Why Holding Cash is No Longer ‘Safe’
Probably the most common theme we hear across our profession, especially in areas that are more rural, is the fear of the markets and desire to hold cash. After all, cash is king. In essence, it’s hard for me to blame people for this logic. Most people in rural Oklahoma or the West Texas Desert don’t trust Wall Street or corporate America any further than they can throw them, and I don’t really blame them.
The real problem with this is that even when we think we are just mitigating risk by saving, we are actually losing. Now more than ever, holding cash, whether it’s in a Nike shoe box under the bed, or in a savings account at your local bank, is a losing battle. Every single day, the purchasing power provided from this sum of money becomes less and less. The projected inflation rate for 2021 is 2.24%, and this was projected before President Biden proposed another stimulus bill. This means that we have to return roughly two and a quarter percent just to be able to buy the same amount of goods in services on December 31 as we would’ve on January 1, and the odds that your savings account is doing this is slim to none.
I understand the distrust of the markets, I really do. It’s a delicate game, and people would rather not take the risk. The problem is in the current climate, the risk of not being invested is just as prevalent, if not more so, than the market risk you take by being invested. When we are holding cash, we know for certain we are losing. Every day, we (the United States) are printing money, and handing it out for political pandering, and shipping the rest of it to countries around the world with no end in sight. Besides, if we are just expecting the government to hand over the keys on their new found power, I assume we are sorely mistaken.
With proper asset allocation and investment management over a given period of time, all of these factors can be mitigated. Sure, if we look at the S&P on a yearly basis, we may see a down year now and again. But over the course of 10, 20, 30 years, we know what that looks like. There will be several market cycles in our lifetime, but we shouldn’t try to time a down market in order to buy in. Over the last 100 years, 3 out of every 4 years has been a positive year in the market. So the second we try to time a buy in, the odds are stacked 3 to 1 against us.
Our fears are often misplaced, but currently, the only thing that is certain is any stockpiles of cash you may have are losing purchasing power at an extreme rate. The real fear from the markets comes from misunderstanding or lack of knowledge. You should never feel like you don’t understand what you are invested in, and it is our job to make sure you are comfortable with and understand your holdings. Our goal is to make sure you never feel uncertain again, and allow you to rest easier at night, knowing you aren’t losing 2.24% of your purchasing power this year by holding excess cash to avoid market risk.
-Colin Feller, President