Two facts here:
- Investing in the market in the short term is risky. Investing in the market appropriately in the long term is safe and effective.
- Holding cash in the short term is safe and effective. Holding cash in the long term is risky – guaranteed loss of purchasing power.
Now, the details:
- We frequently state that, historically, over the long term, properly selected US market index exchange-traded funds, held in tax-advantaged accounts, in an appropriate asset allocation, have been the investor’s best way for growing savings and are likely to remain so for many years. No stock picking, no attempts at market timing. We could not find a single peer-reviewed paper supporting stock picking or market timing. Quite the opposite! Meanwhile, there are thousands of articles originating from Wall Street marketing departments that promote stock picking and market timing methods.
Wall Street derives half of its income from investors trading using stock picking and market timing methods. Understandably, Wall Street makes every effort to encourage such trading.
- We should always have enough cash to meet regular expenses. People have needed to sell securities at a loss to fund current expenses. If we do the right thing, there is no need to go there.
However, holding cash in the long term is almost guaranteed to result in loss of purchasing power. Yes, there have been deflationary periods, most recently during the market crash between 2007 and 2008. Such periods are so rare that we can call them historical anomalies. Money today almost always buys less than it did yesterday and will most certainly buy even less tomorrow.
These two points tell us that we need a balance between cash and invested money, that is, asset allocation. Call me (no charge) if you want to review this post. (705-441-4566)
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