Best of the Week
Most Popular
1. Investing in a Bubble Mania Stock Market Trending Towards Financial Crisis 2.0 CRASH! - 9th Sep 21
2.Tech Stocks Bubble Valuations 2000 vs 2021 - 25th Sep 21
3.Stock Market FOMO Going into Crash Season - 8th Oct 21
4.Stock Market FOMO Hits September Brick Wall - Evergrande China's Lehman's Moment - 22nd Sep 21
5.Crypto Bubble BURSTS! BTC, ETH, XRP CRASH! NiceHash Seizes Funds on Account Halting ALL Withdrawals! - 19th May 21
6.How to Protect Your Self From a Stock Market CRASH / Bear Market? - 14th Oct 21
7.AI Stocks Portfolio Buying and Selling Levels Going Into Market Correction - 11th Oct 21
8.Why Silver Price Could Crash by 20%! - 5th Oct 21
9.Powell: Inflation Might Not Be Transitory, After All - 3rd Oct 21
10.Global Stock Markets Topped 60 Days Before the US Stocks Peaked - 23rd Sep 21
Last 7 days
How Stagflation Effects Stocks - 5th Dec 21
Bitcoin FLASH CRASH! Cryptos Blood Bath as Exchanges Run Stops, An Early Christmas Present for Some? - 5th Dec 21
TESCO Pre Omicron Panic Christmas Decorations Festive Shop 2021 - 5th Dec 21
Dow Stock Market Trend Forecast Into Mid 2022 - 4th Dec 21
INVESTING LESSON - Give your Portfolio Some Breathing Space - 4th Dec 21
Don’t Get Yourself Into a Bull Trap With Gold - 4th Dec 21
GOLD HAS LOTS OF POTENTIAL DOWNSIDE - 4th Dec 21
4 Tips To Help You Take Better Care Of Your Personal Finances- 4th Dec 21
What Is A Golden Cross Pattern In Trading? - 4th Dec 21
Bitcoin Price TRIGGER for Accumulating Into Alt Coins for 2022 Price Explosion - Part 2 - 3rd Dec 21
Stock Market Major Turning Point Taking Place - 3rd Dec 21
The Masters of the Universe and Gold - 3rd Dec 21
This simple Stock Market mindset shift could help you make millions - 3rd Dec 21
Will the Glasgow Summit (COP26) Affect Energy Prices? - 3rd Dec 21
Peloton 35% CRASH a Lesson of What Happens When One Over Pays for a Loss Making Growth Stock - 1st Dec 21
Stock Market Sentiment Speaks: I Fear For Retirees For The Next 20 Years - 1st Dec 21 t
Will the Anointed Finanical Experts Get It Wrong Again? - 1st Dec 21
Main Differences Between the UK and Canadian Gaming Markets - 1st Dec 21
Bitcoin Price TRIGGER for Accumulating Into Alt Coins for 2022 Price Explosion - 30th Nov 21
Omicron Covid Wave 4 Impact on Financial Markets - 30th Nov 21
Can You Hear It? That’s the Crowd Booing Gold’s Downturn - 30th Nov 21
Economic and Market Impacts of Omicron Strain Covid 4th Wave - 30th Nov 21
Stock Market Historical Trends Suggest A Strengthening Bullish Trend In December - 30th Nov 21
Crypto Market Analysis: What Trading Will Look Like in 2022 for Novice and Veteran Traders? - 30th Nov 21
Best Stocks for Investing to Profit form the Metaverse and Get Rich - 29th Nov 21
Should You Invest In Real Estate In 2021? - 29th Nov 21
Silver Long-term Trend Analysis - 28th Nov 21
Silver Mining Stocks Fundamentals - 28th Nov 21
Crude Oil Didn’t Like Thanksgiving Turkey This Year - 28th Nov 21
Sheffield First Snow Winter 2021 - Snowballs and Snowmen Fun - 28th Nov 21
Stock Market Investing LESSON - Buying Value - 27th Nov 21
Corsair MP600 NVME M.2 SSD 66% Performance Loss After 6 Months of Use - Benchmark Tests - 27th Nov 21

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Here’s Why You Should Be in Cash Right Now

Stock-Markets / Financial Markets 2016 Sep 28, 2016 - 04:29 PM GMT

By: John_Mauldin

Stock-Markets

BY JARED DILLIAN : People are seriously undereducated on the benefits of being in cash.

The cool thing about cash is that it doesn’t go down. You can’t lose money if you have cash—unless it gets stolen or your bank account gets hacked. We don't have negative rates in the US yet, so you can’t complain about that. If you have money in cash, you will earn zero.


But earning zero is better than losing it!

Here’s the number one question I get from “less sophisticated” investors:

“I want to invest. What mutual fund should I invest in?”

“Do you have any debt?”

“Yes, I have $15,000 in credit card debt.”

“Then pay down your credit card debt.”

“Why? I want to invest and make a lot of money.”

“What is the interest rate on your credit card?”

“20%.”

“You can make 20% by paying down your credit card debt.”

“I can do better than that investing.”

Uh… no, you can’t.

People throw around the term financial repression a lot without really knowing what it means. What it means is that your investing goals should be a lot more modest than they are currently. You should be happy with 4–6% returns. You should be happy with zero returns!

Of course, it wasn't always this way. People’s expectations are grounded in a time when you could make 6.5% a year in cash, and substantially more in equities or risky credits.

Not anymore.

The math behind the cash play

Let’s start off with a game of “name that chart.”

Source: Bloomberg

The ticker is a dead giveaway, but I’m betting that most of you don’t know what it is.

This is a chart of implied correlation in the S&P 500.

Many of you have probably heard of the term index arbitrage; that there is a direct mathematical relationship between the stocks in an index and the price of that index.

There is also a less direct relationship between the prices of index options and options on the constituent stocks.

Using index options and single-stock options, you can calculate what is known as implied correlation, which is a measure of how the market predicts stocks will move together.

When there is turmoil in the market, correlation moves dramatically higher. You know this through experience. When the Dow Jones is down 300+ points, you can pretty much assume that all stocks are down together.

Implied correlation is currently spiking higher. Which is not good.

Liquidity gives you options

There is no law that says you always have to be fully invested.

In fact, just the opposite. I like to have as much cash as possible at any point in time.

Cash is an option to buy something cheaper in the future.

In my mind, there is nothing worse than being fully invested… on the highs.

The market corrects, and you have no ammo to buy stuff cheaper. You’re trapped in your existing positions.

It’s always good to have cash. Lots of cash.

Many people don’t see it that way. They look at cash as a drag on your returns.

Maybe if you are a large cap growth manager trying to closet index the S&P 500. But as an individual investor, you have no benchmark you’re trying to outperform. You’re an absolute return investor. Same as a hedge fund.

If the whole world were going to crap, you would want your hedge fund manager to be in cash. You probably wouldn’t be happy about paying fees on cash, but it’s better than the alternative.

Remember, you are your own hedge fund manager. And you don’t have fees on cash.

There were a handful of investors who were waiting with a big ole catcher’s mitt to buy the banks at the very lows in March of 2009. Now, the fancy part of that hero trade is not calling the bottom. Anyone can call the bottom. The fancy part of that trade is having the liquidity to do it. Having the cash. That is what I have respect for.

Remember, cash is an option to buy something cheaper in the future.

My guess is, things will get cheaper in the future.

Subscribe to Jared’s Insights Into Behavioral Economics

Click here to subscribe to Jared’s free weekly newsletter, The 10th Man, so you won’t fall prey to the herd mentality that so often causes mainstream investors to make the wrong decision.

John Mauldin Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in