(Disclaimer: The following piece is educational and entertainment only. It does not constitute advice of any kind. Investment advice should only be taken in the context of an individual (or household) examination of suitability and risk tolerance by a professional advisor.)

If there is one strategy that is anathema to the vast majority of investment advisors, it is electing to reduce exposure to stock and bond investments and increase holdings of short-term CDs or “cash.” There are several reasons they hate this:

• They usually don’t get paid when you go into cash: advisors typically do not charge a fee on cash holdings. Their bosses don’t like this either.
• One of the commandments (there probably aren’t ten of them) of modern investment theory is that you have to stay “in the market” and not try to “time” it. This assumes “you can never tell when it is going to up or down so just hold on.” In recent decades, there has been more emphasis on the risk of missing out on gains, than on the risk of losing principal. This has become very close to gospel.
• Anytime a client does something that goes against convention or what would be considered prudent or responsible (according to theory), the investment firm sees themselves as exposed to liability: if the market went up substantially while you were on the sidelines, they fear that you might hold them responsible for the lost opportunity.
• Compounding (growing) is at the foundation of investment thought. When you are in cash or CDs, your money is not compounding. Today, it would hardly grow at all with rates near zero. This makes matters worse if inflation is at least 2%: you effectively lose some purchasing power unless you at least earn the inflation rate. A 2-year CD might get you 1%.

Theoretically, there are few times when cash is the best investment strategy. Investors usually have choices between categories of higher-return investments such as bonds, “safe” stocks, real estate, or commodities (these are called ‘asset classes’). If stocks are seen as a poor risk/reward, bonds, real estate and precious metals or commodities might offer more attractive alternatives. Unfortunately today, bonds are at the highest prices in nearly a century, stocks are in the sixth year of gains, real estate is acting “bubbly” like an echo of the 2005-8 era, and commodities and precious metals are very volatile–though they have fallen a great deal in the last couple of years.

The case for cash is this: having your investments not growing (or even losing 1% per year from inflation) is far preferable to having your investments fall 20% or more. The mantra of most advisors is that “the market always comes back.” That’s not really true. It can take decades for stock indexes to recover from a steep fall. Unless you’re thirty or forty, you might not have time to ride out the recovery. The risk to holding cash is that the market continues to rise while your money is treading water. Whenever you struggle to choose between alternatives, one technique is to ask yourself which choice would let you sleep better. Only you can answer that.

WH