Nancy Graham July 2, 2020 Personal Wealth Should I go to cash? “That market correction was too much for me. It was unexpected, it was quick, and it caused me worry. I know the market values have partially recovered from their lows, but what can I do now to protect myself? What if the market declines again?” In times of economic uncertainty and volatile stock markets, you may find yourself paying more attention to the value of your investment holdings. You very likely accumulated this capital to provide you with a secure economic future, and now, you may be wondering, is this the right place to invest for your long-term financial independence? A couple of questions that may come up: Should you go to cash and wait until this current round of market volatility is over – whenever that is. Do you still feel comfortable with the investment decisions you’ve made when the outlook felt more positive? As investors what we are experiencing is risk. Frankly most people do not really want to or enjoy taking risk with their ‘security’ capital. At the same time, taking risk – seeking a higher return on your investments by tolerating increasing and decreasing prices – is a necessary step for many of us to become financially independent. At the same time, the recent market correction may have informed you about your own tolerance to risk. Market corrections are nothing new, we know they happen. What we need to do is pay attention to our response to the experience. You may be closer to retirement than the last time the market corrected. Or you may have a larger portfolio, and thus you are noticing the changes in dollar values. But does that mean going to cash is the right choice? Let’s look: What if we do exit the market, what next? Well, you are left with a second decision – when to ‘re-invest’. There is plenty of academic research that shows if you exit the market, the decision to re-enter is difficult to get right. We want to re invest when it feels ‘safe’. By the time we feel ‘safe’ the market has likely recovered and we end up buying in at higher values that we exited at. In recoveries, there can be concentrated times of price increases that can be hard to catch. There is a graph below that shows the impact of missing the top x days of market price increases over a 20-year period. The message is that a significant portion of the market recoveries can take place in a very short time. And after you have exited the market once, how do you manage your emotions the next time there is a market correction to prevent you from exiting again? Going to cash may result in some short-term emotional relief. When viewed in the context of your financial independence goals, the evidence shows this is not a strategy that is likely to get you where you want to go. So, what else can you do with that discomfort? Here are some suggestions: Pull out your financial plan. If you don’t have one, get one. Review the assumptions. Are they all still correct? Can you afford to take less risk in your portfolio? If you reduce your exposure to stock markets, can you still achieve your goals? Your financial plan is designed to help you make this decision. What have you learned about your own risk tolerance? It can change over time, as the value of your holdings increases, as you move closer to the time when you will look to this capital to support you. You may decide you would prefer less risk and are willing to work longer, save more or spend less in retirement to accommodate this. For some, pooling some amount of cash, what we call ‘mattress money’ that stands as available cash between your needs and market returns can make sitting though the difficult times easier. What about your actual investments? Are you comfortable with your strategy? Do you know how your portfolio is performing compared to the broad markets? At times like this, as investors, we are being called explore our own risk tolerance and then stay the course. Share: Facebook Twitter LinkedIn Email CIRO Advisor Report