As of March 31st, 2020, the amount of money invested in cash reached an all-time high, registering $3.09 trillion, 88% higher than cash investments in 2008. It appears that investors are skittish on the financial markets and the economy – but at what cost?

Image showing total financial assets invested in money market funds.

Aside from 2020 being dubbed the worst year ever, investors are taking a holding pattern as uncertainty looms.  There are too many questions without answers.  When will a vaccine be created?  Who will win the election? How will the amount of debt affect the economy? What if we have negative interest rates? How will COVID-19 reshape the global economy?

Further, we are tired, worn out, cooped up, can’t go back to work, and our pet’s heads are falling off.  Why invest during an uncertain time only to create more mental anguish? Queue the little voice in our head. “You know, I think I am going to just sit on the sidelines until things cool off”.

Do not fall in this trap because you will likely regret it.

There is a consequence to every decision we make. While sitting in cash will likely nurse short-term anxiety, this will lose its luster once the scent of capital prosperity emerges. However, it will be too late for those sitting in cash, hard-pressed on when to get back in the game. From there, roll in disappointment when one realizes they traded a tangible return for a comforting one that no longer exists.

“It’s not supposed to be easy. Anyone who finds it easy is stupid.”
-Charlie Munger

Successful investing is tough. When uncertainty approaches, we are programmed to go on defense, making subconscious fight or flight decisions in milliseconds. Our brains hate investing because it constantly toys with us. What kind of a messed-up system rewards us by spending more money when things are bad and selling when things are great? This is the cost we must bear to participate in long-term, successful investing.

Let’s say you have 1 million dollars (did you read that in Dr. Evil’s voice?). The green line shows investing half in the Vanguard Balanced Fund and the other half in the Vanguard Prime Money Market Fund. The blue line shows going all in – investing 100% in the Vanguard Balanced fund. With hindsight, we can identify several nasty periods (i.e. 2008 and Q1 2020) where cash might seem to make more sense. However, these periods of distress have little bearing on overall portfolio performance with the real cost going to those sitting in cash.

Graph showing the difference of $1million invested in cash versus a balanced investment fund.

*Performance calculated from January 1st, 2007 through August 14th, 2020 using 50% Vanguard Balanced Fund (VBIAX) and 50% Vanguard Prime Money (VMMXX).
**Performance calculated from January 1st, 2007 through August 14th, 2020 using 100% Vanguard Balanced Fund (VBIAX).

 

“But this year is different”. It may be, but why should it matter? If you have a long-term investment horizon (i.e. over 10 years) you will notice that one year has a minuscule effect on the long-term success of your portfolio. For all the uncertainties we can fathom, here is something that you should always keep in mind – the economy, coupled with a good portfolio design, provides opportunities for making money and rewards those who participate – no matter who is in office or what phase of the economy we are in.  However, this only works if you participate!

So, when you hear that little voice inside, squash it.  Focus on the empirical evidence that reminds us that each event of uncertainty is a trick and your patience and discipline will be rewarded handsomely.

If you would like to learn how we keep our clients on track, give us a call.