The Case for Cash
Many people associated investment accounts with being “invested’. After all, that’s generally the meaning and intention for all accounts that own publicly trades equities. And generally, since the market goes up 85% of the time, it makes sense that equity accounts actually own “equities”.
This seems to be “intuitive”. This is why most RIA’s that “manage money” keep their clients invested. Through good times and bad, because most advisors purport that the market “cannot” be timed. Cash is imprudent because if the market goes back up, the client will miss out and subsequently hold them accountable. Advisors do not want this for obvious reasons. It’s riskier for them to get you out than to keep you in. During down markets, clients generally only get out when they breakdown and “call” their advisor and say “get me out”. This in turn gets the advisor off the hook. At Flip – we do not do that …
In the case of Flip, a self-directed, strategic platform where a computer gets users in and out of the market based on the mathematics of AI, the decision to hold cash is a trade. The trade that owns “cash” instead of an equity. Cash still yields little to nothing when not invested. This is not a bad thing when the market on a given day can, in current times, lose 2% a single day!
Another way to justify cash as a position is the following: At the beginning of 2022, Flip got out of the equities market on its main model. If an investor was wise enough to do this and buy a two year T-note (yielding 2% at the time) to be safe, he would have a loss of 12%. Yes – he would have lost by trying to be safe.
Because interest rates are going up positions in interest bearing rates are priced lower. The wise investor would have to wait the entire two years to receive his 2%. What’s worse is that the bottoms of bear markets generally occur before two year note would expire. In other words there is no safe haven. There is no simple answer other than to keep it simple. Its ok if your cash earns nothing for a while.
In the end, in the opinion of the author and from his experience, just plain old cash is the best most simple solution. When markets go down they do it fast but it doesn’t last! Having cash during market downturns is the wise, safe way of managing downturns.