SIMON BROWN: I’m chatting with Chris Rule. He is head of products and client solutions at CoreShares. They are one of the local ETF issuers. Chris, morning, I appreciate your time. You sent out a note earlier in the week around cash. In a jaundiced way I want to say cash is not king. Pre-pandemic there was lots of talk around “Our market hasn’t done much,” lots of talk around “I was better off in cash” and “I wish I’d had some cash”. You’ve done some digging on returns over the period, looking particularly at the win-loss ratio, and the short answer is that cash may actually be not so great.
CHRIS RULE: Absolutely, Simon, and thanks for having me. We always talk about long-term investing and so forth, but I think for investors the pain of loss and the pain of underperforming cash is so extreme, loss-aversion is so extreme, that they do seem to feel that cash is king. As you say, we look at numbers through this win-loss-ratio lens, which basically looks at every investible window. So rather than just looking at a particular point in time, which can be very selective and prone to bias and so forth, we look at every investible window on a daily basis. So as an investor, if you’re invested for five years, on any given day over the last 20 years, what’s best for you? And the reality is that cash is not king.
It’s pretty simple. It’s the reason why people who make lots of money over long periods of time are invested in shares – people like Warren Buffett, who famously says stay invested in the stock markets and stay invested in shares.
Really, we just wanted to highlight that there’s a lot of noise in the short term. In the early days of the pandemic, everyone who had been sitting in cash was sort of high-fiving themselves. But the reality is that they were [doing so] for a very short period of time.
Equities and more risky asset allocations win most of the time over longer periods of time.
SIMON BROWN: The data you’ve got, that’s what really stood out to me. You did two sets. One was against a sort of balanced portfolio, one against the Top 40. I’m going to use the Top 40. Truthfully the data is better, but it’s also an index we all know. Over those 10 years, as you say, you take five-year periods – and there are going to be multiple of them because it’s a daily process – cash wins 13% of the time, so it loses 87%. But what’s more important is that the outperformance by equity is significant. There will be those short periods where you feel like you’re the smartest kid in the room. But, over the longer term, you’re going to get slaughtered if you stay in cash by this data.
CHRIS RULE: Oh, absolutely. We obviously looked at that period for this particular article. When we do our research as a business; we look at a period over 120 years. And, if you look at even longer periods, the numbers just are so consistent that cash will underperform equities over long periods of time. As I say, this is nothing new, but I think it’s just important to highlight to investors that this loss-aversion bias that I’m talking about is so significant; that the pain of losing for investors is so significant that when they do lose relative to cash it just hurts so much more when they win even if, when they’re winning in equities or shares, they’re so much better off.
SIMON BROWN: It’s that loss-aversion. It’s also because I suspect we kind of get a sense of what cash is doing. We kind of know interest rates are, okay, a bit low at the moment, probably 5%. At periods over this time, there would have been higher rates. We’ve got that sense of what it is. If we were, for example, comparing our house or something, we really know what’s happening there; it’s that absolute number.
But what I really liked is this period that you’ve covered as well. It includes sort of years leading up to the pandemic, when our market did do very little or [just] enough. You talk about the loss aversion. The other reason is often explained as that recency bias, where you’ve seen the market do nothing, or perhaps even go down, and you’re kind of [thinking] I don’t want to be there. You take the short term and project it into the forever.
CHRIS RULE: Absolutely, one hundred percent. What you’re feeling at the moment is what’s just happened. So before Covid, as you say, South African equities hadn’t really done much over the last five years. We feel that’s always going to be the experience. We just copy-paste that for the next 20 years. We forget that in 2010 the previous five years were staggering. And in 2007, just before the financial crash, there was this huge equity bull run in the markets.
Take right now, for example, how many investors are jumping from the rooftops that the Top 40 did 55% the last year? That’s 10 years of cash return. So you’ve got to go a long way with cash to catch up with equities.
Equities can sell-off, for sure, but that sell-off is not going to compensate the cash investors enough so that they’re going to catch up in the long run.
So we take what’s happened recently, we copy-paste it, especially when it’s bad. I wish investors were copy-pasting the past year, saying, “Let’s invest in shares because the past year has been so great”. But we don’t feel that joy like we feel the pain in the short term when we are losing money. So it is challenging.
As I say, this is not new stuff. This is just like highlighting. So, [we’re saying] hey guys, zoom out, look at the big picture. Look at the long term, where are you best placed? That almost moves you away from a mindset of speculation to a mindset of genuine investing. That’s what we are trying to communicate, I guess, in the market.
SIMON BROWN: It’s that also. It’s that mean reversion. I am saying to folks that the US has had a brilliant decade, we haven’t. Everyone’s rushing offshore and I’m like, be careful here. When cash has won over a period, the short answer is it’s not going to win over the next period. It’s not going to continue. It is actually going to be the inverse, as that mean reversion comes back into play.
CHRIS RULE: Absolutely. There are just so many underlying behavioural traits that make it hard for us to just invest and stay invested.
Mean reversion is a well-documented kind of investment phenomenon, and it plays out time through time. So don’t look at the past winners, just pick a sensible asset allocation.
If you are invested for the long term, be invested in equities, be well-diversified, and kind of close your eyes and forget about it.
Certainly, we are not punting like, “Just buy SA equities”. That’s not what we saying. We are just saying zoom out, look at the big picture and be invested in equities locally and globally.
Naturally, when you’re retired, it becomes more complicated; when you have these short-term liabilities, when you need your income, it becomes more complicated. But most of the time people are making these comparisons, they’re comparing equities and cash and so forth – which is inappropriate in the first place, but it seems to dominate the narrative for a lot of investors. The braai-side chat was: “I might as well have just been in cash, guys. I took on all this risk.
SIMON BROWN: “My granny beat me. My granny and her cash account at the bank literally did beat me.” You make a great point there. There is a time for cash in our investment life, as we are start to head into retirement, as we are starting to spend. [But] we are sort of talking here when your retirement is a plus decade away, you really don’t need that cash environment at all.
CHRIS RULE: But you’re quite right. There’s a time to hold cash or a portion of cash in your portfolio. And generally, it’s for investor outcomes, it’s for a drawdown, but we don’t believe it’s to try and time the market, to try and sit in cash when cash is going to perform better. You should be sitting in cash for your specific outcome.
SIMON BROWN: Yes. A quick last question: we’re talking cash as an investment and what we’re not talking about is that an emergency fund is a good idea – having some cash for that emergency. But that’s a personal finance [matter] rather than an investment, which we’ve been talking about this morning.
CHRIS RULE: Absolutely. And I mean, look, we advocate for investors to seek out advice. If you speak to an advisor, one of the first questions they’re going to ask you is: do you have an emergency fund? Do you have that three- to six months of cash [waiting for the day you get made redundant, or something goes wrong in your business? Exactly. So no, we are certainly not advocating for people to forget about cash, but we are just saying: “Guys, focus on the long-term goals, zoom out. Here are the numbers without any bias, have a look at them, pick your course now.” It becomes pretty simple at that point.
SIMON BROWN: I agree one hundred percent. It was a great article. You’ll find it on the CoreShares website (or here). That was Chris Rule. He is head, products and client solutions at CoreShares. Cash is lekker, but it turns out cash is not king.
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