Lately, I’ve heard an often repeated question…
Is it time to move to cash?
Interestingly this question has come from people with various backgrounds, different lifestyles, and in different life stages. And, as you might guess, this is nowhere close to the first time I’ve heard it asked.
Generally, this question is posed when there are external factors at play. One such factor right now is certainly the upcoming presidential election (with plenty of recently enhanced drama and tension). Add the ongoing fear of recession into the mix, along with the fact that the market has been doing very well (too well?) leaves everyone with plenty to talk, and worry about.
Before going any further, It’s worthwhile here to remember that market moves, driven by such external factors (though at times scary), are typically short term in nature. This is in contrast to the length of time that an individual, a family, or a business, should be participating in those markets.
Generally speaking, You have two choices about the way you might approach market participation. First, you may choose to be an investor. Alternatively, you might choose to be a speculator.
An investor, for example, might seek to identify an innovative opportunity, such as generative AI, with an eye toward long-term participation in the growth of that theme. Also, given that it is nearly impossible to correctly guess which of those themes/companies will have the long term growth that we desire, an investor will typically diversify across various opportunities and holdings.
By contrast, a speculator might try to time the short term behavior of the market, moving money from one sector or opportunity to another, attempting to create gains out of the constant short-term change, even the change resulting from external factors such as those mentioned earlier.
In my experience, the two mentalities don’t really mix well. One is in it for the long haul and the other for the short term. Although studies have consistently demonstrated that, over the long term (the rest of your life?) investors outperform speculators, the latter often garner more hype and notoriety, making it difficult for the gambler in many of us to resist.
Regarding this, data just released by Bank of America has quantified just how large the missed opportunity can be for investors who try to get in and out at just the right moment.
With data going back to 1930, the Bank of America study found that if an investor (in an effort to try and time their buys and sells) missed the S&P 500′s 10 best days of each decade, the total return would stand at 28%.
If, on the other hand, the investor held steady through the ups and downs, their return over the same time frame would have been an eye popping 17,715%!
When stocks plunge a natural impulse can be to hit the sell button, but this study’s data also showed that the market’s best days often follow the biggest drops, so panic selling can significantly lower returns for longer-term investors by causing them to miss the best days.
But, what about Warren Buffet, who has recently been in the news with indications that he has been stockpiling cash? A closer look would show that he has not been selling to create cash. Rather, the companies he’s invested in have generated cash, and at current prices, he likely has not been finding the best opportunities to redeploy that cash (right now). So, while the cash is in fact stockpiling, it is not out of action, or reaction. It is out of patience!
So perhaps the real question, with all of this in mind, should be:
Am I an investor, or am I a speculator?
The First Six Months of 2024
Looking at the first six months of this year, we would have to call it pretty bullish. There is both good and bad news in that.
On the plus side, markets rewarded stock stories with the best potential earnings growth – the ones that are based on innovative technology. The minus side? When just a few names are coming out as the biggest winners, that can lend itself to volatility.
Takeaway?
Although we remain cautiously bullish on US stocks over the remainder of the year, we are open-eyed about the challenges to come in the coming weeks (currencies, Fed policy, oil, etc.), each of which has its own distinct dynamics. Overall, we lean heavily toward the camp of the long-term investor. The approach that has proven to provide the greatest stability, potential return, and peace of mind.
