We’d like to thank the Progressive Prosperity blog, http://azmythblog.blogspot.com/, for mentioning http://www.cranedata.us in a recent post. In a post, “Yields are Back”, blogger Todd from Arizona warns investors against getting carried away with cash. Todd is correct. While cash looks better than it has since 2000 or early 2001, long-term investors should not try to time the money markets either. Match your investment to your needs, risk tolerance, and time horizon, and pay no attention to whether markets are rising or falling. Let us know if you run into other blogs discussing money funds or money markets, and we’ll be sure to keep you posted on the ones we discover. -PeteC
Now just a sec. Personally, I think its best to invest in things where you have some advantage, like domain knowledge. This is a form of market-timing though.
But suppose you were really a long-term investor, and didn’t want to “market-time”. Ideally, you should be trying to maximize your “risk-adjusted-return”. How do you calculate that? Well, qualitatively speaking, start with a very long term average return (preferrably over 100 years:) ), then adjust for risk.
The motivation behind risk adjustment is this: suppose you potentially need money from your account at times beyond your control. (For example, you might have another kid, or max out your medical insurance, etc.) If you have to make a withdrawal when the current total return on assets in the given class happen to be very much under their median return (ranking time-periods), you will have to sell a larger chunk of the assets than expected. This magnifies the hit on the total return down the line.
If you are an “ideal” long-term investor, this never happens to you, and you can always wait out periods of below-average return. Thus you needn’t discount risk as long as you are well diversified. (Well, actually you need to be “ideally” diversified as well, but that is a related issue.)
However, if you are not Warren Buffet, you cannot afford to be an “ideal long-term investor”, so you should be discounting risk….
Another factor is “reversion to the mean”… if an asset has outperformed its long-term average in the medium term, it is due to revert back to its long-term averate again, pulling back its return. (The reverse for underperformers.) This of course assumes that the past has some effect on the future. But it is unreasonable to assume otherwise in real markets: after all prices are determined by other investors who are looking at the past too.
Given both risk discounting, and reversion to the mean of return in such asset classes as stocks and bonds, cash should be a much larger proportion of their portfolios than it is for most investors.