Is Hoarding Cash the Prudent Move As Market Awaits Election Results?

The following is a guest post from Rich Conley, Executive Vice President and Head of Sales of Sawtooth Solutions, a company that provides wealth management services and technology platforms that help advisors manage their clients’ total relationships.

Could cash stuffed into a Mason jar and buried in the back yard be the best investment hedge against the unpredictable future that this year’s presidential election will bring?

Back Yard - Prisma Tokyo Filter

While no one actually encourages burying money, some financial watchers have suggested that hoarding cash – even as much as 50 percent of your portfolio – would be a smart way to limit risk in case the market gets extraordinarily jittery once we know who the next president will be.

But not everyone agrees that strategy is the right call – at least not for all.

Unintended Consequences

“Cash is an old standby that certainly works,” says Rich. “But raising cash could create unintended tax consequences so you will want to take that into consideration as well.”

Conley says “hoarding” is something of a loaded word. It suggests that people are letting emotion creep into what should be a disciplined approach to investing and building wealth over time.

“Hoarding may also be counterproductive,” he says. “It may be a good idea for some investors, but not for others. The primary reason someone would want to hold a higher than normal amount of cash is to reduce investment risks.”

Conley says he just recently had a lengthy discussion on the subject and its implications with Barry Mendelson, CEO of Capital Market Consultants in Milwaukee.

“To reduce risks, you need to have a good idea of how much risk you are taking right now and how much of it you want to reduce,” Conley says. “That answer won’t be the same for everyone.”

The Cash Hoarders

He says there are a few things to consider before anyone decides to join with the cash hoarders.

  • Market reaction isn’t inevitable. Just because doomsayers think election results could negatively jolt the market, that doesn’t mean it will happen. “If you think back to the last election, it produced a result that was very counter intuitive, with the market rallying very strongly following the results,” Conley says. “I don’t know many people who would have guessed that, except those who believed the status quo would be rewarded.”
  • Other options exist besides hoarding. There are plenty of alternative approaches to limiting risk. But in choosing one, each investor should decide for themselves what they are trying to protect against and what approach best matches their forecasted outcome and concerns.
  • Issues to watch. The political issues of particular concern to investors are the same issues impacting the general electorate, such as national security, public safety and the economy. Depending on who wins, the approach to those issues could be quite different, as would be the effect on investors.

Final Thoughts

“No matter what, we will have a new administration and things change,” Conley says. “There is risk in change and likely it will be quarters before there is clarity on the nature of that change.”

 

Blogger-in-Chief here at RetirementSavvy and author of Sin City Greed, Cream City Hustle and RENDEZVOUS WITH RETIREMENT: A Guide to Getting Fiscally Fit.

6 Comments

  1. We have a good cash reserve that serves two purposes. One is for putting it back in the market when we see dips of 10 to 15%. The other is to use for augmenting our expenses when we pull the plug on the jobs next month. We’re in agreement with what we’ve read about about withdrawal strategies the first few years of retirement being detrimental. If the market goes down and you’re taking out 4%, you can erode your nest egg.

    What I don’t like hearing is all the gloom and doom reports of people totally getting out of the market because they fear a collapse. I’m hoping it’s overblown. But if they’re correct, I think we will have more to worry about than simply our investments. Therefore we have no intention of getting out and burying cash in the backyard.

    • It sounds as if you guys have a solid strategy, and at the end of the day, that’s as important as anything else. There is no single right answer as the factors (e.g. age, desires, current savings, tolerance for risk, etc.) for everyone are going to vary. Unfortunately, too many have no plan at all or one that’s based solely on what they read somewhere and may not apply to their situation, or doesn’t apply as accurately as they believe.

      Thanks for stopping by and sharing, my friend.

  2. I always have some cash in case a big thing happens like my truck breaks down but I’m gonna continue to buy. If the stock market goes down I’ll be able to buy more if it goes up less, unless I find a real good bargain.

    • Yep. Always a good idea to have an adequate emergency fund to fill critical financial gaps or meet unexpected expenses; and it certainly is a good thing if opportunities in the stock market present themselves.

      Thanks for stopping by, my friend.

  3. Rich, good article, and valid discussion. Much depends on your life stage, risk tolerance, and realization that you’ll have to re-enter market on any dips. For me (Age 53, 21 months away from an early retirement), I’ve been raising cash in small tranches. Each time I sell, I put a reminder on my calendar and investment spreadsheets with the amount moved, the date, and my targeted re-entry date. If the correction comes, as I suspect it will, I will simply review my notes and begin re-allocating the traches as my targeted re-entry price is hit, maintaining a minimum of 2 years spending needs in cash under all scenarios. Fingers crossed, but seemed a valid approach given my reduced risk tolerance.

    • I’m ten years away from retirement and recently started making a concentrated effort to increase my cash holdings – after years of maintaining as little cash as possible – not because of the looming election, but because I want to be ready to retire early if the opportunity (i.e. employer incentive) presents itself in 7-9 years and possessing more cash is part of the repositioning my portfolio.

      Thanks for stopping by and sharing your thoughts, my friend.

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