Ride the Bull Market or Hold On to Your Cash?

The stock market posted returns of more than 20% in 2017 and continues to climb to new records into 2018. Many of our clients are asking: should I invest more aggressively to profit from this run, or is it time to go to cash? Economists and money managers are offering their opinions each day in the news about how much higher the market can go, how overdue it is for a pullback or a correction, and how quickly it will recover once the correction comes.  The fact remains, however, that no one really knows.  If it were possible to know in advance, there would be no stock market.

For the market to work, reasonable people have to disagree at least slightly about what is a good buy and what is a good sell.

We don’t recommend that our clients try to “time the market” and trade in and out of holdings in anticipation of a correction.  Many people missed out on record gains in 2017 because they were nervous then about a correction and had gone at least partially into cash. As 2018 dawns to even higher market values, strong earnings, low unemployment, and a burst confidence following the passing of the tax bill, things look good for another year of gains.  However, it could change at any time, and quickly. So how do we answer the question: should I invest in growth stocks now, to take advantage of this run?

What is the money doing now?

If your money is currently invested in holdings that are delivering positive returns, it may not make sense to liquidate those so that you can buy into more aggressive holdings.  For instance, if you have money in a preferred stock that is delivering a solid 8% income every year, the potential gain from switching into a growth security at this point is probably not worth the risk. If the money you are considering investing is sitting in cash (and I am not talking about your emergency fund), you might consider putting at least some of it to work even now. Perhaps your account has generated some income that you have not re-invested, or maybe you rolled over a 401k and haven’t invested it yet, or maybe you just got paid a large cash bonus.  In these cases, it may make sense to start investing that money immediately, even though values are high. If the cash sum is large relative to your whole next egg (more than 20% or so), you may want to invest it slowly over a few months.  That way, if the market dips, you will still have some cash available to throw in when prices are lower.   If the cash sum is relatively small, you could invest more quickly and not be adversely affected in the long run, especially if your time horizon is long. That brings us to our next question.

How much time do you have before you will need the money?

If the money you are investing is for a financial goal that will need to be funded in the next five or ten years, use caution.  In 2008, market values fell nearly 40% and took years to recover.  Don’t let that happen with your high school student’s future college money or the money you plan to live on in five years when you retire. Instead, continue to use lower-risk, lower-return instruments that can help you earn a little and keep up with inflation while protecting the principal. If the money you are investing is for a goal that is ten or more years away, it probably makes most sense to invest it now.  You may experience a drop in values in the short-term, but on the other hand, you may not!  And if there is a significant correction, your account will have time to recover.

How devastated would you be if the market corrected tomorrow and you realized double-digit losses?

Even if you pass the first two questions above (the money you want to invest is in cash, and is not assigned to a near-term goal), you should consider what it will do to you emotionally if that money loses significant value in a correction.  If you would feel enormous regret or depression to see the money that you invested in January of 2018 go to half the value later in 2018, just take it slow. You will still do better over the long haul to be invested than to be in cash, but you can take your time.  Talk to your adviser about the best asset allocation for your risk tolerance and goals, and invest according to that allocation on a timeline that feels comfortable.