Wait for a Crash or Put My Money Back to Work?

“The question of whether we’re due a market correction next week or next month doesn’t matter because we have a plan that accounts for the possibility that it will happen someday.” – Carl Richards


Common sense reader mailbag: In June, my financial advisor recommended I leave all of my funds from a recent 401(k) rollover in cash because he was sure the market was going to crash. He told me stocks were trading at all-time highs so a crash was imminent. Now it’s five months later and I’m still waiting in cash. What should I do? Continue to wait it out or jump right back in?

It looks like you’re not alone in this case. According to a recent Blackrock survey, people have 48% of their savings and investments in cash, with only 18% in stocks and 7% in bonds. They too are unsure of what’s going to happen in the next 6-12 months and are nervous for what’s to come.

Here’s the thing. Waiting doesn’t help. By making your move an all-or-nothing decision, you’re almost guaranteed to be stressed out by waiting for a correction.  Or you’ll be stressed once you put your money to work thinking that you invested at the wrong time.

You’re stressed either way.  This is a good way to ruin your portfolio and destroy wealth. It’s also a great way to lose out on sleep.

Investors have been claiming for years that interest rates are bound to spike higher from generational low levels and kill bonds in the process. And they were right (eventually), but it took much longer than anyone would have predicted.

When rates finally did shoot higher by over 1% in early summer how do you think investors reacted? They pulled more money out of bond funds than they have in years after they incurred losses.

So you could wait for a crash or correction in the stock market to deploy your cash. But how will you react if and when that actually occurs? You’ve been waiting for so long already that you may be inclined to talk yourself into waiting even longer.  I’ve seen this happen to countless investors since the bottom of the market in 2009.

The next crash is always right around the corner even though this has always been the case with financial markets.

It’s much better to have a plan of attack that you can follow no matter what the market does. This won’t allow you to thread the needle and perfectly put your cash back to work, but if you could do that, you’d be all set anyways.

I would break up your money into 4 (or 6 or 8 or 10…) equal pieces. Then just pick an interval to put your money back to work through dollar cost averaging. It could be monthly, every six weeks, quarterly, whatever works for you. Put your money back to work on your set intervals no matter what happens with the markets.

You’ll make some purchases at better levels than others, but the point is not to time the market perfectly. The point is to keep your behavior in check by setting up a plan ahead of time and not playing the waiting game while your retirement funds sit there and gather dust.

I think now would also be a good time to re-evaluate your financial advisor. Saving for retirement through your 401(k) means you have a time horizon of multiple decades (either until retirement or after you retire).

This means that worrying about how the next 6-12 months are going to play out won’t have much of an impact on the ending value of your portfolio. For your reference, since June, the S&P 500 is up roughly 9%, but that shouldn’t matter for this decision.

What matters is that you have a long-term plan and you follow it through the various market cycles, whether stocks are at all-time highs or not.

Your plan shouldn’t be based on your financial advisor being able to predict the next 6-12 months. It’s not a realistic long-term strategy.  They should be thinking about the next 6-12 years, at a minimum.

Carl Richards of the New York Times has shared in the past the three most important things a financial advisor can do for you:

1. Help me clarify my goals.
2. Remind me of my goals.
3. Stand between me and stupid.

Everything else is simply an offshoot of these three factors. You can have the smartest market strategist or stock picker in the business, but if they don’t know how to handle your goals and keep you (or themselves) from making dumb decisions then it doesn’t matter how much they know about the markets.

Your advisor needs to explain to you the main points of emphasis you should be focusing on.

This includes saving, asset allocation, global diversification, rebalancing to lagging or undervalued investments, keeping your costs low and making sure your risk profile and time horizon matches your ability and willingness to take risk in the markets.

Basically you create a long-term plan and focus on what you can control. You can’t control the market over the next 6-12 months. You can control how you react to the movements of the market and where you get your advice from.

Source:
Investor Pulse: Survey Results (Blackrock)

Further Reading:
Real Financial Advisors

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