently. The research looked back over the last 15 years at the Dow Jones performance. So from 12/31/99 through 12/31/14. The study looked at what happened to performance if you missed out on certain days. The days that the Dow did the best. What the study shows is fascinating.

  1. If you put $10K in on 12/31/99 and left it, you’d have $22,118 at the end of 12/31/14. The average rate of return was 5.5%. Not killing it but not bad at all.
  2. If you take out the 10 best days, the return drops to $11,308 for an average of 0.82%. So 15 years, and if you miss the 10 best days, you basically lose all your return.
  3. Miss the 20 best days and your return is negative, ending with $7,297 or -2.08%

As I’m sure you assume, the more days your miss, the worse the return gets. In fact, if you miss the 40 best days of the period (so call it 2 months’ worth of trading days out of 15 years) your return is -6.54 annualized and your $10K has turned into $3,628.

Interestingly, the best days typically come after some of the worst events. Two of the ten best days came within a year of the 9/11 attacks. Seven of the best days the Dow has seen since 1996 occurred within a year of the financial crisis. The point is, getting scared and going to cash when things are not going well is typically when you miss out on the best performance. Clearly, it can be devastating to your portfolio to miss that good performance.

We realize this isn’t easy. It’s not fun to watch your portfolio fluctuate in value and log into the computer and see red on the screen. We get it. It’s emotional. Which is exactly why we’ve built Wela the way we have. To combine the efficiencies of technology with the support of a human advisor. We know you have lots of questions about your financial situation and we wanted to provide an outlet to get those questions answered. We're here to provide you with a way to get your financial journey on the right track or help you stick to the plan that you’ve worked hard to create.