It seems scary enough by just reading the news headlines in the past week, when US Debt Ceiling Impact and Euro Debt Crisis still show no sign of relief.
- Aug 3, 2011 (Wed) – US Senate approves debt deal hours before deadline / STI weighed down by bleak US data
- Aug 4, 2011 (Thu) – STI plunges on global economic fear
- Aug 5, 2011 (Fri) – STI sees the third straight day of losses, with no relief in sight
- Aug 6, 2011 (Sat) – STI falls 3.6% as investors flee markets / Large investors turn to cash
- Aug 7, 2011 (Sun) – US Credit Rating cut caps week of misery
So is Cash the King now?
I will explain the current situation with 3 charts
Chart #1: Fund Sales from fundsupermart vs MSCI Asia ex-Japan Equity Index.
The chart clearly shows when the market was moving up, people pumped in more and more money into riskier asset but immediately shunned away when the market crashed. As the Saturday Straits Times yesterday:
“Large investors … are pulling their money out of stocks and other investments and stashing their hoards of cash at banks … The (Cash) accounts do not earn interest … At one point, yields on one-month bills actually fell into negative territory before ending at zero – signalling that investors are so worried that they are prepared to pay the US government to take their money.”
But wait, by doing so, didn’t you just buy stocks when the market was high and sell when the market was low? No wonder so many people lost money during the financial crisis and never made it back. This is exactly because that most investors were rushing to the jump onto the wagon just before the market hit the cliff and crashed, however, when the market rebounded 100% since 2009, many investors are holding cash!
Chart #2: Investment Performance in S&P 500 Index Missing the 5 Best or Worst Days.
There are many similar studies but I find this chart is pretty recent. The first half of 2011 is very volatile,
- if you had a crystal ball and avoided the 5 worst days, you would have a stellar return like the yellow line (fantastic but we all know it is impossible).
- On the other hand, if you were holding cash for just 5 of the best performing days, your portfolio return would be underwater like the red line.
Stock markets were mostly down by 10% for the past week. Given the current market scenario, if you are moving into cash now, you are not only realizing the damages by the worst days but most probably will miss the best performing days in the future as well. There is a high probability that your investment return will be even worse than the red line.
And that is exactly the same mistake made by many investors as the first chart shown.
As reported by the news on Aug 6, “Singapore share plunged 3.61% yesterday …The last time investors went through this sort of pain was on Mar 30, 2009, when the market crashed 4.1% amid the fallout from the financial crisis.”
Chart #3: Historical performance of the Straits Times Index (STI).
Isn’t Mar 2009 the bottom of the stock market since the financial crisis and the stock market run up more than 100% since then? Is stock market really going to die after a crash like this?
I think this is a good time for investors to reflect themselves:
- Why do you invest?
- What is your investment objective?
- What is your investment horizon?
Remember the famous words from William Shedd,
“A ship is safe in harbor, but that’s not what ships are for.”