CFP® – Brian Puckett's Blog

Written by Brian Puckett, CFP®, CPA/PFS, Attorney at Law.

We’ve recently been approached by a few nervous investors, who, thanks in part to Election Day jitters, are considering cashing out a sizable portion of their portfolio. While this may seem like a good idea at first, there are more downsides to cashing out than you might think. A sounder course of action is to stick to your long-term plan and not let Election Day distractions disrupt a sound investment strategy.

Certainly cash is becoming more popular these days. According to the most recent Wells Fargo/Gallup Investor and Retirement Optimism Index survey, 43 percent of investors reported having moved their money to cash or cash equivalent savings over the past year — far more than those moving money to stocks or bonds. Investors also revealed they have an average of 19 percent in cash savings and 11 percent in CDs or money market accounts.

But while some people view cash as king, there are several reasons why it may not be as desirable for long-term investors. For starters, unlike the 1980s when you could earn savings interest rates of 14 percent or more in CDs, today’s rates are only a small fraction of that. Stocks, on the other hand, have a well-documented history of outperforming the major investment choices, including gold and bonds. What’s more, when you factor inflation into the equation, you lose even bigger with cash because it erodes your purchasing power, meaning you can actually end up with negative growth. Some savvy investors call this “going broke safely”.

Here’s another problem with taking a cash-heavy position. Nobody can time the market effectively. Even professionals often fail miserably when trying their hand at market timing. So, by cashing out, you take on the new risk of earning a substantially lower return. The more often you switch in and out of cash, the more risk you pile on. It’s a loser’s game.

Remember, that, over time, the stock market has a strong history of rebounding, even after significant corrections. If you are investing for the long-term, you’ll most likely have time to ride out market fluctuations and still come out ahead. Jumping in and out of cash positions makes long-term growth even harder to achieve.

Certainly there are reasons an investor would want to keep a portion of his or her portfolio in cash—such as short-term needs and goals—and we even advise it in some instances. However, we don’t recommend most investors keep a high portion of their portfolio in cash for the reasons stated above.

While cash may seem to perform better in the short term, research supports the importance of sticking to your asset allocation, which is specifically tailored to your age, your risk tolerance and investment goals. We know staying the course may seem scary in light of Election uncertainty and other outside pressures, but we urge you not to let unfounded fears topple a sound investment strategy.

At Align, we help you craft a portfolio that’s best suited for your particular needs. Please don’t hesitate to reach out to us if you have any questions or concerns.

Brian Puckett | JD, CPA, PFS, CFP®
13921 Quail Pointe Drive | Oklahoma City, OK 73134
T: 405.607.4820 | F: 405.294.3340
125 5th St. S. Suite 201 | St. Petersburg, FL 33701
T: 727.455.0033
Toll Free: 800.401.6477

By Brian Puckett, JD, CPA/PFS, CFP®
Align Wealth Management
www.alignmywealth.com
800-401-6477

In last month’s blog, “Get Along, Little Market,” we discussed the benefits of diversifying your investments to minimize avoidable risks, manage those that are unavoidable when we’re seeking market gains, and better tolerate market volatility along the way.

Our next topic: understanding how to build your diversified portfolio to effectively capture market returns. To do that, we must understand where those returns actually come from.

Market returns represent something deeper than the ups and downs of stocks and bonds. They are our compensation for providing the financial capital that feeds the human enterprise going on all around us.

When you buy a stock or a bond, your capital is ultimately put to work by businesses or agencies that expect to succeed at whatever it is they are doing, whether it’s growing oranges, running a hospital or selling virtual cloud storage. You, in turn, are not giving your money away: You mean to receive your capital back, and then some.

A company hopes to generate profits. A government agency hopes to fund its work with money to spare. Investors hope to earn generous returns. Now,
even if a business is booming, you cannot necessarily expect to reap the rewards simply by buying its stock. By the time good or bad news is apparent, it’s already reflected in share prices.

So what does drive expected returns? One factor is the acceptance of market risk. Stocks, as you may know, are often riskier than bonds. When you buy a bond:

• You are lending money to a business or government agency, with no ownership stake.

• Your returns come from interest paid on your loan.

• If a business or agency defaults on its bond, you are closer to the front of the line of creditors to be repaid with any remaining capital.

On the other hand, when you buy a stock:

• You become a co-owner in the business, with voting rights at shareholder meetings.

• Your returns come from increased share prices and/or dividends.

• If a company goes bankrupt, you are closer to the end of the line of creditors to be repaid.

In short, stock owners generally face higher odds of not receiving an expected return and of losing their money. While stocks are considered riskier than bonds, they have also tended to deliver higher returns over time. This outperformance of stocks is called the equity premium. The precise amount of the equity premium, and how long it takes to be realized, is never certain.

As the chart below shows, stock have handily outperformed bonds over time. However, they also have exhibited a bumpier ride along the way:

Exposure to market risk is among the most important factors contributing to premium returns. But it’s not the only factor. Next month, we’ll continue to explore market factors and expected returns, and discuss why our evidence-based approach is so critical to that exploration.

Tag: CFP®

CASHING OUT IS NOT A CASH COW

What Drives Market Returns?