| | | Thursday, January 28, 2016 | Issue #2727 | |
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When to Put Your Cash to Work in This Market Alexander Green, Chief Investment Strategist, The Oxford Club
 Although the Fed raised short-term rates a quarter of a point last month, according to Bankrate.com the average money market account still yields just one-tenth of 1%.
On the positive side, that means savings accounts and money markets have outperformed the S&P 500 over the last two years.
Over the long haul, of course, it's a virtual certainty that cash will underperform stocks and bonds.
Yet cash has its uses...
For starters, you should hold enough of it to cover at least six months of expenses. Sometimes emergencies happen. And you don't want to sell your equities in a downturn to meet your overhead.
Cash also makes it possible to take advantage of bargains.
Far too few investors use market corrections and full-blown bear markets as buying opportunities. Sad too is the investor who recognizes when assets are dirt-cheap but doesn't have the wherewithal to purchase them.
How does this happen? During a long, rip-roaring bull market like the one we've had, investors start feeling that holding cash is like dragging an anchor. So they get fully invested.
That's not generally wise. But if you do have cash to put to work, when should you deploy it?
After all, if you invest too early, you'll wish you'd waited. And if you're too patient, you'll wish you'd acted.
Fortunately, there is a way to avoid both these regrets.
Start by realizing that your timing will never be perfect and only hindsight reveals "Start by realizing that your timing will never be perfect and only hindsight reveals the ideal time to invest. Recognize too that the average bear market lasts 15 months, with stocks declining an average 32%.
"Given these facts, here's a good rule of thumb. Invest a third of your cash if the market drops 15%, another third if it drops 30%, and the final third if it drops 45%, which history shows happens a few times each century." | |
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the ideal time to invest. Recognize too that the average bear market lasts 15 months, with stocks declining an average 32%.
Given these facts, here's a good rule of thumb. Invest a third of your cash if the market drops 15%, another third if it drops 30%, and the final third if it drops 45%, which history shows happens a few times each century.
Will you actually do this? Investors often act emotionally instead of rationally. And while they assume they'll be bargain hunters in a down market, that's often because they can't imagine the news backdrop... or all the voices of gloom waving them off.
Recall, for instance, that as the Dow sliced through 6,500 a few years ago, prominent bears like Bob Prechter were calling for Dow 3,000. (Notice that no matter how low the market goes, permabears remind us that this is "just the beginning.")
For a good indication of what you'll do in the next bear market, recall what you did in the last one:
- If you used the downturn to buy dirt-cheap assets and reinvest your dividends, give yourself an A.
- If either through fear or lack of cash you only reinvested your dividends, give yourself a B.
- If you didn't buy anything or reinvest dividends, but you didn't sell in a panic, give yourself a C.
- If you sold everything in a panic but got reinvested at some point in the recovery, give yourself a D.
- If you sold everything in a panic and never reinvested, give yourself an F. And realize that - even if you are an expert at taking out gall bladders or running a chain of dry cleaners - you probably shouldn't be running your own money.
Here's the beauty of the "Three Thirds" Approach. If the market recovers, you'll be glad you put at least a third of your cash to work. If it goes lower still, you'll be glad you have enough cash to further reduce your cost basis. And if something really scary happens, you may have an opportunity as big as the last one, if you're willing to take advantage of it.
It may sound simple, but this - or something very much like it - is what sophisticated investors have always done in the past.
And it's what the smart ones are doing now.
Good investing,
Alex
Editorial Note: As history has shown, stocks are virtually guaranteed to beat cash and other instruments over the long term. It's a point we make often at Investment U. That's because we believe it's imperative that you understand this and stay invested. Especially if you're at or near retirement age...
Sadly, one out of three Social Security recipients counts on government checks for 90% or more of their income. To make matters worse, researchers at The Oxford Club have just uncovered evidence of a coming $91 trillion shock... one that could gut our Social Security system once and for all. You need to know what's coming - while there's still time to prepare. Click here for details.
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In this market, there are no guarantees. But if you take Alex's advice, at least you can earn the highest possible return while minimizing risk. Another solid plan? Picking up stocks with strong sales growth, increasing market share and greater profitability. Investment U Plus subscribers are discovering one such play today. Click here to find out how you can join them. | |
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