Friday, September 18, 2020

Cash on the Sidelines?

ASK THE CFP® PRACTITIONER


 

 

“We always underestimate the future.”

~ Charles F. Kettering, Inventor

(1876-1958); General Motors head of research from 1927-1940.

Question: Before the presidential election I moved a significant percentage of my portfolio to cash. I’m still waiting for a market drop to get back in. What are your thoughts and suggestions?

Answer: If it makes you feel any better, you’re not alone. Many people are holding cash still waiting for the “right opportunity” to enter the market.

For every $1.00 invested in the market as of March 31, 2017, there was roughly 0.70 cents sitting in zero maturity (cash) accounts. This is almost enough money to “buy-out” the entire S&P 500 Index. As seen in the graph, generally speaking, the current ratio of 1.43 (1.00 divided by 0.70 = 1.43) may be seen as a signal that the market remains undervalued, 1.57 is the ratio’s past twenty year average.

Based on history, it’s likely that there will be a market pullback within the next twelve to eighteen months; when and how deep are the questions. If we continue in an upward trend we don’t know how far off of current levels a theoretical entry point will be. Also, a pullback big enough to make a move may be a psychological shock to anyone who pulled out in the first place, making it even less comfortable to commit funds at that time.

The Enemy

Short-term volatility is often the enemy to investors, causing some to stay on the sidelines until things calm down in their minds. Attempts to “time” the market require two “right” decisions; first, when to get out, and then when to go back in with the possibility of missing out on potential rebounds. This is why many institutional investors tend to shun market timing.

There is always a place for cash in portfolios. It provides liquidity for current expenses, cash flow needs and emergencies while also providing a necessary cushion for some investors. The amount in cash, bonds and stocks will be determined by your needs and appetite for risk. Any cash levels beyond these reserves could be placed in some sort of income or return-generating asset to help meet your goals regardless of short-term market fluctuations. With a plan, “excess” cash doesn’t exist, it all serves a purpose.

What to Do

Lately when the market drops, more cash moves in. This is making the pullbacks shorter and shallower. According to MetaStock analysis, since mid-July 2016 we have not experienced pullbacks greater than six percent. So far during 2017 we haven’t been down more than three percent (as of when this is being written), which creates more disappointment for those on the sidelines. Much of the overall economic data is actually improving. This makes holding large amounts of cash even more uncomfortable for some.

Deploying idle funds and/or cash on the sidelines can be accomplished in several ways based on the investor’s goals and objectives. It’s a delicate dance to recommit funds while trying to reduce the risk of committing capital

 

 

and avoiding a significant market decline. A blend of several strategies may be appropriate; starting with a portion now, waiting for pullbacks for some funds, and entering over a series of dates over a period of time with other funds. This third approach is known as dollar-cost-averaging (DCA).

We’re aware of the challenges of waiting for a pullback, and committing “now” may be too traumatic for some. This makes DCA a more tasteful option. DCA is a strategy designed to minimize both the psychological and practical impact of market volatility.

Making a commitment to investing the same dollar amount at regular intervals allows you to ease your way back into the markets over time. This balances the natural desire to “do something” while keeping emotions in check.

A well-designed financial plan will likely have entry and exit strategies based on the investor’s objectives, goals, needs and risk appetite. This is best discussed at length while designing a plan and revisiting at regular intervals, then deciding if any action is necessary.

Having a financial plan or investment policy statement to see you through the inevitable ups and downs of the market may ease emotions and help steer through these times. As a guideline, money invested in the market should be committed for a minimum of three to five years. Investors with shorter time horizons may want to seriously consider if the stock market is the place for them.

Once a commitment to a strategy has been made it’s helpful to follow the plan and not let the noise in the news derail your plan. Know what you own and why you own it. Stay focused and invest accordingly.

The S&P 500 is an unmanaged index of 500 widely held stocks. It is not possible to invest directly in an index. Dollar cost averaging does not assure a profit and does not protect against loss. It involves continuous investment regardless of fluctuating price levels of such securities. Investors should consider their financial ability to continue purchases through periods of low price levels.

Investing involves risk including the possible loss of capital. There is no assurance that any investment strategy will be successful. Asset allocation and diversification do not guarantee a profit nor protect against loss. The opinions expressed are those of the writer, but not necessarily those of Raymond James and Associates, and subject to change at any time. Information contained in this report was received from sources believed to be reliable, but accuracy is not guaranteed.

“Certified Financial Planner Board of Standards Inc. owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER ™, CFP® (with plaque design) and CFP® (with flame design) in the U.S., which it awards to individuals who successfully complete CFP Board’s initial and ongoing certification requirements.”

This article provided by Darcie Guerin, CFP®, Vice President, Investments & Branch Manager of Raymond James & Associates, Inc. Member New York Stock Exchange/ SIPC 606 Bald Eagle Drive, Suite 401, Marco Island, Florida 34145. She may be reached by phone at 239-389-1041, or email darcie. guerin@raymondjames.com. Website: www.raymondjames.com/Darcie.

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