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Flatirons Wealth Management Blog

The S&P 500 is NOT a Money Market Fund

September 21, 2018

 

I recently read a story wherein a financial advisor was told by a client that he was going to "park some money in the S&P 500 for a few months."  The advisor was dismayed.  It seems the client viewed a 100% equity allocation (that would be what an S&P 500 index fund is) as the same as a money market fund.  Remember those?  Back in the 1980s you could get double digit interest rates on your savings.  In the 90s and 2000s that declined to mid to high single digits, still not bad.  Nowadays, you're lucky to get 1.5%.  But whatever return you were getting, it was nearly guaranteed, and it was what people did when they knew they would need their money, all of their money, sometime soon.  

After 300%+ of gains in the last 9 1/2 years it seems some investors have forgotten what a bear market in stock looks and feels like.  So allow me to remind you.  It's painful.  It hurts.  It keeps you up at night.  It ruins plans you made.  It makes you never want to buy another stock again. 

Let's get one thing clear: the S&P 500 is NOT a money market fund.  I agree, it sure feels like it is lately.  And yet, the absence of risk in the recent past does not mean it has been eliminated, just as the absence of rain does not mean it will never rain again.  It will.  It always does.  And while I continue to remain longer-term bullish on stocks, I do feel it's one of my jobs to remind you that this does happen.  Selling prudence right now feels like selling ice to an Eskimo.  And unfortunately, it's only after a market drawdown occurs that this prudence will be back in demand. 

So to close, know this, some day I promise you it will rain again.  Stocks will go down in value.  If you forget this fact, I assure you, you will be reminded most painfully.  

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