Holding an appropriate amount of cash in a portfolio can be the financial equivalent of taking deep breaths to relax and may be tempting during times of market volatility. The feeling of security from having cash on hand could enhance your ability to make thoughtful investment decisions instead of impulsive ones. Having a cash position coupled with a disciplined investing strategy can change your perspective on market volatility. Knowing that you're positioned to take advantage of a downturn by picking up bargains may increase your ability to be patient.
Should I Convert my Portfolio to Cash?
Selling during a down market locks in any investment losses, moving a paper loss to an actual loss. Selling when the markets are bottomed out means you bought high and sold low, which is the worst investment strategy.
A period of extreme market volatility can make it even more difficult to choose the right time to make a large-scale move. Watching the market move up after you've abandoned it can be almost as painful as watching the market go down.
Finally, be mindful that cash does not grow over time. In fact, inflation decreases the power of cash over time. The opportunity cost of having cash is high; although you won’t lose any of the capital, you will lose out on significant potential earnings in the market. If you have long-term goals, you need to consider the impact of a major change on your ability to achieve them.
All in all, dropping your investments and moving to cash may help you avoid some short-term risk and may make you feel better, but completely abandoning the market is a poor choice in the long-term. The market doesn’t move in straight lines – either up or down – but historically trends upward over time.
You Should Always Have Some Cash
Having a cash cushion in your portfolio isn't necessarily the same as having a financial cushion to help cover emergencies such as medical problems or a job loss. You should adhere to financial best practices by having emergency savings. A portfolio with an appropriate asset allocation that takes into account your time horizon and risk tolerance may help you avoid having to sell stocks at an inopportune time to meet ordinary expenses.
If you have questions about the best way to react to a changing market, contact a Farm Bureau Wealth Management Advisor.