Why cash is trash for long-term investors


Nearly three years after stocks hit their bear market bottom, investors are still leery of equities and hiding out in cash, much to the detriment of their long-term financial goals.

Fund-industry statistics show that investors currently than at any time in history, according to DWS Investments, part of Deutsche Bank Group (DB).

That means a lot of folks missed the rebound in stock prices since those dark days of March 2009. True, this year has been no fun at all, but the S&P 500 is still up nearly 80 percent from its bear market nadir.

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Cash, meanwhile, is yielding less than nothing, once you subtract inflation from near-zero percent interest rates. Unfortunately, many investors are still looking for a tell-tale sign indicating it's time to reposition their cash holdings back into the capital markets, writes Jeff Piliero, regional investment manager at Wells Fargo Wealth Management, in a new note to clients.

That's a huge mistake. Market-timing (that is, guessing where stocks are headed in the short term) is a near impossible feat, Piliero says, because the lion's share of returns tend to come in short, unpredictable stretches.

Indeed, from January 1989 to May 2011, the S&P 500 rose 7.2 percent on a price basis. But if you subtract just the 50 best performance days out of those 12-plus years, the S&P 500 actually lost 3.3 percent. See the chart, courtesy of Wells Fargo Wealth Management and Bloomberg, below:

Bloomberg, Wells Fargo Wealth Management

That's a strong case for remaining committed to your long-term financial plan, regardless of how stomach-churning the stock market may be. As Piliero notes, even during the most difficult times, over the long term a diversified allocation across stocks, bonds and other asset classes is far more prudent than piling into cash.

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    Dan Burrows, a veteran of Aol's DailyFinance, SmartMoney and MarketWatch from Dow Jones, covers the markets and economy with an eye toward investing for the long haul.