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Where Trillions Dwell
Back in the 1980s, a popular Wendy’s commercial featured a soon-to-be-famous elderly lady peering at a small piece of hamburger perched on a huge bun. She then asked:
Where’s the beef?1
Today we can ask a similar question:
Where’s the cheddar?
With the huge market sell-off in March and April, we know that those who sold stashed a massive amount of cheddar or moolah. Unless they used it in the ensuing rally, it’s still there, somewhere, just sitting.
A little research reveals that a gigantic amount of bread (bigger perhaps than the bun holding the burger shamed in the Wendy’s commercial) is … to mix our metaphors … parked on the sidelines. Sitting. Waiting. Waiting for what?
On June 22, Jesse Pound wrote an article for CNBC. The article’s title pretty much summed up its contents: “There’s nearly $5 trillion parked in money markets as many investors are still afraid of stocks.”3 As pointed out by Mr. Pound, more than $4 trillion flooded into money markets as investors sold anything not nailed down. Money market assets peaked during the week of May 13, setting an all-time record of $4.672 trillion. Recent outflows, he said, still leave 90% of that amount waiting on the sidelines.4
Mr. Pound cites Ryan Detrick, a market strategist at LPL Financial, who noted that “after the 45% bounce, give or take, in the S&P, we haven’t seen really the big part of the retail crowd come back in. … It kind of shows again that a lot of people are really still on the sidelines.”5
Mr. Detrick revealed even more staggering numbers in a recent Tweet:
$15.4 trillion cash in bank accounts right now, a new record.
Recently up 15% the previous 3 months, another record.
Combined with the record of nearly $5 trillion in money markets and safe to say there’s a lot of cash on the sidelines.6
Another Stash of Cash
Another trillion dwells in orphaned retirement accounts. And this amount is likely to grow because of the massive loss of jobs in the recent virus crisis.
Many companies set up 401(k) plans for their employees. The employee contributes to the plan by way of paycheck deductions. In some plans, the employer contributes a certain percentage of the employee’s wages. Over time, these plans can grow significantly, the gains free from tax until the employee starts withdrawing funds upon retirement.
There’s a slight problem. As employees change jobs, they often forget about 401(k) plans with their previous employers. As reported by Mitch Tuchman in a June 2020 MarketWatch article:
Over a recent 10-year period as many as 25 million people in workplace plans changed jobs and left behind a 401(k) plan. Millions more have left behind more than one, according to a GAO study.7
Millions of people who lost their jobs during the pandemic will one day find new jobs, most likely with different companies. Yet their old 401(k)’s with the previous employers might just sit there, with no one paying any attention to any strategy of investment.
Mr. Tuchman offers some sound advice: roll those old 401(k) accounts into an IRA account. That way, you—or your financial advisor—can make rational decisions about staying in the market, getting out of the market, or getting back in the market when the drop appears over. Beware, Mr. Tuchman advised, and make certain you complete a true rollover:
Make sure you request a rollover, not a distribution. If you take money out of your 401(k) plan you will be liable for taxes and, possibly, penalties for early withdrawal. Once the money is transferred you can begin to choose new investments in your IRA that better fit your current age, risk tolerance and retirement goals.8
Fear of Fear Itself
It looks as if fear accounts for this vast amount of wealth sitting on the sidelines. If I get back in the market, I think, it’ll no doubt crash. After all, I say to myself, look at the massive unemployment around me. How can the market possibly go up, I wonder?
Millions of sidelined investors asked those questions as the stock market recovered most of its pandemic losses. Granted, more convulsions loom just over the horizon. But it makes little sense to sit there and watch potential gains pass you by.
Protecting Against Crashes: Our 1-2-3 Approach
At RFS, we protect our managed accounts against the ravishes of stock market crashes.
First, we watch your account, every minute of every day.
Second, we use technical analysis and active management to decide when to deploy your funds … and when to pull them back into cash.
Third, we use trailing stops to guard against crashes.
A Word About Trailing Stops
A trailing stop is a type of stop-loss order that combines elements of both risk management and trade management. Trailing stops are also known as profit protecting stops because they help lock in profits on trades while also capping the amount that will be lost if the trade doesn’t work out.
Here’s how it works. When the price increases, it drags the trailing stop along with it. Then when the price finally stops rising, the new stop-loss price remains at the level it was dragged to, thus automatically protecting an investor’s downside, while locking in profits as the price reaches new highs.
A trailing stop-loss is a way to automatically protect yourself from an investment’s downside while locking in the upside.
For example, you buy Company XYZ for $10. You decide that you don’t want to lose more than 5% on your investment, but you want to be able to take advantage of any price increases. You also don’t want to have to constantly monitor your trades to lock in gains.
You set a trailing stop on XYZ that orders the position to automatically sell if the price dips more than 5% below the market price.
The benefits of the trailing stops are two-fold. First, if the stock moves against you, the trailing stop will trigger when XYZ hits $9.50, protecting you from further downside.
But if the stock goes up to $20, the trigger price for the trailing stop comes up along with it. At a price of $20, the trailing stop will only trigger a sale if the stock drops below $19. This helps you lock in most of the gains from the stock’s rally.
I Don’t Have Any Positions
When talking to your friends, you might say you don’t currently have any positions in the stock market.
But you do.
Your position is cash. And it forms a part of a gigantic ocean of liquidity that will one day seek and find a home. The home it finds is most likely to be the U.S. stock market. The wise approach is to have some of your wealth in cash, some in bonds, and some in stocks. Your risk tolerance will govern the percentages for each type of investment. But you really ought to have some positions other than a 100% position in cash.
Give Us a Call‘
Call Jack at (301) 294-7500, and we can start figuring out a sensible plan designed just for you.
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7 Beware the vultures coming for your old 401(k) money, MarketWatch, June 17, 2020, by Mitch buchman, https://www.marketwatch.com/story/beware-the-vultures-coming-for-your-old-401-k-money-11592320876.