Feb

14

I heartily recommend the use of the compounded value of cash as a multidimensional tool. That is, one takes the daily 3-month bill rate and compounds it. (If you are looking at market days, it is the cumulative product of the 252nd root of 1 + the rate.)

I had previously illustrated how year-on-year changes of that data are an excellent indicator as to whether Fed policy is accommodative or restrictive. Now I recommend comparing that data as a benchmark to whatever else you are trading. The point is obvious: If whatever you are trading does not outperform cash (i.e., 3-month bills), then don't own it at that time; it's a dog!

Consider the broad market. Compare a buy-and-hold S&P to the strategy of switching to cash if the yearly growth (252 market days) of the cash is less than that of the S&P. Results of that daily strategy (4300+ days since 1989) are illustrated here:

www.mathinvestdecisions.com/cash_comp_v_tr_spx.gif

This is not difficult, and the savings for the investor can be substantial. Ranking your other assets versus cash can be even more rewarding.


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