Watching the principal value in your investment drop from previous highs definitely doesn’t feel good. Over the years, as the market has experienced turbulence, it is not uncommon for clients to come to us and ask if they should sell their investments and stick to cash until the market becomes more stable. Essentially, they are looking to stay on the sidelines rather than ride the waves of the market's ups and downs for the time being.
We typically respond in three ways:
1) We remind our clients that bouts of volatility, as we have seen recently, are expected…especially in election years. As former Summit Wealth Group advisor Dave Adams would say, “We’ve seen this movie before. We cry in the middle, but there are tears of joy in the end.”
2) The strategy of moving to cash means that we have to make two correct guesses. First, the correct time of when to get out. Second, the correct time of when to hop back in. No human, despite what the financial media might lead one to believe, truly knows what will happen tomorrow or the following day in the markets. Statistically, we only have a 25 percent chance of timing it right. Fifty out of fifty, times two. We also have a 25 percent chance of getting it wrong and selling out at the bottom. This means we will have to buy back in at higher prices. Finally, there’s a 50 percent chance that we time one side of the transaction correctly, leaving us where we started, minus the dividend payments we may have missed while sitting on the sidelines.
3) It is important to remember that a backslide in account value does not mean you lost money. You only lose if you sell. Historically speaking, long-term investors who choose to ride out the turbulence and stick with their plan have a much better chance of reaching their investment goals than those who try to time the market.
The problem with going to cash is the fact that we can’t afford to stay in cash because of inflation. Therefore, in most cases, accounts need to take on some market risk to stay ahead of inflation.