What Do I Do with My Cash?

I regularly get asked this question. Not by my clients but by people in line with me at the grocery store, at networking events, at lunch…wherever I happen to be engaging with someone who asks me what I do for al iving. As soon as I mention that I own an investment advisory firm, thisquestion gets asked.

The “Main Street” investor is nervous about the market, the economy and would prefer to ship the Senate and Congress on a boat to nowhere so there’s no confidence Washington DC is helping matters.

 Their homes are worth less than they were 5 years ago, they cannot refinance easily no matter what the ads on TV may tell us, kids are moving back in after college as there are no jobs, one or both income earners feels insecure about their job and bonuses have been cut. Gas and oil cost more than last year, a bag of groceries costs a lot more and health insurance rates continue to rise at double digits.

Many investors remember the stock market crash in 2008 as if it was yesterday. Some never got back in and missed the ensuing rally.  Bonds have outperformed stocks for the past several years and each of the last few years have experienced double digit corrections which are difficult for many to tolerate.

Wall Street for the most part is bullish. Most money managers seem convinced that the Fed will maintain an easy stance as will Central Banks around the world. Money will flow and markets will remain supported.

So what is an investor to do if they are sitting on a lot of cash right now and are tired of earning miniscule returns in money markets and bank savings plans?

1) Create a Plan:

Would  you ever drive to Florida with a carful of kids and not have a plan. What roads will you take? Where you will you stop and how often? What kind of hotel/motel will you stay in? What is your final destination? How long will you be there and what activities will be planned? All of these details and more are taken by any family planning a vacation.

Yet, most of us walk around life with no idea how much money is enough to meet our goals, what kinds ofreturn we are achieving in our portfolios, what kinds of return are reasonable to assume going forward, what will we do in retirement, etc.

So craft a plan with the biggest goals of your life in mind. Figure out “how much is enough” whether on your own or with a professional. Face the music and see what you are really spending to live now. Add inflation and figure out what you’ll need at retirement. How long do you wish to work? Will you pay 100% for kid’s college if you have not done so already?

2)  Liquidity is King:

It is hard to know what amount of cash is appropriate if you do not have an idea of what emergencies may arise or what types of opportunities in which you may like to invest. If you have a plan, it is easier to determine how much should be in your “rainy day fund” and also how much you may need IF 2008 is revisited and you do not want to panic sell.

3) Don’t Just Look at 5 year Returns:

In the last four years, the S&P has rallied over 50% from the bottoms in early 2009. That kind of rise can make any 5-year return number look attractive. Take a look at the worst quarter, the longest drawdown and how much the fund or manager lost from the peak of October 2007 to the bottom in March 2009.

Be sure you are comfortable with that type of downside risk before you invest in a manager or a fund.

4) Be a Squirrel:

One way of investing is to allocate your funds depending on the goal. So a retirement account with a longer time horizon may have a higher risk profile than a college fund with only 4-5 years left before you start withdrawing.

These days it is very easy to create different asset allocations from a series of mutual funds or ETF’s (exchange traded funds) to turn key allocations from any advisor, you can decide to have an aggressive growth portfolio in one “pouch” and a conservative income portfolio in another “pouch”.

5) Stay with the Program:

If you follow steps 1 through 4, you should
be able to tolerate any market pullback (correction or collapse depending on
your view) as you will have your liquidity and can always dollar cost average
into a portfolio or scoop up investments post-crash. Your time frame should
match both your risk tolerance and your goals so you can sleep at night and
stay with the program.