Volatile Markets – Should You Go To Cash or Stay the Course?

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Volatile Markets - Should You Go to Cash?
How do you respond when things look a little crazy on the stock market? Should you sell your stocks and go to cash during volatile markets, or should you stay the course, and keep your money invested for the long haul? One of the most common responses is to get worried and sell, deciding to…

How do you respond when things look a little crazy on the stock market? Should you sell your stocks and go to cash during volatile markets, or should you stay the course, and keep your money invested for the long haul?

One of the most common responses is to get worried and sell, deciding to go to cash. According to T. Rowe Price, that can be costly in the long run. While it might be hard to hang in there when you see your portfolio drop in value, for many long-term investors, it’s best to turn off your emotions and stick with your investing strategy.

Volatile Markets - Should You Go to Cash?

When you see several days of steep losses in a short period of time, it can be tempting to switch into panic mode, following the crowd and dumping your stocks. However, panic selling can cause you bigger problems in the long run. Consider that one of the biggest factors in your success as an investor, as well as in other areas of life, is your mindset. Are you letting fear cloud your financial judgment? If so, you could miss out on some of the opportunities provided by a down market.

DON’T PANIC – How to Handle Volatile Markets

One of the worst things you can do during times of market volatility is panic. Decisions based on a knee-jerk reaction are usually bad decisions — especially if it means dumping a fundamentally sound stock and locking in your losses. Before you sell due to a market drop, imagine the words “don’t panic” in large friendly letters 😉 Step back and think about why you want to sell.  If you want to sell because everyone else is selling, it might be time to adjust your mindset and start looking for opportunities.

Fear-Driven Finances and Loss

The stock market is an oft-cited example of what can go wrong when you let fear rule your financial decisions. During the financial crisis of 2008, and in the aftermath, a number of people, afraid of the stock market’s poor performance, sold. The problem when you sell at a time like that, of course, is that you end up locking in your losses. I was a little bit afraid for some of my investments, but I ignored my panic reaction and kept with my dollar cost averaging plan. Now, I’m seeing better returns.

Of course, there are other ways to let fear rule your finances. Some of these fears include:

  • Fear of missing out: Many people are driven to scams because they are worried about “missing” a big opportunity. Pressure to get in, or you will miss out, can work on a different type of fear that pushes you into poor decisions.
  • Fear of falling behind: Do you look at your friends and family and worry that you are falling behind? This type of fear can prompt you to spend beyond your means. Your fear of how you look in front of others might result in debt that can get out of hand.
  • Fear of risk: While you don’t want to take irresponsible risks, you shouldn’t shun risk altogether. Some risks are smarter than others. You need to add a little risk in order to be successful, whether it’s investing in a carefully considered ETF or starting your own business. Here is more on risk tolerance and investing.

Don’t Let Fear Rule You

You don’t want to let fear rule your financial decisions. That means that you need to take steps to protect yourself from yourself. In many cases, you can stop fear from taking control by refusing to make quick decisions. Rather than selling everything all at once, ask yourself what’s changed. If the fundamentals of an investment are the same, there is a good chance that it will recover with the rest of the market. Realize, too, that great “insider” opportunities are meant to use fear to push you into making an irrational decision. Think it over carefully. Most legitimate opportunities don’t expire immediately.

Stepping back can also help you avoid making other financial mistakes. Ask yourself why you are doing something. Honestly answer why you want to buy a new car, new shoes or a bigger TV. Learn to be comfortable with your own expenditures and lifestyle, and do your best to stop worrying about other people have. If you focus on what you are grateful to have, you will feel less fear about keeping up with your neighbors.

It can be hard to overcome your fears, even the fear of money. However, if you study your own emotions, and refuse to make financial decisions when fear is the dominating stimulus, you can reduce the number of poor choices you make. Education can help, too. Learn about yourself, and about how money makes. You will feel better about your decisions when they come from knowledge, rather than from fear.

