“Bottom line: Cash only matters when it matters. And when it matters, it really, really matters.”
We’ve used this quote before, but the sharp selloff in the stock market is a vivid reminder of just how wise it is.
When the market is rising, holding cash seems foolish. It may earn next to nothing and is a drag on return. If you’re an investment manager, clients will wonder why they pay you a management fee for an asset that offers so little.
Moreover, when the market is rising it may seem intelligent to borrow so that you can buy even more of a good thing.
But then the market tumbles.
And cash looks different.
Now you see that it has a couple of things going for it:
- Cash provides security. When the market drops sharply two days in a row, people can’t help but draw a straight line between the two points and calculate how soon they’ll run out of money.
But cash has value you can count on. It’s the teddy bear a child clutches under the bed covers when a thunderstorm pounds the roof and rattles the windows. It helps you stay the course toward your goals rather than panic and sell.
- Cash can have extraordinary option value. Those who had been fully invested can only buy after they sell something else, and that something else may be at a low price. With cash, you can take advantage of low prices to make good investments. The cash that had seemingly been asleep, drawing little interest, can now wake up and show its value.
Barry Dunaway, CFA®
America First Investment Advisors, LLC
This post expresses the views of the author as of the date of publication. America First Investment Advisors has no obligation to update the information in it. Be aware that past performance is no indication of future performance, and that wherever there is the potential for profit there is also the possibility of loss.