My opinion has not changed. It is based on three premises:
1- It is impossible to predict short-term stock market movements.
I have written many times about this. My most recent blog (“Above all else, avoid being struck out“) is a good example of the capital error that market timing constitutes for a long-term investor.
2- Stocks offer the best returns for a long-term investor.
In the current period of high inflation, I would add that they offer the best long-term inflation protection. According to Morningstar, stocks of large US corporations have provided a compound annual return of 10.2% from 1926 to 2019. Meanwhile, US government bonds have provided a return of 5.5%, while inflation has been 2.9%. Short-term bonds (T-bills), which are similar to cash, returned 3.3%.
Unavoidably, keeping a relatively high percentage in cash reduces a long-term investor’s returns.
3- An investor invests for the long term.
The sums he decides to invest in equities should be invested exclusively with a long-term horizon – a minimum of five years, ideally ten.
That said, for current liquidity needs and to cover contingencies, an investor should keep adequate cash in the bank. I believe I read that it is generally recommended to keep six months worth of expenses as an emergency fund. Such a sum seems reasonable to me in the event that an investor loses his job or faces significant unforeseen expenses. In my mind, these liquid sums are not part of an investment portfolio.
A retired investor who depends on the income from his investments to live on may very well have bonds in his portfolio. However, I question the relevance of keeping cash at all times in such a portfolio, knowing that a large amount of cash will be held in a bank account.
In my opinion, we invest in the stock market the sums that we will most likely not need for several years, knowing that stocks are the most profitable alternative in the long term (if we invest intelligently). And knowing that corrections and bear markets are normal and unavoidable – they are the price to pay for the superior returns of equities over the long term.
This is why I believe that, come hell or high water, an investor should be fully invested at all times.
