Thursday, April 27, 2017

Strategies for Investing Cash

Written by  Woody Derricks, CFP®

The stock markets are at all-time highs and don’t appear to be ready to change course any time soon. If you have a rollover from an old 401k or some saved cash, you may be asking yourself if this is the right time to invest that money. You may want to have your money invested right away so that you don’t miss the potential upside of the market, or you may want to wait on some or all of your investing for fear that the market may pull back. When clients come to me with cash to invest, I typically offer them three options: invest the money all at once, invest over a period of time, or hold off and invest later. Each option has its pros and cons and should be evaluated to determine which is most appropriate for you.

Invest the money all at once: This strategy is akin to jumping into a pool and doesn’t work for everyone. I find that investing all of the money at once works better for people who have a rollover from their 401k or other employer retirement plan. The reason for this is that the money was already invested and has only been out of the market for a brief period of time. This is simply reinvesting the proceeds.

This strategy also potentially works for clients with higher risk tolerances. They are more inclined to not want to miss any opportunities in the market and are willing to accept some short-term losses should the market pull back.

The advantage of this is investing all of your money with the potential to see it all rise over time. The obvious disadvantage is that the market could pull back and you could see immediate losses in your account.

Invest the money over a period of time: This strategy is akin to gradually walking into a pool. For people with excess cash or clients who are more moderate risk takers, investing money once a month for three, six, or 12 months may be the ideal fit. By investing over a period of time, you’re dollar-cost averaging the money into the market. This allows you to get some money in right away if the market goes up and to allow you to buy into the market if it goes down over a period of time.

While this strategy doesn’t fully protect you from a market decline, it might soften the impact versus investing it all at once. It also limits your upside should the market continue going up from day one.

Hold off for now: For market timers, holding off for the time being and waiting for a market decline to invest the funds is also an option. Market timers are hoping that they are correct in projecting a market decline and that they’re able to buy at or near the market bottom. This strategy might provide some downside protection, but might miss out on potential gains prior to a market drop and relies heavily on the investor to accurately time the market bottom. Doing this may lead to missing upside and buying in at a higher price than where the market currently stands.

None of these strategies assures gain or protection from loss. Each has its advantages and risks and should be weighed in coordination with your overall investment objective with your financial professional. You may even find that a combination of these strategies is ideal for you.

Dollar cost averaging involves continuous investment in securities regardless of fluctuation in price levels of such securities. An investor should consider their ability to continue purchasing through fluctuating price levels. Such a plan does not assure a profit and does not protect against loss in declining markets.

Stock investing involves risk including loss of principal.

All indices are unmanaged and may not be invested into directly.

Woody Derricks, CFP®

Woody Derricks, CFP®

This article is for informational purposes only and is not intended to provide specific advice to any individual. Consult your legal, tax, and/or financial advisor to determine what is appropriate for your situation. Securities offered through LPL Financial, Member FINRA/SIPC.


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