The S&P 500 finally reached official correction status last week, off 10.2% from its record high on Sept. 20. After last week’s Thanksgiving plunge, many investors are skeptical that this bull market can resume its upward trajectory, citing everything from a potential decline in economic growth as the Federal Reserve raises interest rates to weakening corporate profits as pressure mounts from higher wages and a stronger dollar. Not to mention the potential for a prolonged Trade War with China, adding strain to global economies and their respective markets.
All of these fears sound very rational and pragmatic. After all, the U.S. market has had a tremendous run up over the past decade. So perhaps the sensible thing to do is head for the exits and park your money into the security of a high yielding savings account. Heck, some banks are even paying upwards of 2% now. Makes complete sense, right? Well, actually no.
Here at my Firm, Payne Capital Management, we have an old saying, “Cash is Trash.” The point being, it is never a good idea to have your investment portfolio or long term savings allocated to cash. The most important reason is, YOU ARE LOSING MONEY. Yes, you heard me correctly. I do realize money in a savings account should not go down in price, remain stable and earn annual interest. The problem is money in cash or savings is losing purchasing power over time as the price of goods and services in the economy go up. In the financial world we call this inflation. All this simply means is that the $5 latte you enjoy every morning on your way to work is going to cost more like $9 in twenty years. Or stated differently, a $1,000,000 today will only be worth around $540,000 in twenty years. Ouch, we call that a buzz kill where I come from …
So even if you are currently earning 2% on your savings, not only do you have to pay taxes on the interest earned every year, but you are losing against purchasing power. Over the past 50 years our cost of living here in the U.S. has gone up by an average of 3.22% a year. Therefore, when you factor in taxes and inflation, you are losing an average of 1.5% a year on any money parked in cash. You don’t need a financial adviser to tell you that is not a very good return on your money.
The good news is, presently there are plenty of opportunities to allocate your fresh cash to grow your nest egg over inflation. Despite dire headlines, most of the relevant financial data points to stronger, not declining U.S. economic growth and despite higher wages and a strengthening dollar, corporate profits are actually on the rise. Analyst are predicting company earnings are not only going up for the rest of this year, but again in 2019. Even better, with the recent selloff in October, the stock market is now much cheaper than it was at the beginning of the year. The S&P 500 trades at 15 times 12-month forward earnings, down from the more expensive 18.2 times at the start of the year. Bottom line is companies’ earnings are growing faster than their stock prices.
Furthermore, because interest rates have risen this year, a portfolio of institutionally managed tax free municipal bonds now has a yield to maturity of 3%. Therefore, if you are in the highest tax bracket, that is the pre-tax equivalent of earning 4.7% on your money, more than double a high yielding savings account. Not to mention the risk is limited, due to the high quality nature of the bonds and set maturity dates your principal is scheduled to be returned to you.
So as time ticks away and your cost of living incrementally rises, inflation is quietly eroding the value of all that hard earned money you have sitting in cash. With no shortage of current investments opportunities, provided you decide to allocate your money into a long term diversified portfolio tied to your goals, cash will continue to be trash and the global equity and debt markets will continue to be one of the best chances to grow your nest egg above the cost of living over time.