Is Cash the Only Safe Place to Be NOW?

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Let me start out by apologizing for my last blog post on ‘Is the Reward Worth the Risk?\’ When I said it would be different than anything I had previously written, I didn’t realize how people would react to my comments.

While I have been getting a lot of calls and emails thanking me for the information and explanation, several folks have contacted me and said that the post confirmed things that they had been concerned about and now they are moving everything to cash and just sit, as they are frozen with fear.

My purpose in writing that blog post and recording the subsequent podcast (click to listen) was not to scare you, but to try and get folks attention about the risks building in a number of asset classes, including stocks.

I had written about bonds and particularly bond funds earlier this year and the risks there. So why did I write the last blog post, if not to disturb you?

Well, I wanted to get you to consider reducing risk in your investment portfolio, not run and hide. Take advantage of current valuations to reposition assets to more conservative options.

I want you to remember that even in the worst of times, there will still be things that make money.

For example, at the height of the crash in November 2008, there were 49 stocks that made new highs, and 1894 new lows on the 20^th of that month.

So even at the worst of the worst, there are some investments that will benefit in every market condition, we just need to figure out what those investments might be.

As I mentioned in the opening, many clients have said they just want to liquidate everything and hold cash.

What Can You Do to Prevent Losing Money?

While that will prevent you from losing money in a stock, bond or real estate drop, you are likely not making progress toward your financial objectives given the 2% or less that you will earn on your savings.

This is why we have been implementing strategies with clients that are returning 2-5% on their cash, without current taxation. This way you are getting a fair compensation while you wait for a solid buying opportunity (sometimes these returns can be tax free, instead of tax deferred). So if cash is the only thing that will allow you to sleep at night, consider this type of strategy.

After all, cash can be a great asset to have available when markets drop. Just think of those folks who bought real estate for 30-50 cents on the dollar during the recession. These folks made a lot of money during the recovery.

Same thing with stocks. The hard part is buying when these asset types are on sale. If Nordstrom’s had a sale, you might be excited to go and buy some bargains, but most people don’t like doing that with investments.

If you had bought Apple on the day I mentioned, November 20, 2008, you would have paid $11.50 per share that day and now it is worth about $200 per share! Now you might be thinking, “if I sell in that situation, I will have to pay taxes. Well, isn’t holding on to that asset and watching it drop from $200 a share to $100 a share a tax as well?

Isn’t it Better to Not Lose Money?

In fact, one of the first things I was taught when I started my brokerage career was, “Nobody ever lost money taking a profit”, and those words are as true today as they were 30 years ago, maybe even more so.

For over 30 years I have heard people say they want to wait before investing, until they are sure the market is going up. Unfortunately, the longer a market goes up without a drop, the greater the drop tends to become.

So by waiting, they are increasing their risk, not decreasing it. I know this is counter intuitive, but it is logical if you look at human behavior and how we react to things.

What About Real Estate?

In real estate, clients are looking to take profits in markets that appear to be peaking, like here in Northern California and are exchanging into less risky types of real estate in states where valuations are more reasonable.

When valuations become more reasonable, cash will present opportunities to those who have it and have the fortitude to make a purchase when things look bleak. After all, if I buy a property that was selling for $1m before a drop, if I can buy that for half off, my risk is greatly reduced.

Things like class A apartment buildings, office space, and regional shopping centers are all examples of types of real estate that might get hurt in a downturn, given today’s prices.

We are looking at “recession resistant” real estate types that will continue to perform in tough times. These are things like self storage, manufactured housing developments and medical office buildings.

What’s the Bottom Line?

I want to encourage all of you to review your current investment portfolios with an eye toward risk.

Ask yourself when you will need to spend those investment dollars to put your kids through school, buy a house, start a business or retire and then look at each asset and ask; will this get me there?

The other question to ask is; “Would I buy this again today at the current price”? If the answer is no, then you know your answer, it is time to sell. You have this opportunity to reduce risk exposure and position yourself for opportunities to come. Especially if you are going to use that money within the next five or so years.

Need Help?

If you are not sure what the money is for, then download the Thought Organizer from the first page of our website to help clarify your thinking.

Then contact your advisers and find out what they are recommending for managing risk and what steps they are taking to reduce your exposure to market drops. I would suggest that a response of “not doing anything, we are here for the long term” is not an acceptable answer if you are going to use this money in the next 5 -7 years.

If you don’t have an adviser, or are not happy with their answers, give us a call and we can talk about options that will help you sleep better at night and Retire Happy!!
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