History says doing nothing and avoiding rush to cash will eventually boost returns

Published Tue, Oct 11 20229:08 AM EDTUpdated Tue, Oct 11 20229:17 AM EDT

Dash to cash? You might want to reconsider. "Investors are seeking shelter in cash amid a volatile market and fears of a recession," Mark Haefele, chief investment officer at UBS Global Wealth Management said in a note to clients Tuesday morning. He cited data from EPFR Global indicating the week through Oct. 5 saw the largest weekly inflows to cash since April 2020: Into money market funds: $89 billion Withdrawn from global stock funds: $3.3 billion Withdrawn from bond funds: $18 billion Source: UBS/EPFR Global Haefele, however, is too smart to simply recommend going with that dubious trend. "We continue to advise against retreating to the sidelines, especially given the drag on cash from high inflation and the challenge of timing a return to markets without missing out on rebounds," Haefele said. Aside from the obvious (cash pays little and is no protection against inflation), there is the simple fact that the market is subject to short, violent rallies (the S & P 500 rallied 5.6% in just two days last week). Haefele reminds everyone about the value of staying invested and the folly of market timing. The academic evidence against market timing — the idea that you can successfully know when to buy and sell — is overwhelming, largely because you must be right going in and right going out, and the chances you can do that successfully are very small. Here's a small example of what Haefele is talking about. This is the growth of $1,000 invested in the S & P since 1970. Hypothetical growth of $1,000 invested in the S & P 500 in 1970 (through August 2019): Total return $138,908 Minus the best performing day $124,491 Minus the best 5 days $90,171 Minus the best 15 days $52,246 Minus the best 25 days $32,763 Source: Dimensional Funds These are startling numbers. Not being in the market on the 5 best days since 1970 reduces your return from $138,908 to $90,171. The takeaway: If you're not in the market on the most important up days, your returns are markedly lower. But nobody knows when those days will occur. Vanguard founder Jack Bogle had a saying: "Don't just do something, stand there!" The message: The best strategy would be to determine a long-term plan and stick with it, and ignore the urge to "do something."