When Great Britain voted to leave the European Union in late June, the media had a field day. Stock markets across the globe were down significantly the following Friday and Monday after the vote. It was certain, according to any financial TV show or publication, that the EU was disintegrating and that economies everywhere would slow. Bearish portfolio managers came out of the woodwork to showcase their large cash positions that they will, of course, invest when the inevitable 30% decline in the stock market finally arrives.
Then something funny happened – global stocks rallied the next day, and the day after that, and the day after that. The buying continued into July with the S&P 500 up almost 9% from post-Brexit lows. If you sold out of your investments post-Brexit and went to cash, you have missed this large market rally. What looked like an “obvious” chance to sell stocks now and buy back significantly cheaper later, turned into just to opposite – a great buying opportunity.
With interest rates near zero in the US (and negative in some countries), cash is your worst enemy. Inflation eats away at your interest and gives you a negative “real return”. A diversified portfolio comprised of stocks, bonds and “real assets” may be riskier than cash, but these asset classes combined should provide a return greater than inflation over time.
The article below, from the New York Times, addresses the “cash” problem but in the context of a bank account or “rainy day” fund. As a financial advisor, I get asked about “rainy day” funds quite a bit – I think this article does a good job of addressing the issues with keeping large cash balances in low interest bearing accounts.
*All returns are courtesy of Moringstar.com
*The above article is informational in nature only and is not a recommendation to buy or sell securities. All information is gathered from sources believed to be reliable, but neither Charles Brown nor Ausdal Financial Partners, Inc guarantees the accuracy of the information. All investments carry a degree of risk. Individuals should consult with their tax and investment professionals before making changes to their investment portfolios.