You don’t need me to tell you that cash rates are (finally?) non-zero! We’ve been paid a few measly basis points on our cash for years and years meanwhile banks were busy lending that money (may I remind you: our money!) for a gazillion times more than what they were paying us. Gorgeous biz model they’ve got going on there. But now banks are in trouble so maybe I should keep schtum! (Psst: Read here why Silicon Valley Bank went bust in under 36hrs!)
But anyway, while banks were busy paying us next to nothing for our deposits, this all changed when inflation took off like a bat outa hell and interest rates were hiked up. Way up. The base rate here in the UK is 4% and in the US it’s not much higher. So you’re now effectively being paid to take on zero risk whatsoever. And looking at what markets are up to right now (or should I say down!) being in cash is no crime.
Cash is no longer trash….for now?
So right now, cash is starting to look very cool. We can all agree on that. It’s no longer trash. But over the very long term do you wanna be in cash? Even now, say you manage to get 4% on your cash (which probably means locking it up for a fixed amount of time or limits on withdrawals) if you take inflation into account, you’ll still be losing 6% year-on-year since inflation is 6% higher than interest rates. So unless interest rates are the same or higher than where inflation is currently at, you’ll be losing money! So not quite a bargain after all, huh.
Cash is not the same as investing. Yes, it’s technically an asset class (that’s just semantics, right??) but it’s not going to give you any risk which btw is where all the reward comes from! You know exactly what you’ll get each year. If you wanna grow your capital you gotta look away from cash, and into stocks. However un-comfy that feels. And sounds right now.
Over the long term (ahem, decades NOT days) you wanna be in stocks. It beats cash (and bonds) by a long shot. That’s how you seriously grow your money. And if you hold stocks for 20 years, you’ve got a 99% chance of making money. I’ll take those odds any day.
The short term makes it harder but if you can get through that your future self will thank you!
The trouble is the short term can be super messy and uncomfortable like right now but if you’re able to hold your nerve (easier said than done, I know!), drip feed money into markets month after month you’ll get what you came for.
But that’s not how we’re wired to think. When markets crash, we turn to what feels safest to us. And that’s cash. So we sell our shares (to someone who actually want ‘em) and we turn it into cash. Investing is all about how well we cope with uncertainty. Look what’s happened in the past 2 years alone: we’ve had a once-in-a-lifetime pandemic, a war (that’s still going on!), 40-year-high inflation, 15-year-high interest rates and all the ugly bits in between!
It’s fine to have cash and in fact it’s something you should always have on hand since you never know what will crop up in markets – as this past week has shown us! 2 banks went bust in the space of 2 days (read about SVB’s failure here and why you should care) and now everyone’s worried that loads of other banks will go down too! After all, raising rates from 0% to 4% in the space of 12 months and you’re bound to see some ugly stuff emerge.
You could be waiting a lifetime
If you wait on the sidelines, covered in cash, you might very well miss out on the markets’ best days. Which don’t come around too often. If you even miss 10 of those best days, your portfolio will curse your cash! Timing markets is near to impossible but if you try to time your exit and your entry it means you’ve gotta be right twice which makes your odds infinitely worse.
And while you might feel super comfy sitting on your cash (with these juicy rates!), who’s to say it’s gonna stick around forever? The world is entering a recession, or at the very least a time of much slower growth and if think whole bank crisis starts to actually grow some more legs pray it doesn’t (but Credit Suisse is sending some warning signals having crashed by 20% yesterday!!) then rates are gonna come down as quick as they went up. But no one knows. What’s certain is uncertainty itself! Read here the price you must pay to get the rewards from investing.
But you can’t hide forever. However tough markets look right now, they always recover. It’s question of when NOT if. I know it doesn’t feel like it at the time but it’s the truth.
Though I honestly can’t bear to open Bloomberg as I worry we’ll all get dealt another kick in the backside wiping precious buck off our futures! So I’m doing my best to keep my eyes away but it’s a tough task given CNN, Bloomberg, CNBC, you name it is on in the office 24/7! I’m like argh don’t say something bad. So if you can, keep up off the news and keep investing! (Psst: read here why boring and slow is your investment motto!)
Your best bet is not to time a single thing. And the trouble with having too much cash on hand is that it’ll never feel 100% right to put it to work. Just look at the media: do they ever have anything good to say?! Nope. It’s mostly negative stuff. There’ll always be bad stuff going on you’ve just gotta invest despite that.
Drip feed and let markets do their thing. They’ve been around for a while. They know what they’re doing! Even if it doesn’t feel that way.
Disclaimer: This blog is not investment or financial advice. It is my opinion only. This blog is not a personal recommendation to buy/sell any security, or to adopt any such investment strategy. Always do your own research before you commit to any investment.
Knead Your Dough 