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The Dash for Cash
Investors Who Cash-Out Now Could Miss A Market Rebound
With markets falling and bombs dropping, some investors have panicked and have cashed-out of their investments. Others hold higher levels of cash in their portfolios in fear of rocky markets and more international strife. This crisis investing strategy involves having all your money safely tucked in your bank account or sock drawer just in case the sky falls, or worse, the TSE (Toronto Stock Exchange) drops a few basis points.
But what if the end of the world doesn't come and the markets stage a dramatic rally? (Something that they have historically done after a huge crisis.) Investors who have cashed-out will undoubtedly lose out.
In this article, Russell explains how investors are actually losing money by converting their investments into cash during these volatile times. We'll also look at why investors could be missing out on one of the market cycle's greatest investment opportunities by switching to cash, instead of showing patience.
Interest rates are near all time lows, and so are cash returns
Just recently, the Bank of Canada cut its overnight lending rate to 2.25%. Canada's key interest rate has not been this low since 1960, when it was at 1.95%.
This is great news for an economy that needs a boost, but it's terrible news for investors who rely on cash/term deposit rates as investment income. As interest rates have declined over the past several months, cash investments have also nose-dived. Holding cash during times of low interest rates may actually cost you money.
The central bank has made nine interest rate cuts so far in 2001, with experts expecting more to come. If you are holding a lot of cash investments, that means that even more money could be lost.
Historical Yields on 3-month T-Bills
Canadian 90-Day T-Bills: June 1, 1997 to November 30, 2001
Source: Bloomberg
Cash is not tax-effective
In addition to the low interest rates earned on cash, investors must also be wary of the tax implications of their cash investments. Cash based investments are not tax-effective because all of the interest earned is considered taxable income.
Cash investments won't let you take advantage of market rebounds
Historically, the markets have tended to rebound after a crisis or economic downturn. The table below outlines the eleven calendar-year losses the TSE 300 has experienced over the last 40 years. With only one exception in 1969, the markets bounced back with solid returns in each of the following calendar years.
| Negative Years |
|
Annual |
|
Return the Following |
| on the TSE 300 |
|
Return (%) |
|
Calendar Year (%) |
| 1962 |
|
-7.1 |
|
15.6 |
| 1966 |
|
-7.1 |
|
18.1 |
| 1969 |
|
-0.8 |
|
-3.6 |
| 1970 |
|
-3.6 |
|
8 |
| 1974 |
|
-25.9 |
|
18.5 |
| 1981 |
|
-10.3 |
|
5.5 |
| 1984 |
|
-2.4 |
|
25.1 |
| 1990 |
|
-14.8 |
|
12 |
| 1992 |
|
-1.4 |
|
32.6 |
| 1994 |
|
-0.2 |
|
14.5 |
| 1998 |
|
-1.6 |
|
31.7 |
| Average |
|
-6.8 |
|
16.2 |
In most cases, the world did not end and calm investors enjoyed double-digit gains over the next 12-months. The September 11th terrorist attacks initially crippled the stock markets, but there are already signs of hope. The Dow Jones rose 21% from its lows on Sept. 21, 2001 to Nov. 22, 2001.
Panicky investors who jump ship on their investments during volatile times miss the boat when the markets historically rebound.
Be calm, be diversified, and be ready with Russell
During a time of crisis or economic slowdown, investors should remain calm and patient. There is no need to sell-off all your investments in panic. Instead, look at the long-term picture, the buying opportunities, and investment diversification. This calm, diversified, long-term view is something Russell has endorsed and excelled at for years with its multi-manager approach. Having cash investments may offer anxious investors relaxation, but Russell's investment strategies offer the same piece of mind along with investment diversification and growth opportunities. The same can't be said about your sock drawer.
Copyright® Russell Investments Canada Limited 2001. All rights reserved. See Legal Information. Date of first use: 12/12/01.
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