David Fabian: The recent pullback from all-time highs in stocks and bonds is a godsend for those that have been sitting on high cash positions. There is an immediate feeling of relief that you are able to recapture some lost opportunity after the gut-wrenchingfeeling of missing out on the last rally. Of course, those thoughts are usually immediately followed by “this time feels different” mantra that kept you out of the market to begin with.
Cash is an asset on the downside and a detriment on the upside. Such is the risk versus reward of carrying too much or too little of it at any given time.
My personal belief is that having some cash on hand is a good thing. I’m never one to be 100% invested all the times because there are going to be some unexpected opportunities that develop in the market and you want to be able to take advantage of those. However, there is a big difference between sitting on 10%-15% cash and sitting on 40% cash. The latter will eat up your returns over time and erode the probabilities of reaching your goals.
If you are an active and disciplined trader that has been lightening up on positions into this strength, then you likely have a plan to re-deploy capital at lower prices. In my experience, those types’ of investors are rare to find.
The vast majority of folks sitting on high cash positions are there because they are scared of the market, got lucky by selling at a decent spot, or are just frozen with indecision on what to do next. Fortunately, there are several key steps you can take to overcome the inertia of sitting on the sidelines with too much cash for too long.
The first step in deploying cash in your investment portfolio is understanding that you aren’t going to time it perfectly. You are either going to put too much to work and the market will go lower or you are going to put too little to work and it will go higher. That’s just the market telling you that it’s smarter than you are and trying to rattle your cage.
For some perspective, look at the recent selling in the SPDR S&P 500 ETF (SPY) in the context of the last 3-years. It’s barely a blip on the radar in the context of the long-term uptrend.
Instead of making it an all-or-nothing proposition, consider breaking up your purchases into two or three tranches. This will allow you to average into new positions by taking advantage of time and price to establish the best cost basis possible. I love transaction-free ETFs for this very purpose because you can buy smaller lots over time without having to worry about trading fees eating into your returns.
The second step in deploying cash is to develop a reasonable game plan on where to place your assets. There is no “one size fits all” approach to putting money to work in the market, but you can fill in areas of your portfolio based on your existing asset allocation and risk tolerance.