Market volatility can be stressful.
During periods of unease, many investors start to explore their balance of cash vs. investments. It can be tempting to make knee-jerk decisions out of worry over a longer-term market slump, but we encourage you to keep perspective during turbulent times.
In this article, we’ll explore how you can make appropriate shifts based on personal circumstances, accounting for short-term requirements as well as long-term goals.
Tip: See how your retirement plan would have fared in historic market events with the free Personal Capital Recession Simulator.
How to Think About Your Cash Position in a Volatile Market
Here are some considerations about the balance of cash and investments in your portfolio during a volatile market.
1. Maintain an adequate emergency fund.
We generally recommend that most people should have an emergency fund covering three to six months expenses, but this number might vary depending on your age, retirement horizon, and other factors.
You don’t want to be forced to sell stocks in a down market to finance your day-to-day living expenses. Make sure you have enough cash to cover living expenses so you don’t have to tap your portfolio at inopportune times.
For retirees and near-retirees, setting aside cash in advance of any market movement is especially important. This gives you control over your cash flow during a down market.
2. Make sure your cash isn’t idle.
If you are holding a little extra cash during uncertain markets, make sure it’s in a high-yield savings account ensured by the FDIC. These accounts pay higher returns than traditional savings accounts and allow for complete flexibility. For investors with a longer timeline, short-term U.S. Treasuries, certificates of deposit (CDs) or short-term bonds may also provide an interim solution.
3. Resist the urge to liquidate or heavily reduce equity positions.
Keep in mind that market drawdowns are a natural part of the economic cycle. These uncertainties can cause anxiety. However, moving to cash is primarily a defensive move that makes sense for needs with a relatively short timeframe. In order to meet long-term needs, investors should maintain a balanced amount of equity risk.
How much you should have in cash is a very personal question.
Instead of worrying about the next market pullback, we recommend that investors take the time to examine their overall investment portfolio and cash positions.
While the above tips can help you consider the right mix for you, consulting with a financial advisor is the best way to get an objective opinion on your portfolio.
If you’re worried about the market’s ups and downs, download our free guide to market volatility to get actionable tips from our financial advisors.