Cash is King!

Cash is King! The King is Dead! Long live the King! An unusual thing is happening this year – cash is outperforming stocks and bonds. Allocating your investments to T-Bills has been a winning trade this year.

According to Deutsche Bank, 90% of the 70 asset classes they track are in negative territory for the year. As a comparison, last year only 1% of assets generated negative returns.[1]

U.S. T-Bills, or cash, rarely outperform stocks and bonds. In fact, it has only happened 8 times in the last 92 years. The last year was 1994.[2]

Treasury Bills are a safe investment, probably the safest.  Since 1926 they have never lost money – a rare feat for an investment. If they’re so safe and have never lost money, why not allocate 100% of your assets to this category? Great question. A major reason is inflation. Inflation has all but wiped out your realized return. T-Bills have historically averaged 3.4% and inflation has averaged 2.9%. Your net return, before taxes, has been .5%. If you subtract taxes, your return is negative.[3]

In 1974, T-Bills generated a return of 8%, but the inflation rate was 12.2% - a real loss of 4.2%.[4]

Cash is part of the asset allocation pie of stocks, bonds and cash. All three components are needed for you to achieve long-term investment success.

Cash may provide temporary comfort during a stock market downdraft, but it’s not a long-term solution to creating wealth. Of course, if you need money in the next year or two, then an allocation to cash make sense. For example, if you’re going to buy a new home next year, then a high cash reserve is needed.

A recent client transferred money from their CD to their investment account, a diversified portfolio with several asset classes. Her diversified portfolio is in negative territory so far. She asked me a few weeks ago if she would’ve been better off keeping her money in the CD, and I told her yes, it would have been the better strategy. Hindsight is 20/20.

Stocks aren’t performing well this year looking to break a nine-year winning streak. Stocks never appreciate in a straight line, unfortunately. A jagged chart of stocks is the norm. High points and low ones dot the landscape.

How should you allocate your assets between stocks, bonds and cash? The best way to determine your allocation is to complete a financial plan. Your plan will give you guidance on how to best invest your resources.

When should you allocate more resources to cash? If you need money, then keep it in cash – money market funds, CDs or T-Bills. If you’re approaching retirement, then my recommendation is for you to allocate three-years’ worth of expenses to cash. For example, if your annual expenses are $100,000, then a cash allocation of $300,000 is suggested. Last, if you can’t sleep at night because you’re worried about stocks falling further, then raise enough cash so that you can make it through the night.

If your time horizon is more than five years, invest in stocks and bonds.  Despite their sporadic returns, they historically generate higher returns than cash.

For we walk by faith, not by sight. ~ 2 Corinthians 5:7

November 26, 2018

Bill Parrott is the President and CEO of Parrott Wealth Management firm located in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process.

Note: Investments are not guaranteed and do involve risk. Your returns may differ than those posted in this blog.

 

 

 

 

 

[2] Ibbotson® SBBI® 2015 Classic Yearbook

[3] Dimensional Fund Advisors 2018 Matrix Book

[4] Ibbotson® SBBI® 2015 Classic Yearbook

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