Greed 1, fear 0.
That’s the way 2020 has played out so far in investor sentiment, if you judge by indicators I’ve seen lately about how people are sizing up risk in stock markets.
This is a most bizarre year for watching investors manage the eternal tension between greed and fear. On one hand, there’s a global pandemic that seems unconquerable without a vaccine. On the other, stock markets have been spectacular since a March crash triggered by that same pandemic.
The stock markets have sloughed off the pandemic and investors are getting cocky about risk. I’ve seen examples of this twice lately.
In one case, a millennial reader with a bunch of cash sitting uninvested in her account asked for a view on what to do with it. She’s considering the purchase of a rental property and wondering if she should move her cash into a low-risk investment at a robo-adviser.
Robo-advisers do offer conservative portfolios with assets either evenly divided between stocks and bonds or mostly in bonds. But even those portfolios could lose money over a year, and quite possibly longer than that. If this reader plans to use money in those investment accounts as a down payment on a rental property in the next few years, the safe strategy is to forgo investing and instead use a high-interest savings account earning 1.5 per cent or thereabouts.
Another reader asked recently about the pros and cons of moving a block of savings from his big bank to an alternative bank offering a much better interest rate. I consulted my Twitter followers about this, and at least one person asked why anyone would limit themselves to a bank savings account and not consider stocks and bonds. Another person simply said “cash is trash.”
Cash does seem trashy when stocks and flying, and it’s a win to get a rate of 1.5 per cent on a high-rate savings account. But this is the perspective at a moment in time when greed has pushed fear to the sidelines. If stocks take a dive as a result of the pandemic, if financial markets react negatively to developments in the U.S. election or if something unforeseen happens, fear will turn the tables on greed. Having money in a 1.5-per-cent high-interest savings account will then look like a genius move.
Save money you need within five or so years, invest for the longer term.
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