Cash is not always the answer though. Had one started the same comparison with the fourth quarter of 2002 – the end of the Tech bust – the results would have been different. The 100% in stocks choice would have out-performed the 60/40 strategy except for a few quarters and ended with a spread of about 25%. The volatilities differ only slightly due to a different time period and the maximum draw downs (which occurred during the financial crisis) are the same. While the moment to switch some holdings to cash is the peak of a market cycle, no one knows the peak until long after it happens.
A final thought to how the Everything Bubble might end is that under each of the scenarios mentioned above investment returns will fall.
This article was written by David Blitzer, chairman of the index committee, S&P Dow Jones Indices.
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