Should You Sell All of Your Investments and Hold Cash in a Turbulent Market?

One question that often comes up for investors during turbulent market conditions is should I sell my investments and hold cash, waiting for the dust to settle?

While this may seem like an excellent idea, trying to lock in investment gains at all-time highs and patiently wait on the sidelines to buy back in at rock bottom prices, the reality and execution of such an idea are not always so cut and dry.

For most people, trying to time the market can be a tricky proposition, requiring them to have a deep understanding of the numerous market forces at play. Additionally, it is also difficult from an objectivity perspective. Often, even the most knowledgeable person, managing their own portfolio is too close to it emotionally and doesn’t possess the detached temperament necessary to make unbiased portfolio adjustments. Things get further complicated if they don’t have the time due to other obligations, to devote to monitoring their portfolio along with the markets, the economy, interest rates, etc.

For these reasons, it is often best left to professional investors and investment advisors who can help you strategically position your holdings in relation to your goals, risk tolerance, and the current state of the financial markets. The last item is equally as important as the other two because markets can shift unpredictably, adjust quickly, and often move in unanticipated directions.

For example, at the beginning of the global pandemic, we experienced extremely turbulent market conditions as companies and stock analysts began slashing revenue projections in response to quarantine restrictions and other pandemic-related shifts. This all came to a head in March of 2020 when the Dow Jones Industrial Average experienced its largest single-day point drop in history. This culminated in a series of volatile days, with the stock market ending the crash with three of the worst point drops in US history.

The outlook was grim, and many investors reacted to the market: either panic selling to avoid further declines or debating whether they should move their investments to cash. However, in this case, those who decided to hang on and buy with whatever cash they had on hand, were quickly rewarded as the market bounced back, making a surprisingly fast recovery and erasing the previous losses.

Unfortunately, individual investors who had sold and moved to cash were now in a situation where they had locked in losses and were holding cash while the stock market marched to new heights, unsure about if and when to buy back in. As a result, these investors were left behind as that market went into almost as extreme a rise as the extreme drop. The market, as measured by the S&P 500, fell about -35% from February 19, 2020, through March 23, 2020 (roughly a month). Then rose about +50% and fully recovered to its previous level from March 23, 2020, through August 19, 2020 (about five months).

As a CERTIFIED FINANCIAL PLANNER™ professional, part of the work I do for my clients involves strategically positioning their investments to handle market turbulence. It can often involve taking risk off the table when market trends change. This is not to be taken lightly and involves a detailed analysis of many market indicators.

When these market metrics are indicating higher levels of risk present in the market, dialing back volatility within the parameters of a client’s unique risk tolerance helps to smooth out the ride. Alternatively, when these market indicators exhibit lower levels of market risk, positioning portfolios in a more fully allocated mode makes sense, helping to “make hay when the sun is shining.”

As a financial planner, here are my top five tips to help guide investors through a turbulent market.

Five tips to guide investors through a turbulent market:

  1. Diversify your holdings.

    When it comes to investing, diversification is essential. At its core, diversification means spreading out your risk. So, rather than holding a single stock in a single company in a single industry, you can hold thousands of stocks from different companies in different industries.

    To use an analogy, the importance of diversifying your investments is like deciding between two different elevators.

    The first elevator is held up by a single cable, while the second elevator is held up by hundreds of independent cables. Choosing the first elevator means putting all of your trust in a single cable, which is a single point of failure. Alternatively, the second elevator has hundreds of cables, and your safety is not dependent on the success or failure of any single cable.

    Choosing to diversify your investments means that you are adding exposure to many different types of assets, reducing the risk of failure from any single asset or company.
  1. Re-assess your risk tolerance.

    The next step towards navigating a turbulent market is to assess or reassess your risk tolerance. Your risk tolerance is how much volatility, or up and down in your portfolio values, you’re comfortable with, and it can change over time. For example, as investors get closer to their work-free years and their nest egg grows, they may find less desire for growth and the accompanying swings in the markets and instead may prefer to focus more on income, security, and preservation.

    This is a normal shift, but it’s essential to identify this change before entering a turbulent market, as the turbulence can accentuate the risks you’ve taken in your portfolio. For many, the best way to assess their risk tolerance is through a one-on-one conversation with their financial advisor, where they conduct a risk assessment. 
  2. Align your risk tolerance and your investments.

    Once you’ve identified any changes to your risk tolerance, it’s essential to translate those into actionable steps you can take to adjust your investment portfolio. 

    For example, if you’ve determined that your risk tolerance has gone down since your last review, then you may decide that it’s time to lower the amount of risk you’re taking in your investment portfolio. For some, this means reducing their exposure to growth stocks while increasing their exposure to dividend-paying stocks and/or bonds. That way, as the stock market experiences turbulence, your overall portfolio may fluctuate less than it would have before, as you have more income-oriented investments to smooth out the ride.

    Finally, it is important to consider any tax ramifications of the portfolio adjustments that you decide to make. Selling securities in taxable accounts that have appreciated over the years, could lead to substantial taxes on the gains if you don’t plan properly. 
  1. Maintain healthy cash reserves.

    Investors can create a buffer between themselves and the ups and downs of the market by maintaining healthy case reserves. Often, cash reserves can provide a comfort blanket for investors, giving them time and patience to ride out a bumpy market.

    “The first rule of compounding is to never interrupt it unnecessarily” – Charlie Munger.

    In addition, cash reserves can help investors avoid interrupting the compounding of their investments. That’s because they will already have the funds they need to weather turbulent market conditions and won’t need to sell investments at inopportune times.
  2. Work with a professional.

    Lastly, one of the best ways to navigate market turbulence is to work with a financial planner who has been down this road before. An essential aspect of the work I do for my clients is providing them the peace of mind that their investment plan is strategically positioned in relation to current financial market conditions.

    I constantly monitor, adjust, and position client portfolios to provide them the highest probability of success, helping them enter their work-free years with confidence from a position of financial strength. While I generally don’t randomly suggest this approach for investors on their own, this is something I can offer as a professional with over three and a half decades of navigating financial markets.

I am here to help.

My work centers around helping you maximize the enjoyment you receive from your money, all while creating a financial and investment plan that works and is built to last. The work I do is multi-faceted, just like the clients I serve. If you’re interested in a free introductory conversation where I can explain how I help while hearing about your unique situation, then Schedule a Call Today.

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