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The 4th quarter market drop, concluding with the worst December since 1931, had many “investors” fleeing for the exits.

The year closed out with several trillion sitting in cash, the most since March 2010. 1

When we think of risky asset classes, we tend to think of commodities, real estate, stocks, and even some bonds.  Cash may be last on the list.  Cash, however, has many inherent risks as well, but they aren’t as obvious.

First and foremost, cash is the worst performing asset class in history.2  Over long periods of time, cash has underperformed all other major asset classes.  The more time you spend with a significant portion of your holdings in cash, the higher the probability your portfolio will underperform just about everything.

Second, holding cash for long periods of time practically guarantees that you will not keep up with inflation.  Cash guarantees the loss of purchasing power.  In essence, your cash becomes worth less and less each year as prices go up and your cash does not.  Imagine you put $100,000 in the bank and earn 1% or so a year for 10 years.  When you pick up your cash, you may feel pretty good.  However, the 1% or so you earned did not keep up with the cost of a stamp, a suit, a candy bar, health care or education.3  You may think you made money, but you lost purchasing power.

One reason many “investors” hold cash is to time the market.  They do this despite the fact that there has never been a documented, real-world study done by anyone ever showing that moving from the market to cash and back to the market repeatedly works.  After all, you need to be right about when to get out, then when to get in, and do it over and over again.  If you get burned just once, it can be “over” and your performance permanently affected. On the other hand, there are many real-world