“I went to cash because…” Fill in the blank. This is a common phrase uttered by market pundits, advisors, and amateur investors everywhere. And there always is a seemingly very smart reason to justify putting your investments in cash instead of the market. However; what appears on the surface to be a good investing idea often stands in sharp contrast to the actual results.
Although the U.S. market has given strong 3rd quarter and year to date performances it now is facing the temporary shutdown of the U.S. Government. This is hardly the first and will hardly be the last crisis to dominate headlines. Undoubtedly market pundits will be predicting the end to the now nearly 5 year bull market. There have been no fewer than 9 “crisis” events since the market lows of 2009. Every time the pundits claimed the current crisis would end the economic recovery and “break the bull’s back.” As you can see below, this has been a very costly bet by anyone who has gone to cash waiting for a market pullback. A market pullback will happen eventually, but long term investing success has nothing to do with timing these pullbacks. As the famous investor Peter Lynch once said, “Far more money has been lost by investors preparing for market corrections, or trying to anticipate corrections, than has been lost in the corrections themselves.”
The U.S. Government is officially in shut down mode and an impending debt ceiling looms ahead. While we are not sure what will happen, we know it should not affect our investing decisions. Betting on market movements is called speculation, not investing. As the chart reveals, these bets can often make the investor look very foolish. As a final thought, from 1976 through 1996 there were 17 government shutdowns. The compound annual return of the S&P 500 during this time was over 14% and the total return was 1,776%.
*”Past performance does not guarantee future results. Diversification does not eliminate the risk of market loss. General investment risks include loss of principal and fluctuating value. International investing involves special risks such as currency fluctuation and political instability.” Data from Dimensional Fund Advisors Returns 2.0 Program