Three Reasons To Stay In a Volatile Market and Not Cash Out

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.

By:

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.

2. Protection
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.

3. Growth
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.

 

How To Build Back Your Emergency Fund In a Tight Budget

Emergency funds are  important should you be faced with an unforeseen setback like a sudden job loss, an unexpected car repair or a serious medical situation. If you tapped into or depleted your emergency savings during the pandemic, it’s vital to set a financial goal to rebuild an emergency fund. Experts suggest having enough money for six months of living expenses in an emergency fund.

Even if your budget is tight, there are ways to stash some cash each month toward emergency savings. “It may seem difficult to set aside savings when you are on a tight budget, but you have to think about it as having no other choice,” said Dawit Kebede, a senior economist for the Credit Union National Association, which advocates on behalf of America’s credit unions.

Why is an emergency fund so important to have?

Your emergency fund allows you to pay for unexpected expenses, like providing a cushion if you lose your job or face sudden financial obligations. If you don’t have savings, you may have to rely on credit cards.

“Most people rely on high-interest rate credit cards to pay for unforeseen expenses, which leaves them in debt,” said Kebede. “Creating an emergency fund avoids relying on debt to absorb a financial shock.”

Pay yourself first

Kebede noted that people tend to put saving at the bottom of their priorities when they have fewer resources. So make building an emergency fund a priority.

“Understand that savings cannot be the lowest priority on your budget,” Kebede said. “You have to pay yourself first, even if it’s $15 a month. Setting goals and setting aside something, however small it may be, will go a long way. It will accumulate over time.”

Set a reasonable monthly goal, even when there’s little wiggle room.

Commit to putting bonus cash in your savings

If you get any extra money during the month, even if it’s a small amount, earmark it for your emergency fund.

“When building out your emergency fund for the first time or rebuilding following a major emergency expense, it’s okay to start with small contributions, and any tax refunds, gifts or extra cash are all great ways to contribute,” said Ryan Ball, vice president of market experience at Capital One. “Having a small amount in your account is more helpful than nothing at all in the preparedness for an emergency.”

Set up a save schedule

If you get paid twice a month, for example, create a plan to take a set amount and transfer it directly to your emergency savings account. Even if your budget is tight, pick a small amount and devote it to savings. “When contributing to your emergency fund, the best practice is to contribute to your account regularly and setting a schedule can help,” advised Ball.

To force savings, Greg McBride, chief financial analyst at Bankrate.com, advised automating your savings with a direct deposit from your paycheck into a dedicated savings account. “The savings happens first without having to think about it,” McBride said.

Another option, McBride explained, especially for the self-employed, is to set up an automatic transfer from your checking account to a savings account at a regular interval, such as once per month or every two weeks.

How can you force yourself to save without it seeming like a punishment?

First, accept the mindset that savings should be viewed as deferred spending for important or unexpected items rather than a punishment, said Kebede. Next, take an inventory of your spending habits. Can you cancel monthly subscriptions you’re not using?

Can you reduce takeout meals or the amount you’re spending on extras like dining out or paying for coffee every morning? Can you carpool to save on gas or stick to your grocery list by meal planning in advance?

“Setting aside a small amount regularly helps you feel that you haven’t sacrificed a lot, and watching your savings slowly accumulate will also provide motivation for you to continue,” Kebede said.

Use your banking institution’s resources

Your bank may have resources available to assist you to promote financial wellness and education.

For example, Ball noted that Capital One has resources, including its complimentary Money & Life Program, that helps participants build a plan to achieve their goals in life and think through how their financial behaviors connect to those goals.

“In addition to Money & Life mentoring sessions with a professional mentor, we offer a self-guided Money & Life exercise, ‘Map Your Spend,’ that can help participants visualize their spending and figure out where they can make changes to put a little extra money per month away for an emergency fund,” he said.

Contact your bank or visit a retail location to inquire about what mentoring services may be available.

Source: How to build back your emergency fund in a tight budget | Fox Business

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More contents:

How Much Liquidity Does Your Portfolio Need During Ages 30, 40, 50, 60+

The global market’s volatility and increasing inflation is likely a cause for concern as you manage your portfolio.  With these challenges, it’s advisable to incorporate liquidity into your planning.

Liquidity is described as the amount of cash you can readily access, or how quickly you can convert assets to cash. The need for liquidity can vary depending on your age and risk tolerance, and short and long term financial goals. We’ve asked financial experts for their advice about how to plan your liquidity strategy as you age.

Liquid emergency savings for unforeseen life events

According to financial experts, you should have about six months of liquid living expenses set aside in an emergency fund, if you encounter a job loss, experience a medical emergency or have a sudden expense like a car repair.

“At any age we recommend an emergency fund in cash or cash investments to cover roughly six-month expenditures.”

“At any age we recommend an emergency fund in cash or cash investments to cover roughly six-month expenditures,” says Rob Williams, CFP®, CRPC®, managing director, financial planning, retirement income and wealth management, Schwab Center for Financial Research. “They can cover a one-time surprise expense or tide you over if you have an illness, change jobs, or have another expense, to help avoid the need to sell investments.”

How your age factors in on your liquidity path

According to Williams, investors aged 30 to their early 60s and still working and who do not need money from their portfolio soon could start with around 5% of their portfolio in cash and cash investments, based on the time horizon and risk tolerance.

And, for investors nearing retirement, when they may need to start tapping their portfolio, or another goal, such as paying for a child’s education, may want to hold a higher proportion in cash and cash investments in their portfolio, Williams says.

“We suggest, generally, that investors hold the next year of money that they may need to withdraw from a portfolio, to pay for a goal or expense in cash or cash investments.”

“We suggest, generally, that investors hold the next year of money they may need to withdraw from a portfolio, to pay for a goal or expense, in cash or cash investments,” Williams explains. “This is a good guideline, to determine how much you might want to hold based not just on your age, but your goals as well.”

How goals can influence your decade-by-decade liquidity decisions

John Pilkington, CFP, senior financial advisor with Vanguard Personal Advisor Services, also recommends setting aside 3-6 months’ worth of expenses in an emergency fund, and, given an individual’s or couple’s lifestyle and financial goals, he advises to consider how liquid reserves fit into a broader financial plan.

“For example, if someone is in their early 40s and is planning a significant purchase, such as a vacation property, in the near future, they will have significantly higher liquidity needs than someone of the same age who is only saving for longer term goals,” he says.

Other factors that can impact your need for liquidity could be financing a child’s education or creating a retirement plan.

“Typically, those in their 30s and 40s have competing financial goals – think paying down a mortgage, student loans, saving for children’s future college expenses, saving for retirement – and therefore have a higher need for liquidity should they need to tap funds amid planning other financial obligations,” Pilkington says.

As he mentioned,  a challenge that many in these 30s to 40s decades face is the ability to create liquid reserves, as their competing goals are co-existing among higher debt burdens.

“This audience can benefit from looking at alternative sources of liquidity – such as a home equity line of credit, tapping a Roth IRA, or a personal loan,” adds Pilkington.

Source: How much liquidity does your portfolio need during ages 30, 40, 50, 60+ ? | Fox Business

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Critics:

Liquidity becomes even more critical to consider in the context of an investor’s financial goals. For most, goals can be described most simply as certain amounts of money needed at particular points in time. However, when the time comes, investors will likely need to fund their goals in the form of cash, rather than in the form of financial securities or art.

Of course, exceptions exist for example, a charitable donation of stock or repurposing a piece of real estate investment property to serve as a retirement home. Your financial advisor has the tools and resources to incorporate your financial goals into your long-term plan. To illustrate this, consider a goal of funding a child’s university education. For most, this involves multiple payments of cash over the course of a few years at some point in the future.

When the tuition due-date nears, the portfolio of securities would likely need to become less risky, more stable, more liquid, and more accessible in order to ensure the tuition payment clears. The graph below depicts a hypothetical example of how the cash required over the child’s age increases as he approaches his college education years – requiring strategic planning for liquidity needs.

Especially in the case of relatively large financial goals such as funding higher-education, the chances that your goals become a reality can be improved by starting early, having a long-term focus, and putting a plan in place with your financial advisor.

More contents:

Liquidity – Dictionary Definition of Liquidity”. About.com Education. Archived from the original on 17 April 2015. Retrieved 27 May 2015.

Keynes, John Maynard. A Treatise on Money. Vol. 2. p. 67.

TradeLive”. TradeLive.in. Archived from the original on 26 December 2017. Retrieved 27 May 2015.

The Performance of Liquidity in the Subprime Mortgage Crisis” (PDF). New Political Economy. 15 (1): 71-89. doi:10.1080/13563460903553624. S2CID 153899413.

Mifid ushers in a new era of trading”. Financial Times. Retrieved 27 May 2015.

Understanding Financial Liquidity”. Investopedia.com. Investopedia US. Archived from the original on 3 May 2018. Retrieved 11 August 2014.

Why Stocks Are Rising: It’s The Liquidity, Stupid!”. Yahoo Finance. Archived from the original on 1 June 2013. Retrieved 11 August 2014.

Liquidity: Finance in motion or evaporation”, lecture by Michael Mainelli at Gresham College, 5 September 2007 (available for download as an audio or video file, as well as a text file)

The role of time-critical liquidity in financial markets by David Marshall and Robert Steigerwald (Federal Reserve Bank of Chicago)

Financial market utilities and the challenge of just-in-time liquidity

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The Hottest Perk of the Pandemic? Financial Wellness Tools

In the midst of the Great Resignation, with employers scrambling for ways to hang on to experienced staff, financial wellness programs might be an attractive addition to the benefits bag.

That was a key finding from PwC’s annual Employee Financial Wellness Survey, which was conducted in January 2021 and released in April. Among those polled, 72 percent of workers who reported facing increased financial setbacks during the pandemic said they would be more attracted to another company that cared more about financial well-being than their current employer. About 57 percent of workers who hadn’t yet faced increased financial stress said the same thing.

Financial stress doesn’t just affect worker retention; it also has an impact on productivity. PwC’s survey showed that 45 percent of workers experiencing financial setbacks have been distracted at work by their money problems. The menu of financial wellness tools employers might elect include educational tools for personal finances, one-on-one financial coaching, and even access to rainy day funds.

It’s a growing business sector, too. HoneyBee, a B2B financial wellness startup, recently closed a round of funding with $5.7 million in equity, TechCrunch reported. The financial technology company grew 225 percent during the pandemic and saw a 175 percent increase in usage for its on-demand financial therapy tools. Origin also recently announced that it raised $56 million in its Series B funding round, which it will use for customer expansion, as it saw increased demand for financial planning services during the pandemic, Business Wire notes.

Although one in five workers waits until they experience a financial setback to seek guidance, when they are offered continual support, employees are more likely to be proactive with their finances. According to the PwC survey, 88 percent of workers who are provided financial wellness services by their employers take advantage of them.

By Rebecca Deczynski, Staff reporter, Inc.@rebecca_decz

Source: The Hottest Perk of the Pandemic? Financial Wellness Tools | Inc.com

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Critics:

Making money is definitely the cornerstone of financial wellness and increasing your income can help you obtain your goals. You do not need to be a millionaire, but it’s important to obtain some level of income stability. Being financially well starts with having a reliable income and knowing at a consistent time, you will expect to be paid a certain amount. Steady and reliable income is one of the cornerstones of financial wellness.

Even if you don’t like budgeting or planning, it’s good to set goals for yourself. You are more likely to stick with it when you have goals to reach and can see progress. By creating a plan, you are visualizing the what, why, and how you will get there. If you don’t already have a household budget, grab your most recent bank statement and look at the total amount of money you have coming into your household each month. Then, factor in fixed, required expenses – things like rent or mortgage payments, utilities, insurance, and more.

f you do not have an emergency fund, now is the time to start building it. The goal of an emergency fund is to have available funds for when you are dealing with unemployment or you have an unforeseen cost. You won’t stress about the money because you have a nice cash reserve that you can access quickly. Finance experts often say that you should have at least three to six months’ worth of expenses in your emergency fund. If you have nothing in savings, putting away just $25, $50, or $100 a month is an amazing start. Ultimately, it’s what you feel comfortable with. You can also consider putting it in a high savings investment such as CIT Bank’s Savings Builder, which helps put your savings to work with very little risk.

Once you get a handle on your finances, you can start to map out life events and large purchases, so you can begin saving! Planning ahead is always helpful, and once you get a handle on your current financial plan, set some goals for what comes next. By building a plan, you have a road map to help guide you through the rest of your story. Putting even a small amount into savings on a consistent basis is one of the best ways to get your savings to grow so you can meet your goals, small or large. Set your own personal savings rule to live by and make a plan on how to achieve it. Prepare for life events and large purchases by planning ahead.

Your credit score is another critical part of your financial health. Things like late payments, too much debt or high balances negatively affect your credit score. Keep watch over your credit report and credit score with a free credit report from places like Credit Karma. A higher credit score tells banks and lenders that you’re a reliable and less risky borrower. 

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Curious About Crypto? Here’s What 10 Financial Experts Think

A photo to accompany a story about financial experts' advice for investing in cryptocurrency

Everyday investors are overflowing with cryptocurrency questions, according to the financial advisors hired to answer them.

There is clearly an “emotional euphoria that seems to be sweeping through the public around cryptocurrency,” says Frederick Stanfield, a CFP with Lifewater Wealth Management in Atlanta, Georgia.

But for the average person focused on retirement planning and financial stability, is it time to consider investing in cryptocurrency?

The answer is complicated, so we asked financial advisors for their crypto advice, and here’s what 10 of them are telling clients. In an emerging field with few set rules and norms, we discovered some universal truths that everyone should know before putting money in cryptocurrency.

First of all, financial advisors say a healthy dose of skepticism is a crucial place to start, and you should never invest in crypto if it takes away from other goals and financial fundamentals like paying off debt, building an emergency fund, or maxing out your retirement accounts.

As difficult as it may be, do not become seduced by the intrigue and allure of this new technology, says Stanfield. Instead, employ the same mindset you bring to your regular investment strategy.

Here’s what else the experts want you to know about cryptocurrency investing:

Be Prepared for Loss

As with any investment, financial gains are far from guaranteed with cryptocurrency investing. For some financial advisors, crypto looks more like a lottery ticket than an investment strategy.

That means you should only put in what you’re OK with losing. “On a spectrum between gambling and investing, I think it’s closer to the former,” says Matt Morris, principal advisor at Sanderling Finance in Columbia, South Carolina.

As a high-risk, high-reward investment, keep any crypto investments in perspective amid your broader goals and finances. As with certain types of gambling, “you have a high chance of losing it all, but a small chance of winning it big,” says Nate Nieri, a CFP with Modern Money Management in San Diego, California. “Just don’t gamble an amount that would burden your family or prevent you from achieving your goals” if you lost it all.

Steer Clear if You’re Risk Averse

If you’re risk averse, crypto isn’t the investment for you.“How well can you sleep at night knowing that this is an emerging asset class with high volatility? And if you were to wake one morning to find that crypto has been banned by the developed nations and it became worthless, would you be OK?” asks Stanield.

If you’re going to be constantly stressing about your crypto investment, or tempted to change your investments in light of the volatility that comes with crypto, then you’re better off putting your money in a more stable investment, according to Stanfield.

“I believe it is still in its infancy stage, and just like any new fund or IPO, there is a level of uncertainty about the future that I’m not ready to stomach,” says Alajahwon Ridgeway, owner of Ridgeway Wealth Management in Lafayette, Louisiana. “I believe it … is an unnecessary risk at this point for my clients to reach their financial goals.”

