If you own stocks, you were almost certainly pleased when the Dow Jones Industrial Average reached another all-time high this past week, but what if, for some reason, you have money sitting in cash that has missed the recent market rally? Should you capitulate and chase the market? Or should you hold onto your liquidity until the Dow retreats?
If you’re able to sense when markets reach or approach short-term tops and bottoms, just wait for the inevitable next correction and put your cash to work at the market trough.
The preceding sentence was fully satire. Warren Buffett can’t predict market tops and bottoms, and neither can you.
A more logical and practical course of action depends on the vehicles you use to invest in stocks and your typical decision-making process.
If you normally own individual stocks but are currently sitting on a bunch of cash, the answer is simple. Don’t spend energy trying to predict or time the overall stock market; focus on individual companies, trying to identify ones that are attractive at their current prices, irrespective of the level of the Dow. Admittedly, with the broad indices at all-time highs, finding individual bargains can be difficult. However, the process is no different whether the Dow is 10,000 or 20,000, or the S&P 500 trades at 10 times earnings or 25.
If you’re typically a mutual fund investor but are currently holding an uncomfortable amount of cash, ignore your past decisions. The fact that some of your money hasn’t participated in the bull market is, for current and future decision-making purposes, irrelevant. Nothing you can do can change that past.
What should you do now? If all of your money had been invested in stocks during the past several years, would you be selling stock funds and moving the money to cash? If so, perhaps your portfolio is already properly positioned for your risk tolerance and needs.
However, if you would be more likely to leave your account fully invested in stock mutual funds, then your portfolio ought to be fully-invested in stock mutual funds. You can spread your stock fund purchases over a predetermined, multi-month schedule, in order to eliminate some emotion and short-term luck from the process. But your past decisions are almost completely irrelevant to what you ought to do next, especially in a tax-deferred account.
You might object; if all of your money is invested in stock funds, you can’t take advantage of a price drop to buy at lower prices – when, or if they occur. If a drop does occur, however, there is no guarantee that you will successfully time your purchase at those lower prices. If you had that skill, you wouldn’t be sitting on cash now.
David Moon is president of Moon Capital Management. This piece originally appeared in the USA TODAY NETWORK.