A long, long time ago there was a gameshow called “Money or the box”. In this gameshow, contestants had to choose between taking a known amount of money, or choosing a sealed box in which there was a mystery prize of potential great value, or not. Some chose the money and when the box was opened, it showed that they could have won a car or some other high-value item. Other contestants with a higher tolerance for risk chose the box, but when the box was opened they got nothing, losing the guaranteed cash they could have won.
The question here is: what would you do under the same circumstances? We can take an extreme example and do this exercise with Bitcoin. If somebody offered you one Bitcoin today (currently worth $100 000) or $100 000 cash, what would you choose? Take note that analysts think that Bitcoin will range between $150 000 and $300 000 in 2025.
If we apply this train of thought to something closer to your current situation, we can take the returns you have earned on the S&P500 over the last two years. In 2023 the S&P500 returned 26% and for 2024 we stand at 30%. If we do the math, you will notice that your compounded return over two years has been close to 64%. This is exceptional. So now you have to decide weather you want to cash in at year-end, or stay invested hoping for another good year. Most conservative investors will take the cash and most risk takers will stay invested. The question is; what will be the right choice?
The short answer is that we do not know, but if we look at history, the answer may be somewhat surprising. The table below shows that there have been only three previous occasions with two consecutive years of 25%+ returns in the S&P500 since 1928, and in only one of those instances we saw a negative year following the two bumper years.
So if history repeats itself, you should stay invested because your odds are better, but this is not a gameshow and your financial health is on the line so we would consider the following compromise:
• As per our strategic asset allocation planning done for all clients, you will always be advised to have a portion of cash available for shorter term expenses. This would be an ideal time to make sure that that cash portion is topped up if it has been used during the year.
• If you envisage larger ad hoc expenses in the near future, like replacing a motor car or paying for tertiary education, sell some equity and hold the cash for these expenses.
• Get rid of expensive debt like credit cards and consider paying something into your access bond.
We would not advise you to take a binary approach to your longer-term equity investments. Stay invested with longer-term funds as far as possible. Over time, whatever happens in the next year or two, equities will bounce back and provide you with the inflation-beating returns you need to afford your chosen lifestyle. Just look at the longer-term graph of the S&P500, including all the disasters!