Stick to Your Long Term Plan

Now is not the time to abandon your long-term plan. If you have made an investing plan, stick with it — especially if you have a couple decades left before its fruition. When you have a solid investment plan, it is likely to bear you out over the long term. Short term, things can look pretty jagged and volatile. However, if you look at market movements over a period of decades, things tend to smooth out. Long-term, there is a great deal less volatility. This is good news for your long term investing plan. Don’t let today’s fear keep you from reaching your ultimate investing and financial goals.

While this might be a good time to re-evaluate where you stand and to diagnose some weaknesses in your portfolio or asset allocation, it’s not the time to change everything up just because you’re afraid. Take a measured approach when tweaking your plan, but don’t scrap it completely.

Deciding to Go To Cash When Markets Drop Can Cost You

The biggest problem with selling when you get worried is the fact that you are essentially “locking in” your losses. Until you actually liquidate your stocks, your losses are pretty much just on paper. They don’t become “real” until you sell. Essentially, when you sell during a market downturn, you are selling low after you have bought at a higher price.

You will also see other costs when you go to cash during a downturn. Not only do you lock in current losses, but you also run the risk of losing out on bigger future gains.

I use a dollar-cost averaging strategy with my long-term investing. I invest the same amount of money each month, no matter what’s happening with the market. This means that when the market is lower, I essentially end up buying my investments “on sale.” During a market recovery, that means that my portfolio grows at a faster rate than someone who has been growing a cash account, and finally decides to get back in after prices have begun rising again.

The T. Rowe Price article includes an illustration of two investors who set aside $2,000 each quarter from the beginning of 2001 through the end of 2015. One investor sells and goes to cash when the market drops by 10% or more in a quarter, and then doesn’t get back in until there are four quarters in a row of positive returns. The other investor just plugs away, putting that money into stocks, no matter what is going on. By the end of the exercise, the investor that goes to cash has less than half the account balance as the investor that was able to take advantage of low prices and bigger returns.

This illustrates how deciding to go to cash can cause problems, especially if you do so after the big market drop. While some of this can be mitigated if you sell and switch to cash before a market drop, the reality is that few of us are good at timing the market in this way.

Using Asset Allocation to Improve Your Peace of Mind

This doesn’t mean that there is no place for cash in your investment portfolio. The danger comes in making big changes to your portfolio during times of market turmoil. Instead, it can make sense to use asset allocation to your advantage over the long haul.

You can create a portfolio that includes cash and bonds (and maybe other assets, depending on your goals and risk profile) in addition to stocks. It might help you sleep better at night knowing that your portfolio is 70% stocks, 20% bonds, and 10% cash. In some cases, you might even tweak those numbers, depending on where you stand with your financial goals and risk tolerance.

The idea is that you can consistently invest in those set proportions, occasionally rebalancing as you see a drift in your asset allocation. With this method, you can use index funds or ETFs to help you manage your investments, rather than worrying about stock picking. It’s one way to reduce some of the risk and increase the chances that you will come out ahead in the long run.

Carefully consider your situation and what makes sense for you. However, be aware that most ordinary investors don’t do well with stock picking. Also keep in mind that, often, the very worst time to sell your stocks and go to cash is when everyone else is panicking and doing the same thing.

Look for Opportunities

Now might be time to look for opportunities. Cheap stocks abound during times of stock market volatility and times of economic recession. You could pad your retirement account, or enhance your income portfolio. Even beginning investors can benefit by investing in index investments that have a little less risk than some other individual investments.

If you are a little more advanced as an investor, you can look for other opportunities. It might be a good time to buy precious metals before they skyrocket higher. (Some think that now might be a good time for silver, especially if gold is to rich for your blood right now.) You might also find interesting opportunities in currencies or other investments. Times when the real estate market is doing poorly might produce opportunities for you to buy cheap property to hold on to for a time. During the last economic recession, freelancers were able to find a number of opportunities as companies looking for skilled workers with lower overhead.

Instead of dwelling on how horrible everything is, you can be on the lookout for opportunities in times of market and economic uncertainty.

