Industrial Insight

we buy high and sell low…. | March 20, 2013

http://isharesblog.com/blog/2013/03/19/cash-is-not-king

Cash is Not King

By Daniel Morillo, PhD | Mar 19, 2013 |

It is interesting to see how the peak levels of cash holdings seem to correspond to the bottoms of market cycles, and the lowest levels of cash holdings seem to correspond with the top of market cycles. In other words, when stock prices were low, investors were holding on to a lot of cash. As stock prices rose, investors were putting their money back into the market. Indeed, cash holdings were high right after the 1987 crash and steadily declined as the market rallied in the 1990s. They bottomed out almost exactly when the tech bubble burst in early 2000.

This appears to be one more manifestation of trend-chasing often exhibited by investors. Indeed, when the survey reports a reduction in cash holdings, the non-cash portion of the portfolio had, on average, much higher returns in the preceding period than in months when the survey reports increases in cash holdings1. In other words, when returns have been good investors reduce their cash holdings and invest more in risky assets, and vice-versa when returns have been poor.

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About author

I'm the executive vice president for a steel casting trade association, the Steel Founders' Society of America. I've got a crazy wife, five crazy children, three crazy people that married into the family, and two crazy fun little grandsons.

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