E Should You Raise Cash?

Should you raise cash here? Is being “foolish” and just staying fully invested with every available dollar such a bad idea? Well, did you know that if an investor bought at the very top of the stock market in 2008 right before the crash/Great Recession, and held until now, they would have made a total return of over 9% annually. Take a look at the S&P 500:

Source: BAD BEAT Investing

Staggering isn't it? What you may not realize is that a massive portion of that return is due to reinvesting dividends into depressed shares. This return comes after being "foolish" and holding on through one of the worst market crashes in history.

Why did this happen? Well, we know that stocks, in general, represent ownership in real companies which pay dividends and keep generating profits year after year. The day-to-day business of companies tends not to be impacted by the fluctuations of the stock market/ The fact that stocks are overvalued compared to historical multiples won’t affect how many Big Macs McDonald’s (MCD) makes this year, nor will it impact how many iPhones Apple (AAPL) can sell. Even after the latest pullback in AT&T (T), the telecom will continue bringing in new wireless and video subscribers while paying a growing dividend.

You see, regardless of the stock price, these companies are still making money, year after year, and paying dividends to go with it. Some talk about a bubble or being overvalued. Is the market really overvalued when Apple sells for 12 times earnings after adjusting for cash? Is this really a bubble? Sure with the S&P 500 selling for a P/E ratio around 24, this is higher than the historical mean, but what if stocks were just historically undervalued? Few consider that risk goes both ways. Remember, valuation must be done based on earnings, not stock prices!

Sure, staying fully invested runs the risk of falling victim to further market selling. When risk events surface and new reasons to sell get highlighted in the media, listening to these distractions also runs the risk of missing out on great market gains because you were on the sidelines in cash. Make no mistake, you should always have cash, but recognize that risk runs both ways. What we are trying to say here is that the more you try to time the market, the more you risk underperforming it, unless you are a proficient trader. For most of us that is not possible. As such, everytime one of these market events surfaces, it seems like markets must "flash crash" because of it, and we must sell. Historically, it is very rare for any of these distractions to be a real reason to sell after a few weeks or months. Essentially, experience says that we should ignore them and continue the course. Here are some recent examples:

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Disclosure: We are long T, AAPL

Quad 7 Capital is a leading contributor with various financial outlets, and pioneer of the BAD BEAT Investing philosophy. If you like the material and want to see ...

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Moon Kil Woong 9 months ago Contributor's comment

People should not sell off their investments to build up cash, however, every downturn should remind everyone to save cash. The cash you save today, you can look to increase your investment when the time is right. In the meantime, it also helps you not have to tap into your savings when it is not an opportune time to sell.