How emotions can creep into an otherwise disciplined investment strategy
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?
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.
“Cash is an old standby that certainly works,” says Rich Conley, Executive Vice President and Head of Sales for Sawtooth Solutions (www.sawtootham.com), a company that provides technology platforms that help financial advisors manage their clients’ accounts.
“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.”
All about reducing risk
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.”
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.
“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.”
About Rich Conley
Rich Conley is Executive Vice President and Head of Sales of Sawtooth Solutions, (www.sawtootham.com) a company that provides wealth management services and technology platforms that help advisors manage their clients’ total relationships.