Since the stock market started its period of dramatic ups and downs earlier this year (sometimes fluctuating even 300 to 400 points in a single day), the number of people who ask me what they should do with their holdings has spiked tremendously.
Should I get out? Should I be in cash? Is the market going to crash? What does this mean? Is it safe?
The words change depending on the person, but the emotion is always the same: I’m scared and I don’t understand enough about what I own to know what to do.
Despite years of educational efforts to get small investors to set realistic risk parameters, own only what they understand, plan for sell-offs, prepare themselves mentally for the tough times and stay put… no one does any of these things.
What we do instead is wait for the market to prove yet again that, yes, it does go up before we buy. Then we wait for the bottom of a tough day and sell, almost always for a loss.
And then we sit, frozen in cash.
Which brings me to the subject of today’s piece: the amount of cash we hold.
Before all the gyrations took hold of the market (back when it was going straight up for what seemed like forever), Wells Fargo looked at the asset allocation for 940,000 households with $10,000 or more. The study compared the balance of cash to investments in their portfolios with those of the pros.
For anyone who has worked in the money world, there are no surprises here.
Boomers hold twice as much cash as professionally managed accounts do. Gen Xers and millennials both have about three times the cash the pros think they need.
To be perfectly honest, after 28 years of working with the average person and their money, I know these numbers significantly underestimate current cash positions.
It’s the volatility in the stock market for the past month or so – and the panic-selling it has been driving – that’s responsible.
We’re holding cash… lots of cash – too much cash. A lot more than what the Wells Fargo survey is reporting.
And after taxes and inflation, every penny is losing money every single day.
Cash is the snake oil of investing: It feels good for a while and it sounds like a reasonable fix, but it does absolutely nothing for you. And over time, it will give you one hell of a hangover.
At best, it’s a false sense of security. As the volatility in the market pushes more people to sell, the amount we are holding is exploding.
As we age, this situation becomes increasingly threatening to our security.
I know it feels safe and secure, but over time (something the longevity bonus has given most of us a lot of in retirement), we lose buying power in cash.
It’s a constant downward spiral that, as we draw down our cash position to pay our bills, causes our income base to shrink.
And given enough time, being cash rich will one day result in not being able to …read more
Source:: Investment You