Today’s market volatility and economic uncertainty around the globe is making some investors wonder how much cash they should hold.
My investment advice is to look at the longer term and not just at current conditions, or at today’s headlines. Remember, much of what we read today remains speculation.
I can think of three reasons why you might want to sell some stocks and hold cash—now or at any time.
You can’t sleep at night because you are nervous about the market outlook. In that case you should, as the saying goes, sell down to the sleeping point. This is basically a matter of understanding your own risk tolerance.
You expect you will need to take cash out of your portfolio in the next year or two and you don’t want to risk having to raise cash by selling stocks at low prices.
You have some realistic reason to think stock prices will be substantially lower in, say, six months or a year. This is why most people take money out of their portfolio. Unfortunately they often get that pessimistic feeling at or near a market low.
Numbers 1 and 2 are personal decisions. Number 3 is different.
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Investment advice: The consequences of making the wrong guess
Of course, at times you will guess right about a coming market downturn. But this urge to “go into cash” (as brokers refer to it) rarely appears at times that will pay off for you. Instead, investors often give in to the urge to raise cash just when the market is near bottom.
In that case, you may wind up getting back in the market at higher prices. That can happen even if a downturn occurs after you sell. After all, you won’t plunge back in the market just when prices hit bottom. You may instead sell more of your stocks.
I have to tell you that I know several investors who sold all their stocks within days of the March 9, 2009 market bottom. I tried talking them out of it and got nowhere.
Today’s low interest rates tone down a key risk factor, and I don’t see any reason for a huge upturn in rates. Low rates also dilute the return on T-bills and other cash-equivalent investments. So my view is that it doesn’t make a lot of sense to hold cash at this time.
If you currently have a large cash position, that doesn’t mean you need to rush or make snap judgments to get all your money into the market. Take your time and weigh various investments to see which one is the best fit for the rest of your portfolio.
COMMENTS PLEASE—Share your investment knowledge and opinions with fellow TSINetwork.ca members
If a friend were to ask you whether he or she should sell stocks now and go into cash, what would your answer be? Let us know what you think in the comments section below. Click here.
Comments
Jim
I have been buying dividend paying stocks.
If the asset price goes down I will be somewhat disappointed but I won’t be too concerned as long as the dividend holds.
My favourite example is Fortis. I have not seen anyone cutting back on their electricity usage so the dividend looks solid.
I hold enough cash to pay my living expenses for 1 year instead of the usual 3 months recommended by the financial experts. However this cash was accumulated a long time ago and thus is never raised from the sale of stocks. I trust your recommendations. As such I feel it is foolish to subscribe to an investment letter with a superb track record and then do your own thing. This does not mean that I am not tempted to sell when things get hairy but the discipline is in resisting the temptation to run away. I cannot tell you how many times I have held by my fingernails on only to rewarded by a takeover of one of your recommendations that came out of the blue. I would have lost out if I had panicked like the rest of the herd and sold because things “looked bad”. So I think your advice is sound.
My dad always preached to me, ” better the devil you know than the one you don’t”. I am new to the investment world but have 35 years of trying to stay on an even keel with my personal life and now carring it to my investment portfolio. Better to stick with a sure thing ( or at least what we believe is a sure thing), even though that stock may falter, than to risk going onto a new venture. I enjoy reading your articles. Thanks for the advices.
If you bought a stock then would you buy it again at the lower price ? Does the same reason exist ? I have been saving some tax advantaged income for about 5 years; a little bit I used to buy a couple stocks — to increase my holdings ata lower price — but the vast majority of my cash savings — in TFSAs and in high interest savings accounts basically because I knew that my house needed a serious renovation. Now that that renovation is under way and that most of that cash has already been “deployed” to fund that costly work, I am glad that I did not take any risk with that cash— but it was for a specific purpose ata specific time, so it all depends again on the purpose of one`s investment…and yes, timing is VERY important !!!
I tend to agree with the feeling that too much cash is not particularily healthy investing as long as you are comfortable with the risk you are currently taking. Most politicians are delaying important decisions they need to make in the hope some growth will balance the austerity that is needed. As long as you hold solid companies with safe dividends and be diversified we should come through this down turn with minimum depletion of wealth. I fully expect the politicians will eventually make important positive decisions which will help their economies. Its tough though waiting on them to do the right thing.
I have concentrated on investing in dividend bearing
shares mostly Canadian Banks,also Dividend paying
resource companies.such as metalurgical coal and copper mining, also small amount of Uranium and Oil, I am in my advanced years and do not wish to speculate more than 5% of my investment porfolio.
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X No, I don’t want to make big money in the stock market.
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I have been buying dividend paying stocks.
If the asset price goes down I will be somewhat disappointed but I won’t be too concerned as long as the dividend holds.
My favourite example is Fortis. I have not seen anyone cutting back on their electricity usage so the dividend looks solid.
Hello Pat
I hold enough cash to pay my living expenses for 1 year instead of the usual 3 months recommended by the financial experts. However this cash was accumulated a long time ago and thus is never raised from the sale of stocks. I trust your recommendations. As such I feel it is foolish to subscribe to an investment letter with a superb track record and then do your own thing. This does not mean that I am not tempted to sell when things get hairy but the discipline is in resisting the temptation to run away. I cannot tell you how many times I have held by my fingernails on only to rewarded by a takeover of one of your recommendations that came out of the blue. I would have lost out if I had panicked like the rest of the herd and sold because things “looked bad”. So I think your advice is sound.
Regards
Mark
My dad always preached to me, ” better the devil you know than the one you don’t”. I am new to the investment world but have 35 years of trying to stay on an even keel with my personal life and now carring it to my investment portfolio. Better to stick with a sure thing ( or at least what we believe is a sure thing), even though that stock may falter, than to risk going onto a new venture. I enjoy reading your articles. Thanks for the advices.
If you bought a stock then would you buy it again at the lower price ? Does the same reason exist ? I have been saving some tax advantaged income for about 5 years; a little bit I used to buy a couple stocks — to increase my holdings ata lower price — but the vast majority of my cash savings — in TFSAs and in high interest savings accounts basically because I knew that my house needed a serious renovation. Now that that renovation is under way and that most of that cash has already been “deployed” to fund that costly work, I am glad that I did not take any risk with that cash— but it was for a specific purpose ata specific time, so it all depends again on the purpose of one`s investment…and yes, timing is VERY important !!!
I tend to agree with the feeling that too much cash is not particularily healthy investing as long as you are comfortable with the risk you are currently taking. Most politicians are delaying important decisions they need to make in the hope some growth will balance the austerity that is needed. As long as you hold solid companies with safe dividends and be diversified we should come through this down turn with minimum depletion of wealth. I fully expect the politicians will eventually make important positive decisions which will help their economies. Its tough though waiting on them to do the right thing.
I have concentrated on investing in dividend bearing
shares mostly Canadian Banks,also Dividend paying
resource companies.such as metalurgical coal and copper mining, also small amount of Uranium and Oil, I am in my advanced years and do not wish to speculate more than 5% of my investment porfolio.