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Cash cocaine

Holding cash can be incredibly addictive. It’s safe and understandable, whereas the markets are volatile and unknown. On paper we know that markets rise on average 3 out of every 4 years, and if left alone, investments can compound into serious wealth. But when you receive a cash lump sum and are considering whether or not to invest it, our brains can work against us when trying to get it invested – regardless of what the market’s doing.

When the market’s rising


When you’re sitting in cash and stocks go up, you tell yourself you’ll wait for a correction. There’s always a reason not to invest, and the next crash must right around the corner. Whether there’s a geopolitical crisis, expensive market valuations, or new all time highs, the next crash is inevitable. You’ll just wait to buy at better prices.

Eventually, as markets continue to rise, you start becoming resentful of the gains you’ve missed. You try harder and harder to convince yourself that a crash is coming, and that you should wait for a selloff. Otherwise it means you made the wrong decision by not investing earlier, and we’ll perform all sorts of mental gymnastics to convince ourselves that our decisions have been the right ones. (This seems to be equally true for life outside of investing.)

If you’re sitting in cash and continually waiting for a correction during a rising market, getting invested can be extremely difficult.

Investing cash


Why do we think the market will crash?


Alongside the fear-mongering media headlines, the belief that waiting for a correction before investing is a good strategy might arise from another behavioural bias.

What people may confuse is the chance of future prices being lower than they are today, with the chances of prices falling from a future high – which may still be higher than prices are today. The latter is far more likely than the former, because small corrections are incredibly common – in fact, almost 95% of your time being invested will be spent in a state of drawdown. But this doesn’t mean prices are constantly falling. It just means we spend most of the time below all time highs, suffering through lots of small drawdowns (which are barely noticeable for most people), before the markets make the next high.

A future correction after prices have risen is not the same as prices in the future being lower than today.

Research from Elm Funds has shown that the historical probability of a 10% correction happening any time during a 3-year window is 88%, significantly higher than the 56% occurrence of that correction from the market level at the start of the period.

When the market’s falling


This is where it gets interesting.

When the market starts to fall, sitting in cash is a very comfortable place to be. The further the market falls, the more panicked the world becomes. Cash feels like a safe haven from a world that’s apparently collapsing around you. There’s always a reason not to invest, and these reasons start receiving more attention as the world tries to fit ex-post narratives on top of the market’s performance to try and make sense of the crash.    

Whilst holding cash during a correction is great in theory, deciding when to pull the trigger and get invested is tricky. The panic that ramps up as the market falls makes it more and more difficult to invest. The further you watch the market fall, the further the market seems like it could fall in the future. So staying in cash feels safe. As the fall continues, you tell yourself either that a) you’ll wait for signs of a sustained recovery, or b) you’ll wait for a lower point to invest.

The problem with (a) is that you’ll never know whether the recovery is temporary or not. “Double-dip recession” fears start circling as recoveries happen, making cash feel safer, until you’ve been in cash so long you’ve missed out on big gains. The problem with (b) is that you probably wouldn’t invest if the market continued to fall. As the market falls, it feels like the market doesn’t have a floor, and the drop could carry on indefinitely. It’s really hard to invest when everything feels like it’s falling apart, and in reality, it’s unlikely that we’d be investing when everyone else is running for the door. Most likely, we’d be scared just like everyone else – it’s only natural to herd together in times of crisis, when emotions and gut instincts take over.

Stories from the 2008 crash


For those that have experienced past crashes, you likely won’t remember exactly how you personally felt in the depths of the last recession, because our memories are notoriously unreliable. But thanks to the power of the internet, we can see how other investors felt in real time during the 2008 crash. This thread from the ‘Boglehead’ investing forum was created on October 9th 2008, exactly one year after the market peak in 2007. The ‘Bogleheads’, named after the late great Jack Bogle of Vanguard, are champions of index investing – buying cheap passive funds and ‘staying the course’. They have a strong investment philosophy, and are probably the most “buy-and-hold” investors that you’ll ever come across. Their forums are full of intelligent discussions on investing theory, and the average Boglehead is generally more experienced and well-informed than the average investor. It’s fascinating to see the resolve of the most fervent, informed, buy-and-holders being tested so dramatically.

For context, the market had fallen 41% at the time the thread was created, and would fall another 25% before it reached its lows in March 2009. It gives an amazing insight into how people were feeling during the crash.

Some highlights are below:

“I have been retired for 10 years. I am one who has said over and over again. Stay the course. Look for the long term. Yeah, sure. That’s fine until today. Today did it. I am just starting to be scared so that I won’t tell my wife what happened today…stocks down…bonds down…I’m down. Our retirement funds are sucking down the drain. I lost today alone a year’s worth of normal distributions for expenses. I keep thinking tomorrow will be a turn around. I have said that for 30 days. I am 25% capitulating tomorrow, maybe 50% to money markets….maybe all.

This is not me. I will see tomorrow. 


“In May I bought the International Stock Index in my IRA from my pension money that I moved from Nationwide. I have now lost 1/2 of it. I also bought Inflation Protected Securities which have dropped in value. I thought bond funds should be safe. I am 65 and wonder if I will ever get my money back or will end up depending on SS for my retirement. If so, it will be a short one. I am about ready to follow the panic crowd and save what I can. I can always buy back in later. (When I sell, I always wonder who is buying?) I earned good money over my career, I wish now I would have just kept it in a money market, so much of it is gone. This unprecedented worldwide crises is scary beyond belief, and if anyone thinks a worldwide depression is impossible, consider that when the Fed runs out of money, the Treasury will have to start printing it, and the U.S. credit rating will drop. Then what? The DOW hit 8500 today, and tomorrow it should drop to 8,000 or less. I guess if you are willing to wait 5 years for a DOW of 10,000 this is the time to buy. We are a long ways from the market bottom.”


“I came very, very close to selling 20 percent or so of my stock index fund holdings Friday, Sheepdog. If the market had plunged in the final hour, as it’s done so many times recently, I might have pulled the trigger.”


It’s easy to look back on it now and say how easy it would have been to invest at the depths of the market crash.

Looking at a chart of the MSCI World’s performance makes crashes look easy to stomach, because we can clearly see with hindsight that they recovered. But it never feels that way at the time. The messages above are clear reminders that even the most stalwart investors can get rattled when it all hits the fan.

If you’re sitting in cash during a falling market, getting it invested can be extremely difficult.



The next post in the series looks at the problems associated with one of the most common arguments for getting invested as soon as possible – known as the “X best days argument“.

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Past performance does not guarantee future performance and the value of investments can fall as well as rise. The information on this site is provided for information only and does not constitute, and should not be construed as, investment advice or a recommendation to buy, sell, or otherwise transact in any investment including any products or services or an invitation, offer or solicitation to engage in any investment activity. Please refer to the full disclaimer on the disclaimer page.

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