Weekly Market Commentary 7-5-2011

Effective Cash Management

Weekly Market Commentary 7-5-11

Tim Phillips, CEO – Phillips and Company

open vault door

The Fourth of July celebration came early for the stock market. The S&P 500 closed up 5.61% and the Dow Jones Industrial Average closed up 648 points last week. We did suspect a bit of window dressing by fund managers because June 30th was the end of the quarter but I don’t think anyone expected a week like that.

last week s&p 500 performanceFigure

1 Chart of last week’s S&P 500 performance

I often get asked:

Why do professional money managers not use cash more as a tactical asset class?

My answer:

Weeks like that. Before last week the S&P 500 total for the year was 1.80%. After last week, the S&P 500 total return for the year was 7.57%. If you missed last week, you missed out on over 75% of the S&P 500 total return for the year. We believe that timing the market is an exercise in futility. Investors should be more concerned about time in the market rather than timing the market.

Below is a table showing what happens to your portfolio return if you missed the best days between 1-1-91 and 12-31-10 based on the S&P 500

Days Missed

Annualized Return

Missed Zero Days

9.14%

Missed the Best 5 Days

6.93%

Missed the Best 10 Days

5.42%

Missed the Best 15Days

4.14%

Missed the Best 20 Days

2.99%

Missed the Best 25 Days

1.94%

Missed the Best 30 Days

0.94%

Missed the Best 40 Days

-0.96%

Figure 2 Data taken from Standard & Poor's chart which graphed how a $10,000 investment would have been affected by missing the market's top-performing days over the 20-year period from January 1, 1991, to December 31, 2010

If you missed only the 40 best days over a 20 year period (approximately 7300 days) your annualized return goes from positive to negative. 40 out of 7300 is not a lot of room for error when trying to time the market. If you’re paying 1% in fees and inflation is at 2% your real return can go from positive to negative after missing just the best 20 days. Investors can’t afford to miss weeks like last week.

Now that doesn’t mean cash can’t be used prudently. Cash can be an important asset class when it comes to having a proper asset allocation. It can provide a short term income to meet upcoming liabilities and liquidity needs and be used as a simple hedge against deflation.

It’s important to use cash the right way in order to maximize your return through asset allocation (which determines over 91.50% of your portfolio’s return) and not a market timing tool which accounts for less than 2% of your portfolio’s return.

With all this being said, in my experience having cash on hand to be able to buy things at the right time has usually been a pretty good investment strategy too.

If you have any questions or would like to discuss ways to more effectively manage your cash more in-depth please contact myself or your Registered Investment Advisor here at Phillips & Company.

Tim Phillips, CEO – Phillips and Company

Email: tphillips@phillipsandco.com

Twitter: @PHCOAdvisors

Primary research done by Adam Gulledge, Associate – Phillips and Company