The stock market is fun again this year. Most stocks are up, many are up big. Some stocks are up so much, it’s hard to justify their prices. It’s more likely than not they will fall. This brings us to a fun debate, what should you do with excess cash? My general advice is to keep buying.
Let me share some important details.
What money you invest matters. Only invest long-term money in the stock market. By that I mean money you don’t need in the next five years.
What you buy matters. I’m not excited about buying some of the biggest U.S. stocks, the ones most at risk of being overpriced. I’ll still buy some, but I’m much more excited about literally everything else in the global stock markets.
How you buy matters. At Cherry Tree we have two good choices for clients with a lot of cash. You can either invest it all right away to get to your target allocation or you can invest it in equal amounts over a series of months (also called dollar cost averaging). Both are good choices, although personally I always like to invest any available cash right away. Why? The market goes up 2/3 of the time. If I consistently invest all my available cash right away over my lifetime, I’m likely to have more money in the end.
Sitting on cash and waiting for a downturn is not a good option. Peter Lynch managed Fidelity’s Magellan Fund from 1977-1990. During that time, he doubled the return of the S&P 500 and grew the fund from $18 million to $14 billion. He had a great quote on market timing. He said, “Far more money has been lost by investors trying to anticipate corrections, then lost in corrections themselves.”
My anecdotal evidence as an advisor supports that. I’ve seen investors sit on cash for years while the market goes up. By the time the next correction comes, the market is still higher than when they started.
In a market like this, it’s tempting to get too cute and wait for a downturn to put cash to work. Don’t do it. Stick with your long-term plan. If that calls for you to buy stocks, do it.
About the Author: John O’Connor
John has more than ten years experience as an Investment Advisor. He focuses on devising and maintaining portfolios that meet individuals’ needs, investment research, and investment strategy. John has been recognized as a “FIVE STAR wealth manager” by Twin Cities Business Magazine 2016-2022. He is a CFA charterholder and CERTIFIED FINANCIAL PLANNER™ Professional.
Legal Disclaimer: These posts do not constitute an offer or recommendation to buy or sell any securities or instruments or to participate in any particular investment or trading strategy. They are for informational purposes only. CTW gathers its data from sources it considers reliable. However, CTW makes no express or implied warranties regarding the accuracy of this information or any opinions expressed by the author and may update or change them without prior notification.