Investing Excess Cash when the Markets are Down
A FEW MONTHS AGO, the stock market experienced a swift, steep and volatile decline. During this turmoil, investors may have felt the need to ‘do something’ to keep a sense of control. Ideally, investors remembered their long-term goals and investment strategy and avoided panicselling. Even more, the selloff presented a buying opportunity for those investors that had extra cash on hand. Buying the shares of a good investment at a significantly lower price can be an important piece of a longterm investing strategy.
Talk with your financial advisor about your long-term goals and risk tolerance to ensure current actions align with your overall financial picture. If you do not currently have a financial advisor that is a full-time fiduciary, consider speaking with one to outline your goals and long-term objectives so you have a plan in place as opportunities arise.
Is this an appropriate strategy for me?
As with any investing strategy, it may or may not be right for an individual investor. There are many considerations:
Do you have an appropriate emergency fund?
Do you have enough cash reserves to cover a period of expenses if you were to lose your job or other sources of income? Are you self-employed with an income stream that may be affected? It may be tempting to use cash on hand to invest if you think you can make a profit, but investing should be viewed as a long-term commitment, and funds that may be needed in the short-term should remain liquid and secure.
What is your overall risk tolerance?
It is important to remember that stocks are volatile. If you generally are a conservative investor, consider how you have felt during the current volatility with your entire portfolio. Did you feel anxious given the moves in the market? Were you tempted to sell some of your other holdings? Just because it may be a good buying opportunity, does not mean it is the right opportunity for everyone. You need to make sure that your investment goals and risk tolerance align with trades you place.
What is your time horizon for needing these funds?
Any time you are investing funds in the stock market, you should do so with the understanding that you should have a time horizon of at least a few years because you will need to be able to wait through volatility.
Where do I invest the cash?
As fiduciary investment advisors, we believe in the principle of diversification and long-term investing. When you diversify your investments by spreading them over a wide range of assets and asset classes, you can reduce the overall volatility of your portfolio.
For our clients, we use no-load, low-cost mutual funds and exchange-traded funds to maintain diversification while still providing exposure to the area of the market we wish to target. It can be tempting to focus on individual stocks that have had good performance or are in an area of the market that you believe will perform well going forward. However, an individual stock will be more volatile in the short-term than a diversified fund. You also are exposed to the risk of any one company having outsized negative performance, corporate governance issues, and other factors that can affect stock price. Using a diversified fund that is focused on the area you intend to invest spreads those risks over many similar companies. TK
Barbara Duncan’s career at Clayton Wealth Partners began 15 years ago. Her role and responsibilities have steadily expanded and now serves as a Partner and Senior Wealth Advisor.
