Should We Sell And Go To Cash?

The first six months of 2020 saw the advent of the worst global public health crisis in a century—since the 1918 influenza pandemic. In response, the world locked down, putting its economy into a kind of medically induced coma.

As a response to the pandemic, the United States economy went into recession almost immediately, accompanied by record unemployment. The U.S stock market experienced the fastest, deepest collapse in stock prices in living memory, if not ever.

The equity market crashed from a new all-time high on February 19th to a bear market low (so far) on March 23rd, down 34% in just 33 days. There is no historical precedent for this steep a decline in so little time. Confoundingly, it then posted its best 50 days in history.

It is not possible to forecast the near-term course of corporate earnings or dividends, as they—like the economy they reflect—are still largely hostage to the pandemic. That said, I invite your attention to the fact that on June 30th, the yield on the 10-year U.S. Treasury note was about .66%.

After going through a horrific first quarter, we just experienced the best Q2 since 1957. The market has come so far so fast that some people are wondering if it will correct or even crash later this year. This begs the question: should we sell out of our stocks and go to bonds or cash?

While it may be tempting to take some money to the sidelines and sit in cash, there is danger in this strategy.  Never before, in the history of investing, has anyone been able to successfully pull off a market timing strategy time and time again.  If there was a proven track record of doing so we would have brought it to you years ago.  Please see Exhibit 1 to get a look at how costly trying to time the market can be. Missing just the best 5 days in the market can ruin a well-designed, long-term plan.  Keep in mind, over the last 20 years, 24 of the worst 25 days were within one month of the best 25 days and if you missed just 5 of those best days your hopes of accomplishing your important long-term goals would be dashed (please see Exhibit 2).

Over the last 30 years, the S&P 500 has compounded at nearly 10% per year.  Meanwhile, most individual investors have only grown their wealth at approximately 5% per year (please see Exhibit 3). There is a reason that most individual investors have underperformed the stock market by almost 50% over the last 30 years.  By following the temptation to sell and go to cash, they miss out on some of the market’s best days. Often, the best days come within days or weeks of its worst days.

If the temptation to sell and go to cash is getting stronger, let this be a not-so-gentle reminder that the strategy is foolish and has never worked before. Keep in mind, the 4 most deadly words when it comes to investing are “This Time It’s Different!”.

If you are having concerns or simply want to talk, please do not hesitate to give our office a call.  We are happy to help you navigate through the current challenge.

Exhibit 1:

 

Exhibit 2:

Exhibit 3: