President-Licensed Investment Advisor
There is one question that is completely dominating the conversations I am having with my clients.
No social demographics apply. It doesn’t matter if the investors are young, old, wealthy, middle class, aggressive or conservative. Regardless of circumstance, this is the one thing everyone is asking. And it makes sense because from what I have seen there are few other factors that have a bigger impact on the performance of a portfolio.
I am talking about the dilemma investors with cash on the sidelines are confronting with the S&P 500 trading at an all-time high.
It’s always intimidating to buy at the high high. But it’s particularly intimidating this time around because stocks have seen huge gains in the last four years, with the S&P logging one of its biggest rallies ever after doubling from March of 2009. Take a look at the big rally below.
As you can see, the huge rally in the last four years looks a lot like the housing bubble and then NASDAQ bubble before that. And naturally that’s not real comforting to most investors sitting on the sidelines with a pile of cash.
There’s probably a thousand strategies to approach this dilemma. But we’re gonna keep it simple and focus on two: aggressive or conservative.
If you want to be aggressive then you can simply bomb in with whatever amount of cash you have on the sideline. Or maybe even bust it into two deployments: one now and one is six months in case the market goes down. There’s nothing wrong with going either route. Your biggest risk with this strategy is that the market falls shortly after sending a big chunk of cash into the market. But if you plan on funding your retirement account for years to come then you will still be buying lower prices on any longer-term volatility.
But a lot of investors have been burned by a volatile market, so they are hesitant to drop big chunks of cash into the market. And that makes sense. If that’s the case, then once again, there is a simple solution. Just bust up your deployment into 10-12 installments and send your cash into the market over the course of a year. This mimics the all-time best investment strategy: buying every month with a 401K or IRA so that even if the market does go down you are always buying lower prices every month. But keep in mind, this presents risk too. The risk of waiting to deploy is that stocks rise and your portfolio misses out on those gains. This is very important for investors to understand: when you are in cash, your risk is not participating in a rally.
Bigger picture, if you are a long-term investor then these kind of deployment strategies won’t make that big of a difference in your performance. But every investor has their own style, so there is nothing wrong with going the more strategic route and looking for a pullback in the market before deploying. But just remember that if you have lots of cash parked on the sidelines, your risk is that the market takes off and you could miss out on those gains.