Increasing Investments During Market Pullbacks Might be an Opportunity

It is always better to buy low and sell high. If you’re in it for the long run, you have a long time for your shares to gain value. Several years ago, the effects of the Great Recession decimated stock prices.

At the time, Warren Buffet wrote an op-ed piece for the NY Times, Buy American. I Am. If you missed it, I highly recommend reading it. Warren Buffet is one of the world’s most successful investors, and when he talks, people listen. One of his most famous investment quotes is this:

Be fearful when others are greedy, and be greedy when others are fearful.

Take advantage of buying opportunities

Don’t worry about market timing. I could stress over the daily fluctuations and fractional changes of each share but I won’t. It is impossible to guess when the market will truly bottom out. And trying to do so is bad for the body, mind, and soul. But it is easy to recognize that almost the entire market is substantially discounted right now. Value averaging is the investment strategy of investing more money when stocks drop in price, and this may be the textbook example of when to do that. These opportunities are few and far between and I plan on taking advantage of this one.

Want Warren’s advice on this one?

Let me be clear on one point: I can’t predict the short-term movements of the stock market. I haven’t the faintest idea as to whether stocks will be higher or lower a month — or a year — from now. What is likely, however, is that the market will move higher, perhaps substantially so, well before either sentiment or the economy turns up. So if you wait for the robins, spring will be over.

Invest with a plan. Don’t blindly throw money at a stock you know was priced higher a few months ago. Instead, buy based upon your investment goals and maintain a balanced asset allocation. Otherwise, you are asking for disaster.

How to take advantage of Market Pullbacks

Increase your 401(k) contributions. Adding even as little as 1% can make a difference in the long run, and you probably won’t even notice it in the short term. If you can squeeze more out of your budget, go ahead and try. If it gets tight you can always bring down your contributions later.

Max out your IRA. Your IRA is another great place to stash the extra cash. You can invest up to a combined $6,000 in a Roth or Traditional IRA in 2019. If you haven’t opened an IRA yet, there are several places you can do that, including with your bank or in a brokerage account. Check out more information on our post about where to open a Roth IRA account.

Invest in taxable accounts. If you have already maxed out your retirement accounts, or you think you will need the money before retirement, then consider investing in taxable accounts. I personally have accounts with Vanguard and Ally Invest and recommend both of them.

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About Miranda Marquit

is a freelance writer and professional blogger working from home. She has contributed to, and been mentioned by, numerous financial web sites. Her blog is Planting Money Seeds

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    These responses are not provided or commissioned by the bank advertiser. Responses have not been reviewed, approved or otherwise endorsed by the bank advertiser. It is not the bank advertiser’s responsibility to ensure all posts and/or questions are answered.

  1. Hank says

    This is some great advice. Usually I up my 401k 1% every January because of a pay raise. This year, I think that I will increase my contributions early to take advantage of the low stock prices out there.

  2. Eric says

    I left my 401k alone, I’m already pumping in over 12%. I think next year I may start an IRA also!

    This week I re activated my automatic investing portfolio on sharebuilder after some modification. I’ve been watching [the market] all year and have been writing down companies that I have been interested in, have discovered, or that seemed to brave out this storm. Are we at the bottom? Who knows, regardless I’m putting more money in now! It’s bound to go up and I don’t need the money any time soon! YEY Discount rack of the stock market!

  3. Dividend Growth Investor says

    I think that now is the time to keep contributing to your 401K and not mess with your asset allocation. If you can afford to increase your contributions, fine, if not that’s ok as long as you don’t decrease them because you are afraid the market is going to go to zero.
    Anyways, my research has shown to me that every dollar that you invest in stocks now will generate about 1 dollar in income 35-40 years from now. At least that has been true from 1920-2008..

  4. Ryan says

    DGI: I’m not changing my allocation right now, but I have increased contributions. I think I will wait until the New Year or until things stabilize a little before making changes to allocation. I’m hoping things stay low through the beginning of the year so I can do a lump sum investment in my Roth IRA. I may also front load my 401(k) contributions as well to try and get more money in while the markets are lower.

