When the stock market has been going up for multiple years and you are sitting in cash, it can feel crappy. Looking backward you can calculate the dollars you do not have by missing out 8% growth or 10% growth, or 20% growth…. the bad feelings can just compound.
I’m here to tell you that it does not matter. Stop looking over your shoulder and let’s look forward.
This short post was inspired by a meeting I had with a new client who was disappointed with his 401k returns over the last couple of years. Well it turns out that he never invested his contributions! They were sitting in the cash account. Somethings people go at it alone and fail to cross every T and dot every i. It was not his intention to keep them there but he just never bothered to look….
When was that time you looked at your 401k statement?
So let’s talk about cash. How much is the right amount? When should you have more or less cash?
Your financial goals, time horizon and risk tolerance should determine how much cash you should be holding. Your emotions, the headlines or your gut should not be controlling your asset allocation.
Any financial goal that you have, that is less than 5 years away should be in boring, unsexy cash. The good news is that interest rates have come up and some online banks are now paying over 1%! (www.bankrate.com)
Also, your emergency bucket, which should consist of 3-6 months of EXPENSES should be in cash. I know you might be tempted to invest those dollars because you want to grow your money but you must always remember that the stock market can turn overnight and the average intra year decline is 13.8%! (previous blog post)
If your down payment was reduced by 13.8% you might have to buy a smaller house or your mortgage can get all jammed up.
What if you lose your job or something breaks and your emergency bucket is reduced by 13.8%. I promise you those crappy feelings will be way worse than missing out on the growth over the last couple of years.
And that is what you must understand. Cash is your buffer, your protection. It needs to be there to bail you out of a jam or allow you to take advantage of good opportunities while your retirement accounts should be invested as aggressively as you can handle. You should be making contributions to them as well as building your cash buffer. You need both to experience full financial success!
But to circle back, if your investment dollars happen to still be sitting in cash remember….. the stock market could have went down those years, making you a genius! Or you were just setting yourself up for a great buying opportunity that just hasn’t materialized yet 🙂
Take the time today to adjust your cash positions today and look to the future!
-Jared
