Patricia D. Sklar, CPA, CFA, CFP® | Wealth Advisor
The most common question I have received from my clients over the last month Is “Should I invest some of the cash I’ve been sitting on?” Whether you have saved your last bonus, had a liquidity event such as sale of a rental property or received an inheritance, or you have just been thrifty, let me walk you through the exercise I take my clients on when answering this important question.
Question 1: Is your emergency fund healthy?
In times like these, it’s important to make sure you have at least three to six months of living expenses in savings, and even more if your job is in danger or if you are concerned you can’t get paid by your customers/clients/consumers. If you are retired, then I recommend having one to three years of living expenses on hand. You don’t want to be forced to take money out of your stock portfolio while it is low, just to cover your normal living expenses. If your emergency fund is healthy, then move to question two.
Question 2: Do you have any other goals for this money?
A client asked me the other day if they should put funds saved for a down payment on a house into the stock market, and my answer was No. The stock market could go down right at the time they were looking to make their big purchase. The same answer applies for any other short-term goals you may have such as paying upcoming college tuition bills or buying a new car. If you don’t have any near-term big expenses coming up, then move to question 3.
Question 3: Are you trying to make a quick buck?
At Brightworth, we advise clients to treat the stock market as a vehicle for long-term investments. If you don’t have that mindset, you will likely end up selling at inopportune times and making expensive mistakes. In 2008 many investors got bit by having a short-term view. They let their emotions take over, later kicking themselves for making big mistakes. Some of them are probably still kicking themselves today after the 11-year bull market we just experienced. If you do have a long-term view for the stock market, then move on to the next paragraph.
Yes! This is a good buying opportunity. Markets are lower than they were in early February. This brings us to the follow up question I often get:
But couldn’t markets go lower? Sure, they can go lower, but no one knows where the bottom will be. Did you know we were at the bottom of the Great Recession in March 2009? As one of our advisors said, no one rings a bell to let us know it’s the bottom. The stock market has a good track record of providing positive returns over multiple years and decades, and some of the biggest up days happen during a bear market. If you have the cash reserves to cover your short-term needs, then investing for the long haul, now, can be a very good idea.
Have more questions about investment timing? Click here