Modernist Portfolios: Why We Don't Go to Cash in Downmarkets

In December 2018, we heard from several people about friends’ advisors who are recommending that they go to cash. People are nervous - and not without reason: most equity-oriented portfolios are down 12-15% in Q4, while balanced portfolios are down 7%. Behavioral finance tells us that the temptation to “do something” is undeniable in situations where we feel a loss of control.

But history is on the side of those who don’t let short-term news events scare them out of staying invested. Every generation of investors has had its reasons to worry and pull out of the market: from the Great Depression, WWII, and Vietnam, to the dot com bubble, Great Recession, and now the Trump presidency. And, unfortunately, financial media sensationalism doesn’t help us make long-term investing decisions.

Check out the image below: If you’d invested $100 in the U.S. stock market back in 1972, and left it alone until 2017, that $100 would have grown to $11,086 (dark blue line). The key here is that treasury bills’ returns (aka cash - the purple line) are pleasantly steady, but they don’t rise nearly as high!

Bottom line: decade after decade, markets around the world have been significant generators of long-term wealth for patient, diversified investors.

See below for data sources and disclosures.

This is why we don’t go to cash during down-markets (aka try to time getting in and out of the market). Your portfolio and financial plan should be built to withstand changes in the market. This is why we talk so often with clients about recession-level returns in meetings.

While the markets do their thing, we hope you will find time for rest and restoration this holiday season. You are also welcome to check out this recent essay about behaviors that can help support your long-term financial well-being.

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And now, our data sources & required disclosures:

This image if for illustrative purposes only and not indicative of any investment. It depicts a hypothetical value of $100 invested at the beginning of 1972 and kept invested through December 31, 2017. Assumes reinvestment of income and no transaction costs or taxes. Total returns in U.S. dollars. Past performance is no guarantee of future results. Data source: Morningstar Direct and Dimensional’s Returns 2.0. U.S. Stocks: Fama/French Total U.S. Market Index Portfolio. U.S. Large Value Stocks: Fama/French U.S. Large Value Index (excluding utilities). U.S. Small-Cap Stocks: CRSP Deciles 6-10 Index. International Stocks: MSCI EAFE IndexNet. U.S. Long-Term Gov’t Bonds: Long-Term Government Bonds. U.S. Treasury Bills (1-Month): One-Month U.S. Treasury Bills. U.S. Inflation (CPI): Consumer Price Index for All Urban Consumers (CPI-U). Indexes are unmanaged baskets of securities that investors cannot directly invest in. Index performance does not reflect the fees or expenses associated with the management of an actual portfolio. Risks associated with investing in stocks potentially include increased volatility (up and down movement in the value of your assets) and loss of principal. T Bills and government bonds are backed by the U. S. government and guaranteed as to the timely payment of principal and interest. T Bills and government bonds are subject to interest rate and inflation risk and their values will decline as interest rates rise.

Information provided in this letter is for educational purposes only. To discuss anything in this newsletter or your account, please contact us at hello@modernistfinancial.com. Views and opinions are subject to change at any time based on market and other conditions. The information provided does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. It does not take into account any investor's particular investment objectives, strategies, tax status or investment horizon. All material has been obtained from sources believed to be reliable. There is no representation or warranty as to the accuracy of the information and Modernist Financial, LLC shall have no liability for decisions based on such information. Risk associated with equity investing include stock values which may fluctuate in response to the activities of individual companies and general market and economic conditions.