In his forthcoming book, The Soul of Wealth, Dr. Daniel Crosby tells the story of how dominant Xerox was in the tech space. When Apple and Microsoft came along to create personal computers, Xerox chose not to invest in R&D. By the time its PC, the Xerox Star, hit the market, it was too late. The point of the story is that the timing in business and in markets will never be perfect. In fact, our perfectionism is to blame for keeping cash on the sidelines.
If we looked at markets in 2020, a global pandemic was certainly good reason to stay out. In 2021, supply-chain problems caused a spike in material costs and made it nearly impossible to get a car and many consumer electronics. Russia invaded Ukraine in 2022. About 70% of economists predicted a recession in 2023. And yet, in three of those four years, the U.S. stock market gained ground, which is in line with historical averages. You will never find a perfect year to put that cash to work. You also shouldn’t blindly invest it.
Below are three scenarios for you to come up with a plan for your cash.
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
Scenario #1: If you don’t need the money for 10-plus years…
This money should be invested with an asset allocation that you’re comfortable with. I don’t believe you need to get in over a period of time either (dollar cost average). According to data from Ibbotson and J.P.Morgan, there has never been a 10-year period since 1950 with a negative return in a 50% stock/50% fixed income portfolio. If you want to get a sense of the risk you’re comfortable with, you can use our risk tolerance software.
Scenario #2: If you need the money in two to 10 years…
I still believe this money should be invested, but you should invest over a period of time. I typically recommend three to six months of dollar-cost-averaging into the market.
Example: You have $500,000 sitting in cash that you may need within two to 10 years. You invest $100,000 per month in an appropriate asset allocation.
This will mitigate the risk of buying at a high. I had clients who sold a home late in 2021. They will buy another home in 2025. Their numbers were similar to the above example. We dollar-cost-averaged in, in 2022, and therefore bought as the market was dropping. They are now well positioned for their purchase next year.
Scenario #3: If you need the money in less than two years…
Cash or cash equivalents. Even aggressive asset allocations typically don’t take two years to recover from bear markets. However, the Great Depression, dot-com bubble and the Global Financial Crisis are notable exceptions, so it’s better to be conservative. For money you need in less than two years, I would not advise having market exposure, especially in today’s high-rate environment. There are several options yielding 4% to 5% with principal protection.
There is a fourth option here: You don’t need the money or the return. In other words, you have way more than you need, and the return tradeoff is worth the sound sleep. You can check whether you are in this situation by building out a financial plan here.
Related Content
-
The 'Rule of 25' for Retirement Planning: Start HereTry the simple calculation of the 'Rule of 25.' Because sometimes, a back-of-the-napkin idea is all you need to get started.
-
Within Five Years of Retirement? Five Things to Do NowIf you're retiring in the next five years, your to-do list should contain some financial planning and, according to current retirees, a few life goals, too.
-
Within Five Years of Retirement? Five Things to Do Now
If you're retiring in the next five years, your to-do list should contain some financial planning and, according to current retirees, a few life goals, too.
-
The Home Stretch: Seven Essential Steps for Pre-RetireesThe decade before retirement is the home stretch in the race to quit work — but there are crucial financial decisions to make before you reach the finish line.
-
Three Options for Retirees With Concentrated Stock PositionsIf a significant chunk of your portfolio is tied up in a single stock, you'll need to make sure it won't disrupt your retirement and legacy goals. Here's how.
-
Four Reasons It May Be Time to Shop for New InsuranceYou may be unhappy with your insurance for any number of reasons, so once you've decided to shop, what is appropriate (or inappropriate) timing?
-
Before You Invest Like a Politician, Consider This DilemmaAs apps that track congressional stock trading become more popular, investors need to take into consideration some caveats.
-
How to Put Together Your Personal Net Worth StatementNow that tax season is over for most of us, it's the perfect time to organize your assets and liabilities to assess your financial wellness.
-
Bouncing Back: New Tunes for Millennials Trying to Make ItAdele's mournful melodies kick off this generation's financial playlist, but with the right plan, Millennials can finish strong.
-
Early-Stage Startup Deals: How Do Convertible Notes Work?Some angel investors support early startups by providing a loan in exchange for a convertible note, which includes annual interest and a maturity date.
