Outperforming The Market By 30% With No Risk
Yes, you read that right. Over the last decade how would you have liked to outperform the stock market by 30% with no risk. You also would have beaten out inflation. All you had to do was leave your money in cash. That's right, just plain ole' cash in a money market fund would have outperformed the stock market by 30% over the last 11 years.
I got an email on Friday asking me if I could create an 8% annualized rate of return in a portfolio with low risk. After I got off the floor from laughing I politely typed back that in the past 130 years the market has returned on average 6% growth plus dividends and that only occurred during the three bull market periods 1920-29, 1944-1960 and 1982-2000. Every other period had low to negative returns.
It never ceases to amaze me that so many people are glued to the television set, their computer or phone watching every tick of the market like it will actually do something beneficial for them. When in reality all it does is give them angst and heartburn. Yet, every day, these same individuals who make up the 20% of the population that actually invest in the markets risk their life savings in the hope that somehow the markets will make them rich. Unfortunately, it won't, and yet these same individuals have chased the single worst performing asset class over the last 30 years when they would have been better off in fixed income and even cash.
What people forget is that the secret to wealth is the power of compounding of returns. That means you get a return EVERY year without ANY down years. This is why even a low return of 1 or 2% will outperform the stock market over a long enough time frame as when the market corrects, and it always does, it takes years to recover. Unfortunately, it can't make up the lost time and now the power of compounding can no longer work to your advantage.
So the next time that someone "poo-poo's" your idea of holding cash and they tell you that you should be invested in the markets. Just remember that they are still trying just to get back to even and they have already lost the investing game - they just don't know it yet.
Remember, cash gives you freedom and the leverage to buy great positions from invdviduals that are being forced to liquidate during a market downturn. Having cash gives you the flexibility of picking your entry points that work for your goals because after all, while Wall Street doesn't make money with you in "cash, this is about you and your money.