I went to cash because..

"I went to cash because..."  Fill in the blank.  This is a common phrase uttered by market pundits, advisors, and amateur investors everywhere.  And there always is a seemingly very smart reason to justify putting your investments in cash instead of the market.  However; what appears on the surface to be a good investing idea often stands in sharp contrast to the actual results.

Biased Brains and Bubble Talk

If you are a human and an investor there is good news and bad news.  The bad news first.  Your brain sucks.  It operates in almost every way possible to encourage you to make bad investing decisions.  It is also why you care a lot more about the Fed’s actions than you really should.

A test will easily demonstrate your faulty brain at work.

It’s Déjà Vu All Over Again: 1994

The volatility in the stock market AND bond market over the past few days has everyone concerned.  Forget that the US market is still up over 10% for the year. We all tend to get very myopic in our vision when the stock market starts to waiver.  Especially when bonds, which are supposed to protect us in down markets, are also losing money.  It can make the thought of just selling everything and going to cash seem appealing.  But as history reveals, that can be a very costly mistake.

The 4% Safe Withdrawal Rate Misconception

There has been much discussion lately on the reliability of the suggested 4% withdrawal rate.  It has long been held that withdrawing 4% from your retirement assets per year was a “safe” withdrawal rate.  “Safe” means if the retiree starts taking 4% out of their portfolio when they retire and increase that amount by inflation each year then that income will last them the rest of their life.  4% became a rule-of-thumb even though it actually has strong academic backing.  Recently, however, online articles and general advisor talk have suggested that given the current low rate environment or due to big market collapses like 2008 and 2009 a 4% withdrawal rate is no longer feasible.

The “Safe Dividend Stock” Illusion…

It is very common today to get a client or prospect asking about high dividend paying stocks.  It is perhaps even more common for many advisors today to include dividend stocks as a part of their lead pitch.  “We focus on high quality dividend paying stocks,” they might say.  This will undoubtedly lead to affirming head nods from the prospective clients.  And therein lies the problem.  This idea that high quality dividend paying stocks are a guaranteed smart investment with great upside and limited downside potential has become an axiom of sorts in the eyes of the general public.  No further data is needed; the safety of dividend stocks is self-evident.

Market Peak

The stock market recently surpassed two very meaningful price points.  The Dow Jones surpassed 14,000 and the S&P 500 reached 1,500 for the first time since 2007.  Many people are now starting to wonder whether we are “due for a correction” or are we at a market peak.  As I write this article the market indeed has pulled back from these highs.  But what, if any, influence should these index levels have to do with investing long term?

I think there are at least a few important questions to consider when this type of thinking creeps into our heads.

Predictably Unpredictable

By Eric Burkholder, Portfolio Manager

A 2012 review of market outcomes and the “experts” who failed to predict them.

“Prediction is very difficult, especially if it's about the future.” - Niels Bohr, Danish physicist

The world of investment advice and market forecasting is very profitable.  Let me rephrase that.  The world of investment advice and market forecasting is very profitable for those selling the advice.  The outcome for those who invest on said advice is not quite as rosy.  So each year I make a point to track all the “expert” predictions and highlight some of the more pronounced failures.  2012, as expected, did not disappoint.