100% Cash Portfolios - Are they really that bad?
Just the other day I was posting on a stock topic over at richdad.com’s forums regarding the current slump in the market. I wrote a post responding to someone asking about where the market was going, and simply concluded my post with , “I am 100% cash”. Following that post I got a few quick responses from traders who stated that I was dumb for sitting in cash, with one person neutral on it. So, it made me ask myself, are 100% cash portfolios really that bad?
When I thought about it, it really me take a deeper look at the situation as a whole. Here are some of the pros and cons I came up with:
Pros
- You can’t loose anything. If you have 100% cash sitting in your Ameritrade, Scottrade, Etrade, etc. broker account. Simple is simple, nothing at risk means nothing to loose.
- You don’t have to worry about your account tanking over night. It allows you to take a step back from the market and just sit on the sidelines. Sometimes the bench isn’t all that bad.
- You still gain interest on your money. Though now a days that % is pretty slim, they reward you for sitting with your cash.
Cons
- If you aren’t risking anything, how can you make anything? Without leveraging yourself how are you supposed to beat out the market gurus of the world. The saying of, “Never turn on cruise control in the business world because someone is just waiting to fly by you” could apply.
- You aren’t gaining experience by sitting around. If I am sitting on the sidelines, how am I supposed to get better and enhance my skills. Also, when I do decide to step back in, how fast will I re-adjust to the game?
Now, I am not saying that having a 100% cash portfolio is the right way to go. What I am suggesting is looking at it from two different lights to really get a glimpse of how it could be good and bad.
I personally put myself into 100% cash in my own personal accounts and my clients accounts on May 10th, 2006. The major market indexes closed above their 50 day moving averages for the last time that day; it was really the start of the current market downfall. Though some investors may think I made a dumb play, I think that I have some evidence in my defense. Simple investor math tells me that 3 out of 4 stocks follow the overall market, and who wants to play against those odds? Sitting in 100% has not only saved me from the frustration of watching my holdings go down (which they all did once I exited), but it also has saved me my wallet.
On the other side of the fense, an accomplished investor could say, “Why weren’t you short if you knew the market was going to go down?” And my response is that I didnt know. I had no idea we would be trading next to the 200 day moving average, I just trusted my trader instincts and stepped aside. I decided to remove the risk of what could be a downfall; you never know what news will send the market soaring one way or another.
I have stayed involved with the market’s movements and news through this blog to keep my skills in tact. I agree that when you step away from anything, regardless if its riding a bike, you will loose some of your edge. The quesiton is though is it worth loosing part of that edge to keep part of your nest egg? I think thats a personal opinion answer, because we all have different means to keeping our skills in tact.
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