Is Cash Still King?

Chip Corley |


Since 2000, equity investors have witnessed two mega bear market meltdowns in excess of 50%. The 2008 financial crisis cut stocks down 57%, and the 2000 bust cratered tech stocks 78%. Declines of this magnitude typically happened generationally, yet two mega bears occurred in less than a decade.

History is said to be witnessed through the eyes of the beholder. Young investors entering the market at its peak felt the sting firsthand as they watch their savings cut in half. Pre-retirees whose working days were numbered and whose assets were heavily weighted in stocks were bludgeoned by double-meltdowns. Warren Buffett, considered to be the greatest investor ever, watched his company shrink by 53%; no shareholder was exempt from the carnage; prices fell for a long time.



Many investors reacted by selling stocks and moving those proceeds into cash and cash equivalents. The Federal Reserve took great measures to contain the selloff by lowering rates to zero and implementing $3.5 trillion in quantitative easy (a further means to keep rates low). Investors fled to cash from some or all of their stock holdings to avoid more losses. It was a catch-22 situation; exiting stocks calmed nerves, but cash returns were nil.

According to NBER, the recession ended June ’09. Three month CDs (certificates of deposit) yielded holders an average annual return of 0.34% since then, as depicted in the chart below by the green line. The yellow line shows the year-over-year change in the consumer price index (CPI); inflation averaged 1.52% during this timeframe. Adjusted for inflation, real returns for cash holders equated to -1.18% annually. Lastly, the average household is in the 25% tax bracket, which means the after tax return on 3 month CDs is actually 0.25%, lowering the real inflation adjusted rate for cash holders to -1.27%.

Cash may be king during times of financial distress, but outside of such rare episodes, this monarch’s a despot.


Yours in Financial Fitness,

William "Chip" Corley

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer

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