Holding money is a sign of fear, and fear is the worst investment of all


In the United States, money market balances have gone from less than US $ 3.5 trillion to US $ 4.6 trillion so far in 2020, according to data from Refinitiv Lipper. According to the Federal Reserve Bank of St. Louis, the balances of commercial banks increased from $ 13.3 trillion to $ 15.5 trillion over the same period. Essentially, more than $ 3 trillion has been invested in cash and money market funds since January.To put this figure in perspective, it would roughly represent the total market value of Apple and Microsoft combined, the two most valuable companies in the world.

In Canada, we have statistics from the Investment Funds Institute of Canada, which tracks mutual funds and ETFs. At the end of May, the number of ETFs and money market mutual funds was $ 43.6 billion, up from just $ 30.3 billion a year earlier. According to American statistics, I imagine that bank balances have peaked in excess of $ 13 billion in Canada.

There are certainly good reasons to hold cash and money market funds. They are safe and liquid. If you have short-term needs for funds or as a safety cushion or for day-to-day business operations, this is a very good option. However, as a long-term investment choice, it has not proven to be wise.

When I see a spike in these balances, that spike represents an investment decision. It is people and businesses who choose to be cash rather than other forms of investment. Today, those trillions of dollars are probably earning between zero and one percent. I know it is possible to earn higher rates in very small businesses or by freezing your money for a while, although locking in your money takes away the benefit of liquidity.

It is interesting to note that the largest money market funds in Canada have an annualized 10-year return of less than 1%.

If most Canadians expect long-term investment returns of more than five percent and money market funds have not provided one in the long term, the only reason to have money Long term in a money market fund or bank account is either fear or a real belief that you are able to add value by choosing to enter and exit.

It is possible to effectively time the market by switching to cash, but for the most part it is not efficient, except for some other reason that the markets increase over time. However, there is another reason why market timing is generally not efficient. If we look at the actual monthly data for 2009, the Canadian money market balances and the performance of the TSX 60, we find that investors have missed much of the recovery.

In March, April and May 2009, the TSX 60 rose 26.8% in total. Money market balances peaked at the end of March and fell 1.7% overall over the same three-month period. This means that after a historic peak in money market positions, only a small percentage of investors had reinvested in time to take advantage of the big rebound. From June 2009 to January 2010, eight months after the significant gains, the TSX 60 rose 3.2%. What happened to the money market? Balances fell 35% or $ 23.5 billion from money market security to a form of longer-term investment. No problem with its withdrawal, but they did so after missing much of the recovery.

I mentioned earlier that the only reason to move money from long-term investments into an asset class that is guaranteed to underperform your long-term goals is either fear or the real belief that you are able to add value by choosing to enter and exit. . The reality is that most investors bail out and put in cash after at least a significant portion of the losses. As we saw during the 2009 recovery, they then return this money to investments after most of the significant gains have already occurred. Essentially, most investors do not add value to their portfolios by switching to cash and then reinvesting. This leaves a reason for spending money. That’s fear.

I don’t think I need to reconsider the reasons why fear is not conducive to strong long-term investment returns. If you look at the table below, it shows the returns for 25 years as of December 31, 2019. The returns are similar for any longer term period. Of these asset classes, the only thing we know for the future is that US Treasuries will yield less than 2.5% in the near future. The bottom line is that cash, the money market, and GICs are not good for your long-term investment returns.

What are the best alternatives to investing in cash today? Almost all. This is not a commentary on the direction of the stock market in the short term, but rather a commentary on long-term investment and the inability to predict the future – especially in the short term.

If we just look at dividends and other returns, we will see a range, but all of them are higher than cash returns. As for growth beyond these returns, we can simply put our faith in a long-term story. For reference, I also showed the private credit yields available through the TriDelta hedge fund in the high end.

Finally, history teaches us that big cash changes are short term. When trillions of dollars hit the market (which they will do), do you want to be at the front of this rush where you can take advantage of the dollars that come behind you, or behind.

If you are sitting in oversized positions in the spot and money markets today, the best solution is to get back to normal.

Ted Rechtshaffen, MBA, CFP, CIM, is president and wealth advisor at TriDelta Financial, a wealth management firm specializing in investment advice and estate planning. You can reach him at [email protected]


Please enter your comment!
Please enter your name here