Is it time for you to move to cash?

July 19, 2011

Over the years, Alan Haft has had his share of panicked calls from clients who’ve heard the latest media predictions of financial Armageddon.

But this time around, says the Newport Beach, California-based financial adviser, it’s different.

“In the past, some clients have asked me to reduce their exposure to the stock market when there’s lots of bad news floating around,” he says. “But after experiencing what happened in 2008, more of them are telling me they want to dump their stocks altogether and move into cash, especially if they’re close to retirement.”

With mounting debt problems in the U.S. and Europe, the prospect of a double-dip recession, and the huge gains the stock market has seen since 2009, Haft’s clients are not alone in their concerns about a sharp market decline, despite some upticks like today’s.

According to new research from TNS, 87 percent of Americans with $500,000 or more in investable assets agree that the size of the U.S. government’s deficit is a major concern for them, and 43 percent feel the current state of the economy will jeopardize their retirement plans.

Another survey just released by Insite Security and IBOPE Zogby International indicates that 41 percent of high-net-worth individuals have little or no faith that the U.S. will be able to right itself in this fiscal climate.

Professional investors are worried as well, and some of them view a temporary move to cash equivalents such as money market funds or certificates of deposit as a way to soften the blow of a market fallout.

“In our view it is better to hold cash and deal with the limited real erosion of capital caused by inflation, rather than hold overvalued assets and run the risk of the permanent impairment of capital,” says GMO asset allocation strategist James Montier in a recent report. “The absence of attractively priced assets with good margins of safety should lead investors to raise cash.”

That’s what Madeline Schnapp did in late February and early March when she sold some of her personal stock holdings. At the time, the director of macroeconomic research for TrimTabs Investment Research felt that increased market volatility, the end of QE2 (the Fed’s second round of quantitative easing) and a bubble in silver prices all led to the conclusion that, “it was time to take profits and sit out on the sidelines to see how things shake out. I may miss another run-up but I’m happy with the overall returns these past couple of years and content to reduce risk as volatility picks up.”

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While lots of investors may feel the same way, a number of studies show that most of these people are terrible at figuring out when to enter and exit the stock market.

One of the most widely quoted, Dalbar’s annual Quantitative Analysis of Investor Behavior, concludes that regardless of market conditions, mutual fund shareholders who move their money around a lot earn less on their investments, and often a lot less, than those who simply stay put.

The 17-year-old examination of fund flows shows that they consistently abandon money market funds for stock funds after a long market upturn, when prices are already high. They lock in their losses by yanking money from stocks after the market drops and keeping it on the sidelines too long. Since snap-backs are often sharp and sudden, they miss out on a big chunk of rebound returns.

Staying in money market funds for long periods can also mean losing out to inflation. Today, the average money fund is earning a skimpy .03 percent yield, according to Crane Data, while consumer prices are up 3.6 percent over last year. Many of the funds have holdings in troubled European debt, which raises concerns about their stability.

There’s also the problem of taxes. If you own stocks or stock funds in a taxable account, you’ll need to pay short-term or long-term capital gains tax on any amounts attributable to appreciation unless you have enough investment losses to offset them.

For most people, say financial advisers, a good middle ground between doing nothing and diving into cash is trimming back on some stock holdings.

That’s a particularly good option for people who’ve already saved enough for retirement and maintain a frugal lifestyle, says Mary Katherine Dean of Dean Consulting in San Diego. “If you’re already wealthy, you can afford to give up some growth in exchange for peace of mind,” she says. “But if you’re a long way from saving what you need for retirement, you really need to stay in stocks.”

Haft advises some of his clients concerned about a stock market decline to sell a small portion of their equity holdings and move into investments that stand to benefit from a nervous economy and rising interest rates, such as gold or precious metals and floating-rate bonds. For more conservative clients, he recommends equity-indexed certificates of deposit that peg returns to a stock market index but also guarantee return of principal at maturity, or a short-term bonds that mature in less than five years.

Those favoring a more tactical approach can take a cue from value investors who sell stocks they think may be due for a correction and hold the proceeds in cash equivalents for awhile. After a downdraft, they use the stockpile to pick up companies they like at bargain prices. The challenge, of course, is setting an entry point for moving back in after a decline — and having the backbone to follow through on the return.

 

6 comments

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Cash and Hard Assets ( Physical Gold and Silver, some PGM metals) make a lot of sense in this MKT. The MKT fundamentals are very poor and the same for the Global Economy. Banking, Sovereign and poor MKT Fundamentals make for a poor investment climate. Yes, MKTS rise but look at under the hood, its on declining volume. Beware of the USED Car sales person hawking equities. Invest what you know and understand.

Posted by currency | Report as abusive

>>>“In the past, some clients have asked me to reduce their exposure to the stock market when there’s lots of bad news floating around,” he says. “But after experiencing what happened in 2008, more of them are telling me they want to dump their stocks altogether and move into cash, especially if they’re close to retirement.”

/ / / WOW, some people did learn something from the CRASH!!! And so what if you miss a few pennies of the upside what you’ll save if the Market drops will more than make up for it. And remember the old Market saying: Bears make money, bulls make money, hogs get slaughtered!!! Go ahead and be a HOG and see what happens. OH and there’s another old saying that comes to mind: one in the hand is worth two in the bush.

Posted by Radical_1 | Report as abusive

I find this article very odd….Investors moving to cash? Cash is only worth the paper it is printed on, and what the government says it’s worth.

Central Banks, (Goverment Banks) around the world aren’t moving more to cash, they are buying Gold. Central Banks have purchased more gold in the first half of 2011 than they did all of 2010. Metals hold their value, and will always be worth something…There are tons of articles confirming this fact….

Posted by kpimick | Report as abusive

Why would cash be safer than gold? It seems like all major cash suppliers, with the possible exception of Japan and China, are creating cash as fast as they can

Posted by yrbmegr | Report as abusive

The lever has been pushed and we are half way around the first circle. It is clear and foul what happens from here. We deserve it maybe we’ll learn not to borrow what we can’t pay back and to pay our bill.

Posted by Truth_Teller | Report as abusive

Gold is not necessarily a “safe haven” either.

In 1980 gold was at about $800. By 2001, 21 years later, gold was at $200 an ounce.

That was a 75% loss of value, while inflation was up over 100%.

So gold is not necessarily a “hedge against inflation.” That’s propaganda.

In 1980, silver was at $50. By 2001, it was at $4.00.

Silver lost 92% of its value. Again, inflation in those 21 years went up by over 100%.

Gold and silver do not produce INCOME, DIVIDENDS OR INTEREST.

They only rise or fall in value based on global demand.

When there are better investments, such as bonds producing interest, business ventures producing income, or stocks producing dividends and equity, then investors dump gold like a hot potato.

Gold is for people who are AFRAID. It is the FEAR factor vote.

But it is not a good income producing investment.

Also, the price of gold is easily manipulated by global investors. They can control its value very easily by various means.

Gold may indeed be in a bubble, as it was in 1980.

Posted by Prayer | Report as abusive

[…] with his broker at Raymond James, he cut equities from 70 percent to 50 percent, with another 35 percent in cash; the remainder is in bonds and gold. He hopes to be “semi-retired” by 62 by scaling back time […]

Posted by Reuters Money | Reuters Money | Report as abusive