Monday, July 23, 2012

Why Not Just Go To Cash?

There was an article in the WSJ today on how investors are bidding up shares of dividend paying stocks because investors look at them as defensive.  Here is the link if you are a subscriber:

I have written about dividend stocks before and probably will again.  The bottom line is this, if you want to be defensive you move to cash, that is the only thing where you have a "guarantee" that you will not lose any money.  Why don't investors do this?  Two main reasons:

1. Sales sizzle-----Wall Street gets compensated on getting people to act and to do that you need some sales sizzle.  Dividend stocks have that now, most yield more than Treasury Bonds.   This ignores the fact that if the market drops 10-20% you will probably make money in Treasuries and get crushed in dividend stocks.

2. Wall Street clings to the theory that you always need to do something------Instead of moving to cash during times when the risk outweighs the reward, Wall Street feels that it needs to do something to justify fees (I would argue that moving to cash and protecting money during times of distress is the ultimate way to justify fees).  Therefore, they hold their nose and try to find things that are less bad than others.  If the market goes down 30% and they only lose 20% that is a success.

Bottom line is this, don't fall for the idea that you have to do something and don't fall for sales sizzle.  Sometimes the best course of action is to just hold cash.  It is boring, but the key to making money in the market is to avoid large losses and cash is one of the only things that can promise this.

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