I was reading an article this morning titled “What Would You Have Done in 2009” by a guy I like named Ben Carlson. He writes:
“Have enough liquid reserves available but avoid an addiction to cash. The best part about holding huge cash reserves going into a crash is boasting to your friends (and enemies?) about how smart you are for side-stepping the crash.”
Man, oh man, do I ever agree with this. I can’t tell you how many people have told me over the years they avoided 2008 by being in cash. I don’t believe most of them. The ones I do believe are honest and will inevitably tell me they are STILL heavy in cash. And that brings me back to Carlson:
“The worst part is cash can quickly go from a security blanket to an addiction when stocks are falling. “Just a little longer…” you tell yourself every time stocks are in a drawdown. “I’ll buy when the dust settles” feels like a comfortable place to be until you realize by the time the dust settles it’s probably too late.
I’ve received more emails than I can count from investors who’ve been stuck in cash since 2009. And I completely understand how it could happen because you become paralyzed.”
Folks, I can’t agree enough with Carlson’s take that “you become paralyzed” by being in cash. Let me tell you how this happened to me just last year.
I started my business in 2018 and moved EVERYTHING to cash mid-year, as I was going all in for my business and wanted to make sure I had enough liquidity to keep the lights on if the business didn’t generate revenue. I absolutely did not want to see the market take 30% of my liquid needs over a years time, that 30% could literally be the difference between success and failure for my business. After all, a 30% decline in real terms, means no mortgage payment, no utility payment, no food etc. all because the market had a hissy-fit.
Can’t let that happen. So, I went ALL CASH in 2018. And I sat there watching when the market went up, thinking I just missed enough gains to cover a mortgage payment. Or when the market went down thinking I missed the losses that would have cost me a mortgage payment.
It’s truly a psychological roller coaster, watching, waiting, worrying.
Well, 2019 rolls in and business begins to pick up, enough so, I contemplate going back in the market. “What if the business pick up is temporary?” I ask myself. As such, I stay put, in cash.
And in cash I stayed towards mid-year. I think it was around June, when I finally got back in, frustrated as all can be that I missed these gains.
Now remember, friends, it isn’t the percentage of gain that is frustrating to miss, it’s the actual DOLLAR amounts; 14.90% gain is what equivalent? 5 mortgage payments? You don’t actually think in percentages, you think in terms of DOLLARS and what those dollars could buy.
So, finally I had to make a choice. It seemed business was stable enough to take the risk and get back in the market. The way I looked at it was that my Youtube channel was generating enough income to at least pay the mortgage and all my other debts were paid off. If no one else hired me again, and I had to go work some crappy, old job to put food on the table I could do that, WITHOUT having to tap into my investments.
Around June, if memory serves, I got back in. And ironically, by luck I bought on the “dips”. See the chart above? Well, the market was off 8% from its intra year high by the time I invested.
Yay for me, right? Buying on the dips and stuff?
Yeah, but I MISSED a 10% gain up to that point. I missed an 8% decline off the top, but also a 15% increase BEFORE that. Buying on the dips, by accident this time, literally cost me a huge amount of money!
The question about “buying on the dips” is always WHICH DIP TO BUY? I actually DID buy the dip. But I could have easily waited to buy the dips that were to come later and I would have missed out on even more gains.
The above shows what dip I bought. That’s an 18% gain from when I bought in, on the dips, to the end of the year. Not too shabby, eh? For every $100k, I was up $18,000.
But this overlooks the nearly 15% gain I missed to start the year. So, while 18% is nothing to sneeze at, it’s well short of what the markets did last year, and those are gains I’ll never get back.
And above is just for 2019?
What about 2018?
Hopefully, you can see the absurdity of “buying the dips”. If you bought the dip in February you still proceeded to take a 3.5% loss for the rest of the year.
But that’s not even the real issue. The real issue is how long did you have your cash sitting on the sidelines waiting for the dip?
Were you sitting there waiting for the inevitable Trump decline as Nobel-prize winner Paul Krugman was warning?
“If the question is when markets will recover, a first-pass answer is never.”
The issue with ‘buying the dips’ means inherently you have CASH in which to “buy the dips”. Having that cash means, of course, you’re not invested. And if you’re not invested, you’re missing out! It’s literally that simple.
Don’t do that! If you’re going to invest, just invest and be on your way. Be done with it and don’t look back. There is NO evidence, NONE at all, you or anyone can time the market, buy the dips, moving averages, etc. If you want to get market returns, the truth is always and forever will be, you’ve got to be in the market, come hell or water.