When Cash is Priceless

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In today’s market video, Cabot China & Emerging Market Report Chief Analyst Paul Goodwin looks at this week’s market mayhem and concludes that it’s time to head for the sidelines. You should be selling your losing stocks and putting your weaker stocks on short leashes. And even your winning stocks look like good candidates for a little profit taking. Cash is your friend right now. He also look at a few healthy issues that are resisting the dramatic downtrend; these are buyable, but only if you have plenty of cash on the sidelines. We have no predictions on what the market may do from here, but it’s always a good idea to prepare for the worst.


It’s always nice to have some cash in your pocket, and some people seem to get a kick out of having a wad of bills to flash around (at least on television).

Sometimes cash can be extra nice, like when you happen to have enough bills to cover the tab at a restaurant that you didn’t know refused to accept credit cards. Or even when your Aunt Martha, usually known for sending badly knitted sweaters in embarrassing colors as Christmas presents, surprises you with a delightfully flat envelope with a single photograph of Benjamin Franklin or Ulysses S. Grant.

Yes, cash is the gift that keeps on giving, especially when you have a high percentage of it in your growth portfolio, and most especially when stock markets are (as my mother would say) having a hissy fit. This is what the S&P 500 has been doing over the last six months. [Trigger Warning: This image may cause distress in perennially optimistic growth investors!]

SPX falls below 2000 for the first time this year!

The action of all the major indexes on Thursday and Friday made it clear that the market is in a foul mood and wants to rip the guts out of your portfolio.

Oops, that may have been a little too graphic. Let’s just say that the market is taking this opportunity to show us that, after a record stretch of range-bound trading, it can move quite decisively when it wants to.

So, back to that cash I was talking about.

Last Thursday, I wrote about the problems inherent in mutual funds that many investors use to get their exposure to the major asset classes (click here to read it). I contend that these funds are nothing more than shadow index funds, and that they are really working 1) to outperform their competitors and 2) to outperform their benchmark index (slightly) and only then, 3) to maximize the results for their investors.

Today, I have one additional arrow to shoot at mutual funds, and that is that they are pretty much universally forbidden by their investment guidelines from holding cash. And if a fund is required by its rules to be close to 100% invested at all times, there is no way to protect its investors from corrections like the one we’ve seen this week.

Even if a mutual fund could go to cash, it’s just about impossible for it to sell a position quickly, given the position sizes these giants hold.

The moral of the story is that your portfolio has one more advantage over a mutual fund when it comes to growing and protecting your capital. You can sell a position with a click of a SELL button and not give a thought to what effect that might have on the price. While the battleship mutual fund is making preparations to start getting ready to start its selling campaign, you can be out of a position in seconds and having a nice cup of tea.

Cabot has been helping investors to make the most of this advantage for decades. By increasing the cash position in your portfolio, you can insulate yourself from the slings and arrows of the market.

And, believe me, the calm satisfaction of watching a market plunge while you’re safely in cash is a lovely feeling.

If you’d like to get calmer and more satisfied during a down market (and have more capital to put to work when the bulls come back to town), a click right here will get you started.

This Week’s Fortune Cookie

fortune cookie“There are brambles in the path? Then go around them. That’s all you need to know. Don’t demand to know ‘Why do such things exist?’” – Marcus Aurelius, Roman emperor and philosopher (121-180 AD)

Tim’s comment: This was state-of-the-art philosophy nearly 2,000 years ago, and it’s still a decent framework for investing. Given that no one can understand all the reasons behind the market’s movements, the most effective strategy for growth investors is to simply note the “brambles in the path” and go around them.

Paul’s comment: While it’s always fun to know why something is happening, the real satisfaction in investing comes from knowing what to do. Marcus Aurelius talks about just “going around them” when he talks about brambles, but it takes advisors like Cabot’s analysts to know what to do.

You can always view all previous Fortune Cookies here and Contrary Opinion buttons here.

In case you missed it

In case you didn’t get a chance to read all the issues of Cabot Wealth Advisory this week and want to catch up on any investing and stock tips you might have missed, there are links below to each issue.

Cabot Wealth Advisory 8/17/15 – Create More Yield with Covered Calls

Jacob Mintz, the brains behind Cabot Options Trader and Cabot Options Trader Pro, writes about the use of covered calls to generate income in a challenging market. Jacob gives an example with Aflac (AFL) and explains how to get started with this strategy.

Cabot Wealth Advisory 8/18/15 – Inequality, Part II

Cabot Stock of the Month’s Chief Analyst Tim Lutts posts some responses to his earlier discussion of wage inequality. Tim also looks at a Central American airline that’s seen a huge downtrend in its stock, making it a good value. Stock discussed: Copa Holdings (CPA).

Cabot Wealth Advisory 8/20/15 – The Uncomfortable Truth About Actively Managed Mutual Funds

In this issue, I contend that mutual funds may not be looking out for the value of your portfolio with the same care and dedication that you would if you were making your own investing decisions. Stock discussed: Volaris (VLRS).

Have a great weekend,

Paul Goodwin
Chief Analyst of Cabot China & Emerging Markets Report
and Editor of Cabot Wealth Advisory


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