Why Cash Isn't Trash

Focus: MARKETS

Howard Gold Image Howard Gold Founder & President, GoldenEgg Investing

Everything is priced in,” he explains. The market is incredibly sensitive to inflation, so rates on cash instruments will move up in anticipation of rising prices (especially if the Federal Reserve is hiking rates, too).

For decades, enterprising retirees and others have shopped around for the best returns on CDs and money market funds. A glance at Web sites like Bankrate.com shows how competitive this market is as banks and other financial institutions pay rates above inflation to lure customers.

And although cash would have given you only $9 in 2008 (after inflation) for every $1 you invested versus $99 for government bonds and $9,549 for small stocks, according to Ibbotson, those returns are calculated over 80 years.

In periods like now, essentially a long-term bear market since 2000, stocks have produced zero or even profoundly negative returns for years, and we don’t know how long this will last.

Investors who poured in money at the top of one of the bubbles we’ve seen this past decade may never recoup what they’ve lost. It has been catastrophic for too many Baby Boomers who will retire over the next decade and learned first hand that big stock returns can vanish in the ether, while cold, hard cash sits in the bank earning interest.

That’s why Gambera urges investors who have, say, less than $250,000 and need to live off their savings to keep their money in cash. (At a 4% withdrawal rate, that’s at most $10,000 a year.)

“If a person doesn’t have a lot of money, they shouldn’t take any risk, because they can’t afford to,” he says.

I wouldn’t go that far: I think most people should have a decent chunk of their portfolios in stock.