Cash Is King

With 2 weeks to go in 2018, cash (short-term treasury bills) is king, outperforming all of the major global equity indices.

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Intermediate-term bonds (10-year treasury) are also down on the year due to the rise in interest rates. If this holds through year-end, it would be the first time since 1969 that both stocks (S&P 500) and bonds (10-year treasury) finished a calendar year with a loss.

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Data Source: Stern.NYU.edu/~adamodar

Meanwhile, Cash is on pace to have its best year since 2007 as the Fed continues to normalize interest rates.

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The greatest fear among many investors is that this trend will continue.

Is this a rational fear? How often has cash outperformed stocks and bonds historically? Let’s take a look.

We have annual data on stocks (S&P 500), bonds (10-Year Treasury), and cash (3-Month Treasury) going back to 1928.

Since then, cash has been the top performer in only 13% of calendar years. As your holding period increases from 1 year to 30 years, the odds of cash being king declines from 13% to 0%. The opposite is true for stocks, which have been the top performer in 61% of 1-year periods, 80% of 10-year periods, and 100% of 30-year periods.

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Data Source: Stern.NYU.edu/~adamodar

If the odds of cash outperforming are so low, why hold it at all? Because you may not have a 20-year holding period or you may not have a high enough risk tolerance to hold through short-term volatility in stocks and bonds.

Cash is the only asset class that will guarantee you a return of principal in the short run. While bonds do pretty well on this front they will at times lose out to cash during periods of rising interest rates. We saw that in 2009, 2013, and thus far in 2018.

When was the last time cash outperformed both stocks and bonds in a single calendar year? Way back in 1994. Which means that investors under 45 have never seen it and investors over 45 probably don’t remember it.

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Disclaimer: At Pension Partners, we use Bonds as our defensive position in our absolute return strategies for all of the above reasons. Bonds have provided a more consistent defensive alternative to ...

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