Cash is King, Until it Isn’t

Panicky sellers will be sorry.

That was the message from Charles Schwab’s chief investment strategist, Liz Ann Sonders, according to CNBC recently.

Her stance is in stark contrast to some of the pessimistic calls made by various other analysts, especially in light of how volatile global markets have been so far in 2016.

Investors were thrown into a frenzy at the beginning of January, sparked by a slowdown in China’s economy and crashing oil prices.

Markets around the world plunged and some investors likely swore to never invest in shares again!

But such a decision would be a mistake, according to Sonders, who added “a slide does not necessarily spell doom.”

That’s great news for investors who held their nerve and stayed in the market, despite all the bearish calls and warnings to “Sell Everything” from RBS analysts…

On the other hand, it’s not so great for investors who did panic, selling a good portion of their shares in exchange for the ‘safety’ of cash.

Panic Ye Not

It happens all too often in the share market…

While most investors try to remain calm, others get swept away in the fear.

Unable to bear any more pain, many sell at exactly the wrong time – at the very bottom – only to miss the subsequent rally.

As it happens, the S&P/ASX 200 (ASX: XJO) hit a low of 4,803 points just over a fortnight ago. But it has since regained 5%, and closed at 5,043 points yesterday afternoon.

In addition to missing the rally, those investors will also need to pay the taxman for any capital gains recognised.

Those could otherwise have been deferred until a later year…

The investors who decided to sell out will also have spent a decent chunk on brokerage fees.

Of course, they’re welcome to buy their shares back at any time, but they’ll need to pay their broker again for the privilege to do so…

As Liz Ann Sonders from Charles Schwab said, Panicky sellers will be sorry.

Cash Is King, Until It Isn’t

It’s important to note that I am not suggesting investors don’t hold any cash.

Keeping some cash spare is important for any investor – whether he or she be 25-years-old and just starting their investing journey or a retiree looking to grow their wealth slowly.

As a general rule of thumb, investors are advised to hold at least enough to cover three to six-months’ worth of living expenses…

That is, enough to cover the mortgage and other bills as well as food and water.

If the economy does take a turn south, or if you do happen to lose your job, it’s important to have that safety buffer.

You’ll also want to be holding some cash if the share market takes a turn for the worse, just as it has over the last nine months or so.

After all, if you’re fully invested you’re not going to be able to take advantage of any great buying opportunities.

But as Philip Baker from The Australian Financial Review highlighted last week,

Trying to work out how much cash should be in the portfolio is always a tricky business… But having the guts to spend it when the time is right is also a fine line balancing act.

Hindsight shows us that one of the best times to be converting some shares to cash was in April 2015, when the ASX 200 was hovering just below 6,000 points.

It’s fallen sharply since then, but only now are some investors cashing out —the timing is all wrong!

Baker goes on to say (emphasis my own):

“Having a pile of cash in the portfolio as the market sells off can make investors feel comfortable, and improve performance for a time, but if it’s not deployed well when the bounce eventually comes returns can suffer.”

He’s not wrong…

Australia’s cash rate is stuck at just 2% right now…

The Reserve Bank of Australia will meet for the first time in 2016 this afternoon, but don’t expect them to hike interest rates.

I doubt they’ll lower them today either, but they could at some point this year.

That means that any cash left in a savings account or term deposit could be destined to earn low returns.

Inflation will take its toll while taxes will likely also eat away at any interest earned.

With the ASX 200 still sitting 16% below its April 2015 high, and potentially set for a rebound, now could be the perfect time to start putting some of that cash to work!

Foolish Takeaway

I don’t know what the market is going to do today.

Nor do I know which direction it will go tomorrow, next month, or even next year.

It’s that uncertainty that keeps so many investors on the sidelines.

A little volatility is also what causes many investors to sell out of their shares and return to the ‘safety’ of cash.

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