  5. Pinyo says

    I am buying more. In fact, I just add another $5,500 to our retirement accounts. Now I just have to decide what to buy.

  6. Adam says

    Hi,
    I’m a young guy 23, and I don’t have a 401k or any retirement set up from my current employer. I don’t really have a whole lot of cash to work with but I’m just wondering what would be the smartest move for me at this point. Any advice would be greatly appreciated.
    Thanks,
    Adam

  7. Paul Creamer says

    If you have a 401k where the employer contributs – max it out to what they will contribute to… ie; if max they match is 6% you do as much as needed to get that.

    Afterward, go IRA or externally and do tax advantageed investing or even other good investments (trick is figuring out what is and what isnt).

    Note, that if the 401k has no company contribution you should instead go IRA in full (never do a noncontributive 401k unless the numbers show value – rarely do).

    Also in light of potential company failures, never do a internal 401k type of plan.

    Internal – think Enron .

    External – I worked at American Electric Power and my 401k was Fidelity.com for the whole 8+ years I was there.

    Reason, internal the company can steal your 401k $$, while externally once they send the contribution they are out of the new $$.

  8. Paul Creamer says

    Also anotther thing one can consider for investing in general (not necessarily ira/401k related) is DRIPPING.

    One doesnt even a lot of $$ to do ‘drips.
    Other than the intial start of shares, it can be free (other than shareprice) to drip.

    Drips are where you buy a set amt of $$ each month of 1 or more stocks and always the same amt. Ie; Like I did, started with $50/mth to buy 2 stocks and now doing $500/mth to buy 6 stocks).

    Example: buying $50 of GE whehter its the current $9/shr or $40-$80/share .
    Reinvest of divends too.

    You can do this direct with a company in many cases, but can use the following website to have it do it for you ($25 fee for members). But going direct can be virtually free but requires more initial shares.

    I do it both ways, and I still use both EDWARDJONES and also sharebuilder too depends on what I need and whether I want to do instant buying.

    Note that drips are also scheduled buys, in that u buy on a certain date every month, no matter what happens. I use sharebuilder often to buy normal extra shares when I get lucky enough to time the market.

    money paper com was one research source.

  9. adam says

    Okay thanks for the advice. I need to start planning for the future and w/the economy the way it is I don’t know where to start. Any other tips anyone please let me know.

  10. Ryan says

    Adam: The best thing you can do is stat contributing to a 401(k) if you get an employer match, that way you aren’t leaving free money on the table. If you don’t know where to invest your money, start with a targeted retirement date fund, which will have an automatic asset allocation. Then start learning more about asset allocation and determine if that mix is good for you, or if you should change it.

    Then look into other retirement accounts such as an IRA – Roth is usually considered better if you are eligible to make contributions, but you should look into both Roth IRAs and Traditional IRAs to determine which is the best for your needs.

    If you will need money in a few years for a major purchase like a house or car, then consider starting a CD Ladder or putting your money into a high yield savings account. You don’t want to take too much risk with money that you will need soon.

  11. Ross says

    I completely agree with that last point, that knowledge is a perfect antidote to fear. Fear itself oftentimes stems from not understanding or being educated on a subject, so simply learning can eliminate fear.

  12. Charlie Koch, MBA, CFP®, CFS® says

    Great article. In my experience investors that become terrified during market declines are invested in a portfolio that is far too aggressive for them. One way to avoid this terror is carefully evaluating who you are as an investor and establish what you realistically expect from your investments. You can then use those guidelines to select a mix of investments that are appropriate for you. Think about it, rarely is anyone afraid of something they planned for. Going forward, manage your investments at set intervals. This will keep you from reacting to a particularly horrifying news story and causing long term damage to your investments. For investors that have a long time horizon, periods of decline and volatility offer the often unrecognized benefit of generally lower prices. This allows investors who contribute on a regular basis to buy “cheap” and lower their average share prices.

  13. Walter says

    As long as they are adequately diversified, stay the course. Nothing worse than buying high and selling low.

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