Shares were lower on Friday after Federal Reserve Chairman Jerome Powell gave every indication that the central bank will continue to raise interest rates to fight inflation.
Investors with a weak stomach for volatility may wonder if it’s better to stay in cash during these volatile markets. In a continuation of our series, “What to do in a bear market,” Yahoo Finance asked experts whether holding cash is wise given how inflation eats away at savings.
Do you recommend holding cash during these volatile markets, even with high inflation levels?
“Even in these volatile markets coupled with high inflation, we believe investors should stay invested. Money is hard at the right time because the market is hard at the right time,” Greg Basuk, CEO of AXS Investments in New York, told Yahoo Finance. “Put another way, if the market goes down, investors may want to to hold more cash, whereas if the market catapults up, they regret holding cash.”
Basuk pointed to the July rally as an example of the dilemma of holding cash. With US stocks up 9% in July, one of the best months ever for stocks, ‘cash has been a source of investor remorse. Answer? Stay invested’.
Some strategists stress that continued higher interest rates are poised to send markets lower in the coming months. So the cash on the side can be used for a lower entry point.
“We continue to be very defensive, with a lot of money. We want to see where they[TheFed}goin”EddieGhabourmanagingpartneratKeyAdvisorsGroup[TheFed}goin”EddieGhabourmanagingpartneratKeyAdvisorsGroup[Федералниятрезерв}“ЕдиГабуруправляващпартньорвKeyAdvisorsGroup[TheFed}goin”EddieGhabourmanagingpartneratKeyAdvisorsGroup said recently on Yahoo Finance Live. “Our money is on it tightening higher and longer than what the market is actually positioned for.” And then we’ll have a better entry point in the 4th quarter to dip back into the equity side.”
At the end of the day, one expert emphasized, investors should hold a portfolio that is well-aligned with their financial goals and personal tolerance for market volatility.
“For investors with a relatively short time horizon, such as retirees, some level of cash may make sense,” said James Soloway, chief market strategist at SEI. “The same may be true for investors with a relatively low tolerance for market volatility, but this comes at a cost, given that cash tends to be the lowest-returning financial asset class over any significant period of time.”
Solloway adds that any decision to exit the market “must be relatively timely and requires a subsequent and similarly timely decision to re-enter the market. And when you consider that actual market peaks and troughs can only be identified long after the fact, it should become apparent that attempts at market timing are much more likely to impose a net cost on an investor’s portfolio over the long term.”
If it is recommended to keep cash, what part of the wallet?
“Although we do not recommend cash on hand for investment purposesit is prudent for investors to maintain modest cash positions of around 5% of their portfolios for the ability to quickly apply ‘dry powder’ in these volatile times,” said Basuk of AXS Investments.
One expert says that “cash should only be held for known expenses that will occur in the next 3-6 months.”
“We would rather own short-term long-term fixed income investment classes today than cash for anything longer than short-term liabilities,” Alex Chaloff, co-head of investment strategy at Bernstein Private Wealth Management, told Yahoo Finance. “Although short-duration instruments today outperform cash by a significant margin, neither is keeping up with the current high levels of inflation.”
Consider the retirement schedule is also important.
“For those who have a long way to go until retirement, and given the current economic environment, an emergency fund of 6-12 months of reserves is usually sufficient,” Rachel Tubongbanua, private wealth advisor at US Bank Private Wealth Management, told Yahoo Finance . “For those closer to retirement or in retirement, an emergency fund of 12 – 24 months of reserve is usually ideal, especially in volatile times like what we are experiencing today.”
Is there a better alternative to holding cash?
Depending on your time horizon and risk tolerance, there are investment options available besides holding cash.
“If you’re looking for a non-emergency fund option that’s relatively short-term and low-risk, a laddered Treasury portfolio (bonds with different maturities) can provide that,” Tubongbanua said. “Treasuries are backed by the full faith of the government and there are tax benefits as the income is exempt from state and local taxes.”
Tubongbanua noted that government bond yields have risen dramatically in the past few months and provide better returns than savings or money market accounts.
Furthermore, liquid alternatives are also a way to stay exposed to stocks during uptrends while offering hedging.
“Liquid alternatives represent the best of both worlds: A way to stay invested for upside equity market participation with the built-in risk mitigation needed to weather the volatile and high inflation storm,” Basuk said.
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