“That squirrel had a death wish.” The squirrel was trying to cross the road but was indecisive and started darting back and forth until finally going back to the side he had just come from, barely missing my truck tire. Many investors are like that squirrel, darting back and forth about whether to stay in cash or reinvest in their portfolios.
Parking too much of your portfolio in cash might seem like a good plan in today’s investing environment, but it has its risks too. Peter Lynch was correct when he said, “Far more money has been lost by investors in preparing for corrections or anticipating corrections than has been lost in the corrections themselves.”
Higher rates this year have led many investors to leave cash out of the market and on the sidelines. As of the end of August, Americans have $5.6 trillion in money market funds, which is a record high and nearly 20% more since the beginning of the year.
Here are three reasons why having too much of your investments in cash can be a risky game.
First, the opportunity cost is high. You’re missing out on daily market growth and income while waiting for the perfect time to reenter the market. Fear can lead investors to sit in cash as stocks march higher.
Second, you won’t keep up with inflation. Even though CDs, Money Markets, and Treasuries are paying more than they have in a while, they will never outpace inflation.
Third, you can’t time the market. It is impossible to perfectly time reentry in the market, even for professional investors. Reluctant investors rarely get the timing right.
The main thing is to stay consistent with your investment plan. The odds of long-term investors reaching their goals aren’t good when they aren’t fully invested. Since it’s impossible to time the market, don’t stress about finding the perfect time to reinvest.
Don’t be the squirrel. Have an investment plan and stick to it. I’m not saying to put your investments on cruise control because I am a huge proponent of active management. But understand there is danger in starting and stopping because sometimes it leaves you lying on the road with tire tracks across your face.
Have a blessed week!
Dr. Richard Baker, AIF®, is the founder and executive wealth advisor at Fervent Wealth Management.
Securities and advisory services offered through LPL Financial, a registered investment advisor, Member FINRA/SIPC.
Opinions voiced above are for general information only & not intended as specific advice or recommendations for any person.
Investing involves risks including possible loss of principal.
Fervent Wealth Management is a financial management and services entity in Springfield, Missouri.