Over long periods of time, equities tend to deliver reasonably positive outcomes and outperform most other asset classes, particularly cash. (The article refers to cash as liquid assets for the ease of access such as bank deposits or money market funds and not to currency notes as popularly understood in India). Yet, we are surprised to see clients having long-term capital invested in bank fixed deposits. Whilst we do believe there is a role for deposits in everyone’s asset allocation, they should match the purpose for it is invested. This article is a handy guide to what money should go into deposits and what shouldn’t.
The author says emergency funds, short term foreseeable liabilities and short term retirement spending are all valid reasons for holding cash. But certainly not for parking long term funds or waiting for a better entry point into the stock market.
“Cash can be particularly detrimental to long-term investment goals such as retirement. A retiree who started saving $10,000 per year in 1993 and stashed everything in cash would have ended up with about $380,000 by the end of 2022, compared with about $1.5 million if the savings were invested in an all-equity portfolio or $1.0 million if invested in a balanced fund.
Bad news that you think might cause a market downturn: There is almost always a reason not to invest—economic uncertainty, geopolitical turmoil, natural disasters, or global pandemics, for example. And at times, macro events can result in deeply negative market returns, such as the 20.6% drop in response to the coronavirus pandemic in the first quarter of 2020, or the 19.4% market decline amid surging inflation and rising interest rates in 2022.
But the problem is that it’s impossible to predict how the market will react to any given event, or how long the decline will last. The drawdown in early 2020, for example, was surprisingly short-lived. Investors who sold off early in the year would have missed out on the market’s subsequent rebound, which more than offset the previous losses.
….statistically speaking, the market goes up more often than it goes down.…equity market returns are frequently negative over shorter periods: About 45% of trading days and 42% of weekly trading periods have historically ended up with negative returns. But that still means that positive returns are in the majority. Over longer periods, about two thirds of monthly and three fourths of annual returns have historically been positive for the equity market. Thus, keeping money on the sidelines is often a losing bet.”
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