What do you do with cash when you think the market is due for correction?
- Thread starter Sunny
- Start date
Textbook amount should be 6 months of expenses in an Emergency Fund, and I would recommend a little over 1 month if you are paid monthly in checking/saving combo.
Yes, the market might be due for a correction, but it might also go up to 20,000. I personally felt the same recently and pulled out for a while, but I thought about it further and realized that it is impossible to time. Though I understand the fear well.
The key to this is your ability to repair a portfolio should it go wrong. If you have $100,000 in brokerage and earn $80,000 salary with say... $25,000 in available cash flow (disposable income) if your job was stable you could quite easily go 100% equities regardless of the market, and if we had a 50% drop your salary can divert in to Dollar Cost Average.
However, if you have a very large amount of savings in relation to your income then the ability to repair is reduced - this is why they encourage retirees to shift towards higher bond and cash allocations - the brokerage account will have to provide all the dollar cost averaging itself. So it depends where you are in life...
Paying down your mortgage is always a good thing - though it often isn't the best thing from a pure financial perspective as there is arbitrage involved when looking at mortgage debt (tax favored) in conjunction with fixed income assets - Muni Bonds etc. The Bond route could be a good solution, the only real risk you have there is duration - you need to find Bonds that can be held to maturity to avoid loss of Face Value.
cocobird
Level 2 Member
It's always hard to know what to do. One of the most interesting studies performed at UC Davis discovered that in most cases, putting all the money in at once was generally the best. Why? There are different factors at work. One is the longer time the money is invested. Two is the old saying that you can't time the market. If you miss the very best days in the market, it's difficult to make it up. I also think there is the issue of discipline. Most people are unable to stick to a specific schedule of investment. So that means there is still the attempt to time time market by most people instead of steadily investing no matter what the market looks like.
The reason for this is correlated to my post about cashflow or assets to repair such an investment. If you are earning enough, then it makes no real difference between $100K and $1K but if it makes up a sizeable amount of your wealth and would take a long time to build then it is a different thing.
You could also simply dollar cost average your way into it - investing perhaps $20K every 3-6 months to average it back into the market.
Ultimately though, if that $100K is way out of whack with your income, then you should reallocate into a protective strategy with bonds to offset the equity risk.
ethiopianbuffman
New Member
Basically whenever the market looks like it is due for a correction, you got another 6 months of bull market. If you are really worried about correcting and losing money, then the best thing you could do is put trailing stops on your stocks. You may lose a little, but the whole goal is not to lose a lot.