Stop Keeping Cash Reserves

Young people, especially, should have goals of maximizing their nest eggs over the full course of their lifetimes. Once your working days are behind you, Money = Freedom. It's almost a given, though, that financial advisers tell clients of all ages to, always keep about 10% of your long-term investment capital in cash. The ostensible reasons for that advice are twofold. Your portfolio will be less volatile, allowing you to sleep better You'll have money to put to work when the inevitable crash takes place What's wrong with that reasoning? A lot. It's true that the cash portion of a portfolio never goes down, even in horrific markets. It's also true that it can't go up by more than interest rate paid on short-term CDs, T-bills or money market accounts. The official Ibbotson numbers, from 1926 through 2017, show that most investors would have been lucky to have even held their purchasing power even, when figured on an after-tax basis. Today's artificially low interest rate environment makes that equation more skewed towards loss of buying power than ever before. Keeping 10% of your long-term money with zero chance to grow dilutes the possibility of achieving true success. Did a football coach ever rev up his team before the big game by asking them to, go out there and give it a 90% effort? Cash, and cash equivalents, have always been the worst performing major asset class over the long run. There is no valid investment reason to keep any of your permanent portfolio in those instruments. So, should you really sleep better knowing you've sabotaged your best chance for a good quality retirement? Let's move on to reason #2. The idea of having available cash after a major stock market crash certainly sounds rational. Think about what you did near the bottom in March of 2009. Consider your actual behavior on Christmas Eve of 2018. Those were probably the best times to put money to work in most of our lifetimes. Did you put any remaining cash to work back then? Or, like most people who had reserves in place, did you just feel blessed that you had kept at least some of your money from being decimated along with the rest? I'm willing to bet that few people went all-in when things were cheapest. After all, that would have been breaking the rule of always keeping 10% of your money in cash. Buying into panic selling is the single best way to improve your final results, but it goes against all human survival instincts. Even our own Jim Cramer failed to fully put his Action Alerts Portfolio cash to work late last year. He was not alone. Last December, Mom and Pop investors yanked the most money out of equity mutual funds in a four week period in history. The idea of having reserves to put to use is a good one. In practice, it almost never takes place. Those bullish on stocks were probably already fully invested. Traders wary of stocks would be too busy congratulating themselves for not being fully invested to actually get in before the bottom was clearly left behind. Nobody is smart enough to predict correct market timing. Plenty of us are capable of recognizing deeply undervalued stocks. Avoid the dual mistakes of dragging down performance by always holding cash, and of choosing any fixed income over 100%, or close to that allocation of equities. When you're ready for retirement your dividend income alone is likely to keep up your lifestyle better than any lifetime mix of stocks plus bonds, or stocks, bond and cash.

Stop Keeping Cash Reserves

The idea of keeping a 10% cash reserve for bargain buying when the market tanks sounds good in theory, but in practice it never really works out that way.

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