Keeping cash is a sign of fear, and fear is the worst investment of all


In the United States, money market balances fell from less than US $ 3.5 trillion to US $ 4.6 trillion so far in 2020, according to Refinitiv Lipper data. Commercial bank balances rose from US $ 13.3 billion to US $ 15.5 trillion over the same period, according to the Federal Reserve Bank of St. Louis. Essentially, more than US $ 3 billion has been moved into cash and money market funds since January.To put that figure in perspective, it would represent roughly the entire 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. As of the end of May, the number of money marketed by ETFs and Mutual funds was $ 43.6 billion, compared to $ 30.3 billion a year earlier. According to US statistics, I imagine bank balances have peaked at well over $ 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 running a business, this is a valid option. However, as a long-term investment choice, it has not been proven to be wise.

When I see a spike in these balances, that hike represents an investment decision. It’s people and businesses to choose to be cash rather than other forms of investments. Today, those hundreds of billions of dollars are likely to earn somewhere between zero percent and one percent. I know it is possible to earn higher rates in very small businesses or by locking in your money for a period of time, although locking in your money gets the benefit of liquidity.

Interestingly, the largest money market fund in Canada has a 10-year annualized rate of return of less than one percent.

While most Canadians expect long-term investment returns of five percent and more, and money market funds have not provided one percent over the long term, the only reason to have long term money in a money market fund or bank account either out of fear or a real belief that you are able to add value through the timing of entering and leaving.

Efficiently timing the market, by moving cash is not possible, but for the most part it is not efficient, if for no other reason than the markets go back in time. However, there is another reason why the moment the market is generally not efficient. If we look at the monthly average of the data from 2009, looking at the silver market balances in Canada and the performance of the TSX 60, we see that investors missed much of the race.

In March, April and May 2009, the TSX 60 rating was a total of 26.8%. The silver market equilibrium peaked at the end of March and fell a total of 1.7% compared to the same three-month period. This means that from a record high in the holdings money market, only a very 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 big gains, the TSX 60’s rating is up 3.2 percent. What happened to the silver market? Balances decreased by 35 percent, or $ 23.5 billion from the security of the money market again in a form of long-term investment. No problem with her coming back, but they did after missing much of the recovery.

I mentioned earlier that the only reasons to move long term from investing money in an asset class that is guaranteed to lag behind your long term goals is either fear or a true belief that you are able to add value through the timing of entering and leaving. The reality is that most investors bail out and put funds into cash after at least a significant portion of the losses have occurred. As seen in the 2009 stimulus, they then return this money for investments after most of the significant gains have already taken place. Essentially, most investors do not add value to their portfolios by switching cash and then reinvesting. This leaves a reason for switching to cash. It’s fear.

I don’t think I need to look into the reasons why fear isn’t conducive to long term growth with investment returns. If you look at the table below, it shows returns for the 25 years of Dec. 31, 2019. Returns are similar for a long time. Of these asset classes, the only thing we know about the future is that the US T-Bills will produce a 2.5% lower return in the near future. The bottom line is that money, money market, and Cpg are not good for your long term investment returns.

What are the best solutions for investing in money today? Almost everything. This is not a comment on the direction of the short term market, but rather a comment on the long term of the investment and the impossibility of predicting the future – especially in the short term.

If we look at dividends and other income returns, we will see a series, but they are all more than cash return. As for growth, beyond these returns, we just need to put our faith in long-term history. For reference, I also showed the private credit yields available through the fund’s TriDelta Alternative at the end of the range.

As a final thought, history tells us that the big changes in species are short-term. When the trillions of dollars return to the market (which it will be), you want to be at the front end of the rush to where you can benefit from the dollars coming behind you, or the back weekend.

If you are sitting in treasury and financial market positions today, the best course of action is to get things back to normal.

Ted Rechtshaffen, MBA, CFP, CIM, is president and wealth advisor at TriDelta Financière, a corporate wealth management boutique focusing on investment counseling and estate planning. You can reach him at [email protected]


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