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May 13, 2008--Panicked by recession talk, inflation, and swooning real
estate values, investors are squirreling away record amounts of cash in
the modern equivalent of the family mattress: money market funds. That
could prove a harbinger of the next bull market, says author and
financial adviser John E. Girouard.
About $3.4 trillion languished in money market mutual funds as of May 1, the Investment Company Institute reports. That’s a $1 trillion increase in two years.“No one wants to touch real estate, bond yields are anemic, and the mob thinks economic conditions are too risky for stocks,” says Girouard. “The real risk may be in getting left behind. It’s a basic truth of wealth creation, a historical fact, that staying invested for the long term is the only consistently winning strategy.
“Cash is not king,” he says. “The cost of taxes and inflation will eat up your income and then some, at today’s paltry interest rates. Wall Street experts advocating raising cash levels during uncertain times as a ‘safe harbor’ are all wet.“Unless you think you’ll need the money in the near term, it’s hard to imagine a worse choice than paying for the privilege of parking it in the form of taxes and lost buying power. The harbor’s not safe if you’re in a leaky boat.”
Girouard argues that today’s hoard of idle cash bodes well for stocks. “We saw a similar pattern in 2001-2002. People lost confidence in stocks due to accounting fraud, the post-1990s collapse, and terrorism. Prices fell and cash flowed into money market funds at record levels.”
A year later, a powerful bull market began that drove the Dow Industrials from a low of nearly 7,000 to a high of 14,000, in under four years.“Fear causes people to make poor choices,” notes Girouard. “Once everyone realizes it’s not the end of the world, where else can all this cash go? Like the last time money market funds soared, two or so years from now we may well be able to say this was the perfect time to put spare cash to work instead of under the mattress.”
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