The Cash Strategy


DISCLAIMER:  This is not like my normal blog posts. This is a nuts and bolts financial conversation. That said, this is NOT tax, legal or financial advice.  Please read on with that in mind. 

Raise your hand if you have a 401k.  Raise your hand if you have an IRA.  Raise your hand if you’ve looked at the stock market lately. 

I’m a big believer in action.  Taking action makes things happen.  However, there are times when doing nothing may be the best action.  I’ve written previously about this in The Ancient Art of Waiting, but this time I want to talk about it in the context of money.  

A volatile year with a big jagged slide at the end.

A volatile year with a big jagged slide at the end.

It doesn’t take a genius to see that the markets tanked right at year’s end.  If you’re one of the many people in the U.S. with a 401k or IRA, you saw a big hit to your portfolio.  Your numbers are way down, right?  But what choice do you have?  You’re not sixty years old yet.  You can’t take that money out of your investments without getting a tax penalty. Or can you?

It recently came to my attention that many people don’t know about “going to cash.”  At the risk of sounding like I think I’m so smart, I’m sharing this for anyone who may not be aware of all their financial options.

Going to cash simply means, selling your investments in exchange for their current cash value.  Before you raise your hand and say, “Erik, I’m a long-term buy-and-hold investor.  Over the long haul, everything will bounce back,” know that I agree 100%.  Everything will bounce back over time.  Holding is one option.  Going to cash is another.  I’m not telling anyone to go to cash.  If you haven’t already done that, it may not be a good idea.  I personally think the market will continue to grind sideways or downward for several months, but the big drop is over.

The history of bull vs. bear markets for the past 110 years. (Data Source:  Robert Shiller . Calculations by  Newfound Research .)

The history of bull vs. bear markets for the past 110 years. (Data Source: Robert Shiller. Calculations by Newfound Research.)

For most investors (and if you have a 401k or IRA, you’re an investor.  Yes, one of those nasty people that always get slammed in the news for being greedy) it’s important to know your options.  Here’s a quick tutorial:  a 401k or IRA are kinds of accounts, just like checking and savings accounts are different kinds of account.  IRA literally means “Individual Retirement Account.”  Money you put into a 401k or IRA does not get taxed until you withdraw it.  If you withdraw it before you’re 59.5 years old, you pay a higher tax rate.  The government and banks want you to keep your money invested.  It helps them, and it usually helps you, but not always.  Regardless, most people confuse “going to cash” with withdrawing your money out of your 401k or IRA.  You do not have to withdraw money from your IRA or 401k and move it to your checking account to convert it to cash.  

Let me explain.  Let’s say you have a 401k or IRA with Vanguard. (I have no accounts with Vanguard. This is illustrative only, not any kind of endorsement.) With your Vanguard IRA or 401k funds, you bought a mutual fund to help your money grow in preparation for retirement. Perhaps you didn’t make any choice and Vanguard made a default decision for you.  Either way, you are the owner of $10,000 worth of a hypothetical mutual fund called VanGrow (VGRO).  VGRO is a basic fund that goes up when the stock market does well and goes down when the market does poorly.  When the market is rising, you’re happy.  When the market is dropping you feel scared and trapped.  You can’t withdraw your money because you’re not sixty years old yet. Or if you do, you’ll get hit with a 10% tax penalty.  

Goingt to Cash.jpg

Not so.  Here’s how you do it.  You can sell your shares of VGRO at any point.  Just go online or call Vanguard and tell them you want to sell. They will sell those share and the cash equivalent will now sit in your IRA or 401k.  The point is to leave that money in your Vanguard account.  The market can do whatever it wants but your balance will not budge.  You will not be penalized with any taxes for going to cash.  If you later decide to buy VGRO or any other stock, bond or mutual fund, you use your cash sitting in your Vanguard account to do it.  The same is true for any financial institution:  Fidelity, Charles Schwab, E*Trade, AmeriTrade, CapitalOne, ShareBuilder; any institution that offers IRAs or 401ks.  As long as your cash balance stays within your IRA or 401k there is no tax penalty.

Personally, I went to cash the end of September.  I felt like the end of our ten year bull run was close and I stepped aside.  I sold all our 401k, IRA and other assets but left them in their accounts.  I generally don’t try to time the markets.  For most of our portfolio most of the time, I’m a buy-and-hold guy.  But every so often a big correction comes along.  I believe this is one of those.  I believe we’re headed into a bear market.  In several months or a year or two it will turn around and we’ll be off to the races again.  That shift will happen independent of politics, news and global events. It’s simply a rhythmic pattern just like the tides and waves in the ocean.  Everyone that is holding on to their investments will be fine.  They will recover in time.  Please don’t be alarmed.  The point is to know you are not trapped.  You do not have to ride it out unless you want to. 

The Past 2018-19 The Future.jpg

Many of us feel intimidated by things we don’t understand.  They’re too complicated.  We don’t have time to learn or understand.  We let the experts handle that stuff.  Smarter, richer or more influential people will take care of that for us.  I try to be careful of this mindset.  Please know you’re smart.  You’re capable.  You can be influential, certainly in your own life.  You do not have to feel trapped.  You have options. 

REMINDER:  This is NOT tax, legal or financial advice. Love ya!