There’s also far less historical data available about cryptocurrency to help investors make informed decisions — unlike conventional ETF and index/mutual funds. Crypto investors face additional risk in the form of poor or inaccurate trade data, competition among fellow investors, theft, loss of wallet passwords, supply and demand issues, government regulation, and energy consumption concerns, says Chelsea Rude, a CFP at Rude Wealth Advisory in Olney, Illinois.

“Most importantly for investors, there is a lack of a well designed and tested way to value the assets,” Rude says. This means crypto investors are essentially going in blind, and subjecting themselves to the uncertainty that comes with any new business or investment

Know Why You’re Interested In the First Place

Some people see crypto as an emerging investment, while others see it as an interesting new global currency you can use instead of the U.S. dollar or other international currencies. But whether crypto has long-term staying power on either front is still uncertain.

“I strongly believe the vast majority of people who own crypto currency are doing so for all the wrong reasons and misunderstanding what they are truly buying,” says Ben Lies, chief investment officer at Delphi Advisers.

Many experts are concerned about people dumping their money into crypto without real understanding of the area. Do your own research, and make sure you’re thinking about your investment in the right way.

“Hype and excitement around the space are not reasons for inclusion into any portfolio, but I believe there are compelling reasons to consider cryptocurrencies,” says James Vermillion, owner of Vermillion Private Wealth in Lexington, Kentucky. “When discussing crypto with clients I emphasize education and understanding. It’s important to note that there are thousands of cryptocurrencies in existence and they are not created equally. Due diligence is important, just as it is when looking at stocks or other investment vehicles.”

Nieri warns those who see Bitcoin as a currency to think about what that means for investing. “I don’t typically trade or have a currency hedge as part of my investment strategy. Would you have ever thought about trading dollars for Euros as an investment? In order for Bitcoin to be a legitimate currency, the world’s governments would need to accept it as a global currency, something that has a remote likelihood,” Nieri says.

Keep Crypto In Its Place

Don’t rely on crypto investments for your retirement or overall financial strategy. Make sure the majority of your investment portfolio is made up of stable assets projected for long-term growth.

“What I am sharing for [my clients] to do is build their future financial pie with investments such as stocks and bonds. If there is extra money they want to play with, buying crypto is an option,” says Eric Powell, financial advisor and founder of the Future Mill.

Make sure your overall investment portfolio is predominantly made up of conventional investments like stocks and bonds, says Powell. But within any crypto investments you might have, experts recommend sticking with the big names.

“I personally do not go beyond Bitcoin and or Ethereum,” says Michael Kelly, a CFA at Switchback Financial in Madison, Connecticut.  “I feel those two have a bit more of an established base and feel the risk of other coins becomes too significant.”

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Source: Curious About Crypto? Here’s What 10 Financial Experts Think | NextAdvisor with TIME

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Decentralized finance (commonly referred to as DeFi) is a blockchain-based form of finance that does not rely on central financial intermediaries such as brokerages, exchanges, or banks to offer traditional financial instruments, and instead utilizes smart contracts on blockchains, the most common being Ethereum.[1] DeFi platforms allow people to lend or borrow funds from others, speculate on price movements on a range of assets using derivatives, trade cryptocurrencies, insure against risks, and earn interest in savings-like accounts.[2]

DeFi uses a layered architecture and highly composable building blocks.[3] Some DeFi applications promote high interest rates[2] but are subject to high risk.[1] By October 2020, over $11 billion (worth in cryptocurrency) was deposited in various decentralized finance protocols, which represented more than a tenfold growth during the course of 2020.[4][2] As of January 2021, approximately $20.5 billion was invested in DeFi.[5]

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References

Braun, Alexander; Cohen, Lauren H.; Xu, Jiahua (May 2020). “fidentiaX: The Tradable Insurance Marketplace on Blockchain”. Harvard Business School. Retrieved 2021-01-05.

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