Finances: Avoid Rash Moves

The New York Times has a story up today called Switching to Cash May Feel Safe, but Risks Remain. I highly recommend that you read it.

I’m not a particularly savvy financial person, but “think long term” always struck me as wise. There’s no doubt that it’s pretty hairy out there right now, but I think changing course or being overly emotion is the worst reaction. It’s tempting to be emotional and run for cover, but this article cites research that should give you strength and resolve.

As the title says, switching to cash may fell safe. But:

But if you sell now, you’ll be locking in your losses. And once you’re in cash, there isn’t much upside. In fact, with interest rates low, you’re likely to lose money in cash, because inflation will probably eat up the after-tax returns you earn from a savings or money-market account.

Beyond the low upside of cash, selling low is, obviously, the worst time to sell. It’s bad because you lock in your losses, but the read damage is that you’ll miss the eventual upswing, to devastating effect.

The research they cite is pretty amazing (emphasis mine):

From 1963 to 2004, the index of American stocks he tested gained 10.84 percent annually in a geometric average, which avoided overstating the true performance. For people who missed the 90 biggest-gaining days in that period, however, the annual return fell to just 3.2 percent. Less than 1 percent of the trading days accounted for 96 percent of the market gains.

A portfolio belonging to an investor who missed the 10 best days over several decades across all of those markets would end up, on average, with about half the balance of someone who sat tight throughout.

They note that if you need the money in the next five years — if you’re about to retire — then perhaps the loss of the move to cash might make sense. But for me, and for many of you, “today’s price is not your price. Your price is 10 or 20 years from now.”

So, hang on to what you’ve got and don’t make any rash moves.