This Can Only Happen Near a Market Bottom

There's a new investment game in town...

It's about as simple a strategy as you could dream up. But if you study history, it almost never works.

Still, after last year, folks – including regular mom-and-pop investors and professionals – see it as a no-brainer. Everyone is in on this game.

They love it because it worked in 2022. And as a whole, investors tend to assume that what just happened will keep happening. But as I recently explained, that's a dangerous game...

No one seems to realize that 2022 was the anomaly, not the rule. So they're betting this simple strategy will work again in 2023.

In truth, it almost certainly won't. And the fact that anyone believes this strategy will work today is a sign we're near a market bottom.

Let me explain...

Last year didn't hurt because stocks fell... It hurt because stocks and bonds fell together. That happening is darn rare throughout history.

Typically, bonds hold up when stocks suffer. But that wasn't the case in 2022. Instead, the only major asset class that didn't fall was the most boring of them all... cash.

There are plenty of reasons for investors to hold cash. It gives you optionality for the future... It allows you to take advantage of new opportunities... And it's a safety net in tough times.

What cash rarely does for your portfolio is lead the way. It's almost never the primary driver of returns.

That's exactly what it did last year, though. Everything was down, and cash was... well, cash. It maintained value, which was a win for just about every portfolio. And now everyone assumes this same scenario will happen this year.

That's according to a recent MLIV Pulse survey from Bloomberg. This weekly survey asks both professional investors and regular mom-and-pop investors various questions about the market.

And one question specifically asked if these folks thought cash in their portfolios would be a drag on performance or a positive. The recent results are eye-popping...

Both professional and regular investors expressed nearly identical sentiment. Roughly two-thirds of investors expect cash to help portfolio returns this year.

It's important to understand how crazy a belief that is.

You see, cash provides no return to a portfolio. So there's only one situation where it can improve returns... That's when stocks and bonds both lose money in the same year. (If either is positive, you'd have been better off holding that asset instead of cash.)

Yes, that did happen in 2022. But it was the first time it has happened since 1969. And since 1928, it has only happened two other times, in 1931 and 1941.

That means cash only helps returns once every three decades or so. But because it happened last year, two-thirds of investors expect a repeat this year.

To be clear, that doesn't mean you shouldn't hold cash. It has value. And it often makes sense. But don't expect it to be a positive for your overall returns again in 2023. That's an irrational belief.

And the thing is, folks don't believe it because it's rational... They believe it because they're scared.

Tens of trillions of dollars in global market value vanished last year. That has turned investor sentiment sour... and has scared folks silly (and for good reason). Now, they want the safety and security of cash.

This mentality can only happen near a market bottom. I urge you not to let the fear freeze you into inaction. There's still a lot of opportunity out there.

So if you hold cash today, it's time to put some of it to work.

Good investing,

Brett Eversole

Further Reading

"Inflation trajectory matters for the market. When it's falling, stocks tend to do well," Brett writes. He says the odds of a stock market rally this year are darn high. And although this isn't the consensus view among investors, if you're willing to be a contrarian, buying stocks is the best move right now... Learn more here.

When the market falls, it paves the way for future outperformance. According to history, the years that follow tough times have the potential to be banner years. "You'll still want to wait for the trend before going all-in," Brett writes. But the right time is quickly approaching... Read more here.