August is traditionally a slow month in the markets, with low trading volumes and fewer headlines. A trade war between the world’s top two economies changes a lot.
After a rough week of stock-market volatility (^VIX) – the Dow had its worst one-day percentage drop of the year on Monday – the major U.S. indices are finally in the green. This is thanks in part to positive news out of China regarding its yuan and a better-than-expected trading report (China saw a 3.3% rise in exports compared with a year earlier).
Investors quickly turned to safe havens such as gold (GC=F) and bitcoin (BTC-USD).
While waiting for the next move in the U.S.-China trade dispute, investors might be tempted to cash out before tensions rise higher – and risk more damage to their portfolios. With so much concern over growth around the globe, here’s why one chief investment officer says it’s best not to cash out of stocks.
Reason #1: Tax concerns
“You shouldn’t be in the market at all then. Don’t ever go all in on cash,” Kim Forest, CIO of Bokeh Capital told Yahoo Finance. “If it’s a taxable account, you’re going to have to pay taxes on those stocks that have gains. That’s a big consideration.”
Reason #2: Predicting the future
“People are horrible at market timing. Nobody really knows the future,” Forest said. “You might think that having that cash is going to save you. But that cash is supposed to grow over time. If you’re in the market, you have to just get used to that asset value going up and down with the market.”
Reason #3: Keeping faith
Stocks go up over the long run: “You just have to believe that in time there’s going to be growth; and the growth is going to show up in those stocks and that is going to show in your portfolio,” Forest said.
A Fidelity report from earlier this year is a good example of why holding on is in most long-term investors’ interest: The investment giant examined the 1.64 million portfolios that were around at the end of March 2009, around the low point of the Great Recession, and that are still around today. In the decade between Q1 2009 and 2019, the average 401(k) balance, which had been $52,600, grew 466% to $297,700 – or an 18.93% increase per year.
Source: Three reasons to stay in a volatile market and not cash out
How to plan for the worst and stay invested
Consider these 3 elements: emergencies, protection, and growth potential.
Consider thinking about the investment portion of your financial plan in terms of 3 categories: emergencies, protection, and growth potential.
Understanding how your emergency fund, insurance, and your investment strategies work together can help keep you on track toward your goals.
One of the key factors to success in long-term investing is the ability to stick with it through good markets and bad. A full emergency fund and adequate insurance coverage can give you peace of mind when the market gets rocky.
1. Emergency fund
It makes sense for everyone to have some money set aside for the unexpected. While 3 to 6 months’ worth of essential expenses is a good starting point, it’s important to decide how big your emergency fund should be so that you can sleep at night. Saving 3 to 6 months’ worth of essential expenses is a big goal to aim for so if that seems out of reach, $1,000 or enough to cover 1 month of essential expenses is a manageable milestone to aim for while working to save more.
Protection is a critical piece of a financial plan. It includes foundational pieces like life insurance, protecting your income in case of a disability, and basic estate planning. It also includes protecting part of your money from stock market risk. For instance, if you have goals that are less than 5 years away, your investment strategy should reflect that, with less exposure to stocks than you might have for goals that are 20 years away. You may not want any stock market investments for a goal that close.
As your life and financial situation scale up in complexity, often as you get older and hopefully become more financially comfortable, the layers of protection you may want could extend to long-term care insurance and tax-efficient inheritance strategies.
Once you’ve accounted for your emergency fund and protected certain aspects of your life, the growth portion of your plan is where you would put your diversified investment strategy. This component is generally the largest piece of your plan.
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