Scary times for stocks often makes cash just fine

ON THE MONEY

Your Money

June 18, 2006|By GAIL MARKSJARVIS | GAIL MARKSJARVIS,CHICAGO TRIBUNE

What's wrong with cash? Not a thing.

If you can't stomach the market's recent plunge, you could move a little money into a high-yielding savings account or money-market fund temporarily and earn close to 5 percent.

In fact, some institutions are higher. EverBank of Jacksonville, Fla., offers high-interest checking accounts over the Internet with a 5.5 percent three-month teaser rate, then 3 percent to 4 percent later, depending on the amount kept in the account.

Parking money at rates approaching the 5.9 percent historical average on long-term U.S. Treasury bonds certainly has appeal now. Virtually every type of investment, from gold to stocks and bonds, has been pummeled since early May. Gold futures are down about 20 percent, the Dow has lost more than 5 percent, and the average international fund has bled about 13 percent.

As investors dumped those investments, they stuffed cash into safe holding places like money-market funds.

It is a reversal in behavior.

During the first four months of the year, investors loved stocks, especially hot international markets. They pulled money out of money-market funds and stuck it into stocks. But in May, investors started worrying about risky investments. They stashed $33.7 billion in money-market funds in May, and during the first week of this month they added $32.8 billion, AMG Data Services says.

David Kover, a Chicago financial planner, joined the throngs of investors, moving clients out of gold, technology exchange-traded funds and emerging-market international funds. He has 30 percent to 40 percent of their money in money-market funds. Why not pocket money from investments that doubled, he figured, and keep it safe while waiting for the Federal Reserve's next interest rate meeting June 28 and 29.

The Federal Reserve has been raising rates to curb inflation, and investors are worried the Fed will go too far, possibly causing the economy to falter. Also, higher rates have curbed speculation, a drag on the stock market.

Often, financial advisers resist moving money from stocks to cash during scary periods. They generally want clients to keep three to six months of household earnings in cash at all times for emergencies. Then they invest the remainder in stocks and bonds, leaving investments in place in good times and bad.

The thinking: Long-term stock and bond investments do significantly better than cash. And if too much money is parked in cash during nerve-wracking periods, investors miss the unpredictable spurts in the stock market that have repaired stock market damages.

Over the past 16 years, investors would have averaged a 10.6 percent annual return if they had kept a diversified stock portfolio in good times and scary times. (That's 60 percent in large-company stock mutual funds, 20 percent in small-cap funds, 15 percent in international stock funds and 5 percent in emerging markets.) If they had moved out of an asset class such as international funds or small-cap funds when they were nervous during the period, they would have earned 8.2 percent on average annually.

Gary Bowyer of Park Ridge, Ill., is among the financial planners who tend to adhere to the buy-and-hold discipline. "We're standing pat because the economy is rolling along reasonably well," Bowyer said. "I think the market is doing what's normal - fluctuating."

Yet, he said, "a person has to sleep." If Bowyer encountered a very nervous individual, he wouldn't object if the person moved perhaps 5 percent out of stock funds and stored that extra cash temporarily in a money-market fund.

gmarksjarvis@tribune.com

Messages for Gail MarksJarvis also can be left at 312-222-4264.

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