Can Cash Help You Meet Your Financial Goals?

August 26, 2019

So far, 2019 has been filled with uncertainty. Ongoing trade tensions between the United States and China, speculation over whether the Federal Reserve will raise or cut interest rates, and concerns over slowing global economic growth have all contributed to the increased volatility we’ve seen over the last several months.

Still, we’ve been through periods of uncertainty before. Though the details may have changed, the risks remain the same. Economic and political headwinds—and a host of other unknowns—are always in the background when investing for the long term.

Fortunately, there are ways to mitigate these risks. Diversifying assets, keeping a close eye on market fundamentals, and adhering to a well-defined investment plan all increase the likelihood of meeting your long-term goals despite short-term fluctuations in market performance. Nevertheless, the idea of staying the course doesn’t always resonate with investors who are worried about losing money in the near term.

Managing the Short Term to Prepare for the Long Term
At Blue Trust, we understand how emotions can lead investors to make poor timing decisions, which can ultimately cause them to fall short of their financial goals. Yet, we realize that managing emotions can be difficult, especially when hard-earned money is at stake.

Most investors make mistakes with their long-term investments—money they won’t need for at least five years. This is because long-term investments, like stocks and other growth-oriented securities, are usually most sensitive to market volatility. When investors see their portfolio balance drop dramatically, they often become concerned—even fearful—and immediately abandon their strategy. The decision to go to cash when markets are declining may seem beneficial at the time, but over the long run, it only erodes progress.

The good news is you can stay the course without having to battle these natural but counterproductive emotions. While it may sound counterintuitive, the first step to protecting your long-term investments is to make sure you have adequate cash reserves to meet your near-term obligations.

Managing Your Cash Reserves
Since periods of uncertainty are inevitable over a long-term investment horizon, we believe it’s best to avoid trying to determine your cash levels based on near-term market expectations. After all, investors are notoriously bad at timing markets. In fact, a recent report from DALBAR revealed that the average investor withdrew more from their funds than they invested in 2018, yet poor timing resulted in a loss of 9.42% for the year compared to the S&P 500’s return of -4.38%.¹ In other words, going to cash at the wrong time cost the average investor 5% in performance last year!

To protect yourself from unnecessary losses due to poor timing decisions, we recommend calculating how much cash you’ll need to meet your expenses and liabilities over the next one to two years. Rather than exposing these funds to market risks, they should be invested in cash equivalents like money market funds or ultra-short-term bonds. Since these instruments are much less sensitive to fluctuations in the market, it’s less likely you’ll have to worry about short-term losses that may impede your ability to meet your obligations.

By maintaining enough liquidity to meet your needs over the next one to two years, you could leave your long-term investments untouched regardless of the prevailing market environment. This is the essence of Blue Trust’s investment management approach. We construct investment strategies based on various time horizons and dynamically adjust them as the economic landscape changes, helping to enable you to have adequate reserves to meet your immediate cash flow needs so that your other investments may grow steadily over time.

For more information on our time-based, dynamic approach to investment management, please contact a Blue Trust advisor by calling 800.987.2987 or emailing blog@bluetrust.com.

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¹ Dalbar. “Average Investor blown away by market turmoil in 2018: DALBAR study shows the Average Equity Fund Investor lost twice the money of the S&P in 2018.” https://www.dalbar.com/Portals/dalbar/Cache/News/PressReleases/QAIBPressRelease_2019.pdf

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