Chapter 14
Buy-Hold Myth #5: You Won't Make Any Money If You Sell and Sit in Cash

Let's play a game. I'll put a plank of wood—300 feet long and three feet wide—in the parking lot. In the middle of the plank I will place a thousand dollar bill. I'll dare you to get on one end, walk to the middle of the plank, pick up that bill, and walk to the other end. If you get to the far end of the plank without falling off, you can keep the thousand dollars.

If I offered you this challenge, would you take it? Of course you would. Why wouldn't you? But what if I took that plank of wood to the Petronas Towers in Kuala Lumpur and anchored it between the two towers, 88 stories high? I'd even put a rock on the bill, to keep the wind from blowing it off. Would you still take my dare? No? Why not? Your investment in both situations is the same: a 300-foot walk. The return on your investment is the same: a thousand dollars. Your investment and return are the same in both circumstances, but one challenge you would take and the other you would not. What's the difference? The second dare has 88 stories of risk underneath it. You could die.

What if I increased the prize to a hundred thousand dollars? Or a million? Would you walk that plank, 1,483 feet above the ground? (you're not allowed to wear a parachute, by the way). Most of you would still decline and you'd be right to do so.

Some people knock my idea of selling in a bad market. They point out the fact that my clients will make zero while they're out of the market and in cash. So what? If there were a danger my clients might lose half their money or more, I would advise them against that risk. I wouldn't tell them to walk across a 300-foot plank 88 stories up off the ground so they can make money. That would be irresponsible. I would try to keep them off the plank altogether. I would put them in cash.

Cash Can Be Your Friend

Poor old cash. Nobody likes cash. Nobody likes low returns. It is human nature to want to make the most money possible. We have pursued money for most of our adult lives. During our working lives we wanted raises. During our investing lives, we wanted higher returns. Cash doesn't offer that.

But if you are retired or retiring soon, you have to make friends with cash, and even with a 0 percent return. You can't be worried about making high returns. You have to protect your principal. One of the consequences of protecting your principal is that you will most likely underperform. It doesn't matter. Would you rather hold on while the market drops 6,000 points? Don't you think the retirees who experienced that sort of loss wish they had gone to cash? That they would have rather made zero than watch their net worth drop by 30 percent or 40 percent? Getting out of the market and into cash can save your retirement and give you peace of mind. Not only that, but making zero isn't such a bad deal.

Bewitched by Zero

“Oh, whatever is the matter now?” Endora cast a withering glance at Darrin, who sat at the kitchen table with his head in his hands.

“Mother,” said Samantha, “Can't you be nice for even a minute?”

“Oh, all right. What's the matter, Derwood?” Endora poked Darrin with a fingernail.

“Darrin is worried about our investments,” said Samantha. “The market seems to be going down.”

“So?”

“We're both getting close to 65. We want to retire and be secure.”

“Well, if that's what you want,” Endora waved her arms above her head.

“Now wait a minute…” Darrin raised his head, too late.

Endora snapped her fingers. “Done.”

“Oh, no. What did you do?” Darrin looked at his wife, who turned to her mother.

“I simply cast a spell on your investments,” said Endora. “They'll stay at a nice even zero so you won't have to worry.”

“Zero? Not worry? Are you kidding?” said Darrin. “Sam, please tell me she's kidding.”

Samantha looked at her mother. “I don't think she's kidding.”

“Of course not,” said Endora. “Why would I do that?”

“Ohhh,” Darrin groaned.

“Darling? Maybe it's not so bad,” said Samantha, “Tell you what, I'll just take a little peek into the future and see what happens.”

“No witchcraft…” Darrin stopped and put his head back down on the table. “Oh, go ahead.”

Samantha wiggled her nose and shut her eyes. “Let's see…We won't need the money until you retire at 65…then we'll need to take out money to live on.”

Darrin groaned again.

“You'll want to take out 4 percent,” added Endora. Darrin looked at her in disbelief. “I have been around the block, you know,” she said.

“If we take out 4 percent of our investments for the rest of our lives…” said Samantha.

“Don't forget about inflation,” Endora said. “You'll need to increase the withdrawal by an extra 3 and a half percent per year.”

“Plus 3 and a half percent…” Samantha wiggled her nose again. “that money will last us…19 years! We'll have money until we're 84.”

“Really?” said Darrin, raising his head.

“Really, darling,” Samantha said.

“Really,” said Endora. “I don't know what all the fuss was about.”

That's Not All

But our bewitched couple doesn't necessarily have to make zero forever. If there's an up year in the future, they could get back in the market and make more than zero.

Cash doesn't always make zero. In the early 1980s, the interest on cash was over 10 percent. The current low interest rate for cash is a historical anomaly.

It's likely that either the market will stabilize and/or cash will pay more than zero at some time. If it does, Samantha and Darrin will be able to extend the amount of time their money will last beyond age 84. There's only a remote chance that they will make zero for the rest of their lives, even if they were in cash the whole time.

And even if, like Samantha and Darrin, you do make zero for a short time, you know what? It's the right thing to do. Sometimes there's a cost, but doing the right thing is always the right thing to do. When you're retired, you need to be willing to take a lesser return in exchange for having money for the rest of your life.

Security or Surfing?

Let's say you have a beautiful vacation home right on the beach. As a lifelong surfer, this oceanfront house is a dream come true. One day, all the forecasters say there's a hurricane coming your way. You have two choices at this point: You can board up your house, get in your car and drive 100 miles north, or you can stay behind and say, “It'd be a total blast to surf those gnarly waves during the hurricane. That'd be cool.” The first choice isn't glamorous and it's not fun. You've got to secure your house, drive for a few hours, and get a hotel—all for something you're not even sure will happen. The second choice is easier: You ignore the danger and get ready for some great waves. Let's say that in scenario number one, the hurricane doesn't hit the beach. It turns around and goes off to sea. You would have been better off staying in your house. You could have spent time on the beach instead of being cooped up in some hotel. Darn it! Now let's say that you chose scenario number two instead and the hurricane does hit. You stayed behind and now you're dead.

Which is the better choice? Would you rather have the inconvenience and expense of playing it safe? Or would you rather stay and possibly get wiped out?

If you are retired, or about to retire, you cannot afford to take the chance of getting flattened by a financial storm. You can't walk a plank thousands of feet in the air. You can't risk your principal.

If you get out of the market and go into cash, you may not make as much as you could have, but you'll protect your principal. And remember, if you had to make zero for the rest of your life, you could take out 4 percent a year and live off your investments for 19 years. Making zero seems like a small price to pay for that kind of security.