Safety Is As Safety Does
About thirty years ago, a relative told me he only buys certificates of deposit – safest investment in the world, he said, adding that stocks were too risky. He would scour local banks trying to squeeze an extra quarter of a point from the local teller. In 1990, a 6-month CD paid more than 10% interest, so he felt wise in his investment strategy. He failed to realize that inflation averaged 6%, so his net return was 4%.
Since 1990, the interest rate on a 6-month CD has fallen 99% from 10% to 0.09%, while the S&P 500 soared 2,270%. If he invested $100,000 in a CD earning 10% he made $10,000. Today, he would earn $90. To generate $10,000 at current rates, he needs approximately $11 million in assets.
The markets are frightening and volatile because of the war in Ukraine and inflation, so the urge to sell stocks is high. Cash offers a reprieve from the destruction – a safe place to hide until conditions improve. If you sell stocks today, when do you repurchase them? How will you know it is all clear? Investors sold stocks in March 2020 as the S&P 500 fell more than 30%. It appeared to be an intelligent move until it started to recover. The S&P 500 erased all its losses by August and soared more than 50% from the March low. You earned 16.25% if you did nothing in 2020, while the yield on the 6-month CD fell 67%, dropping from .34% to .11%.
During my 30-year career, I've never seen a balanced portfolio of stocks, bonds, and cash drop 67%, let alone 99%. Is it possible? Anything is possible, but I wouldn't bet on it. If your time horizon is three to five years or more, invest for growth.
What's normal anyways? ~ Forrest Gump
March 10, 2022
Bill Parrott, CFP®, is the President and CEO of Parrott Wealth Management, 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 so our clients can pursue a life of purpose. Our firm does not have an asset or fee minimum, and we work with anybody who needs financial help regardless of age, income, or asset level. PWM's custodian is TD Ameritrade, and our annual fee starts at .5% of your assets and drops depending on the level of your assets.
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