Cash Isn’t King: Avoiding Hindsight Bias In Turbulent Markets

Cash Isn’t King: Avoiding Hindsight Bias In Turbulent Markets

As we fully enter the fall season, the markets continue to seesaw dramatically. Some are lamenting why they weren’t in cash from January. We all see the beginning-of-year values on our statements and can experience something called ‘hindsight bias’ – a not-infrequent tendency for investors to consider past events as being more predictable than they really were. “If only I had [fill in the blank: sold, not invested, not invested as much] then everything would be OK now….now I’m going to have work [x] more years….or put off [x] purchase or expense perhaps….forever….I may never achieve financial peace of mind…this is all rigged against me….” 

Some may be wondering why we didn’t recommend going to cash—the market was at all time highs in early January, and the headlines reflecting inflation, interest rate increases, and war in Ukraine were numerous. There is a reason we don’t recommend going to cash as a strategy to sidestep market declines. The main reason is that we don’t advise speculating. Going to cash is a speculative decision. It assumes that, even if we knew all the events that would come to pass in advance, we could determine the resulting market reaction. It simply is not possible. 

Think of March 2020. COVID hit. Global economies shutdown. A pandemic gripped the world. This could lead one to assume that we needed to batten down the hatches and sell (pay capital gains) and move the money under the mattress. Instead the market recovery from March 24, 2020 through January 3, 2022 provided a 114% return. 

Besides being speculative, going to cash is not a sustainable long-term strategy. It assumes that we would also be able to know when to come back into the market as well. After seeing market appreciation in July this year, one could have reasonably assumed that re-enter date was June 30th, 2022. The market appreciated into the early part of the summer—only to give up gains and shift down into bear market territory again by late September. Perhaps now, that date would be September 30th, given the market performance this quarter so far.

There is no time-tested period, or signal, to say ‘go back in’ or ‘stay in’. One might be right once or twice, maybe even 3 times, but over any long-term period, it’s virtually impossible to do so consistently. The results of missing, getting back in, or jumping out at the wrong time – no matter how right it feels in the moment–can be devastating to an otherwise solid 10-year or 20-year plan. And that can lead to more speculation to try and ‘catch up.’ 

We are not going to say that these times are easy. We are however happy to listen to you and discuss what makes the best sense for you given your overall situation. Feel free to review our resources page for short videos and articles about navigating market turbulence.

If you would like to speak with Esther or Erik about this subject or any other related personal financial matter:

ESTHER SZABO
CFP® , Certified Financial Transitionist®
Founder and CEO, Gates Pass Advisors
BOOK A CALL with ESTHER

ERIK SCHEI
CFA, Certified Financial Transitionist®
Associate Advisor, Gates Pass Advisors
BOOK A CALL with ERIK

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