It seems like nobody believes me. The market can only go up right? If you believe that, the top 1% in wealth will get your stock market investment.
Why? Because it doesn’t feel good to “lose money”. I quote that because I mean market value. Most novice investors will sell like crazy when the market starts going down out of panic.
Rather than put yourself in that position, raise cash now. When the market drops, don’t panic, that is what the cash is for.
Cash Will Make Your Loss Less
If you are holding 30% in cash, any loss will be on only 70% of your brokerage account. Let’s say the market loses 30%, you only lose 21%.
Cash Will Allow You To Buy At Better Prices
Once the market drops, and it will drop in time, the prices for the same shares of stock you hold will go down in price. Think of it as a sale on your 10 companies. Time to buy.
However, it is better to buy in smaller chunks over a few weeks so that your average price is lower. Often a big drop is followed by other drops.
Cash, Not Treasury Bonds
I have no idea what will happen to treasuries during a market downturn. Logic says they will go up in value, but they may not. Best to hold in investable cash. Not gold either.
Doesn’t Cash Depreciate?
Yes, it is called inflation. If you hold your cash for long enough you will lose value. Think of it more like an insurance policy, you pay hoping you never need it.
What Happens If I Just Don’t Sell?
There are two ways to make money in the stock market: Pick the right companies, and buy low, sell high. Often the best opportunities are when stock prices are the lowest.
The real problem though is that you really have to grow thick skin to do nothing during a 30, 40, or 50% downturn. It really doesn’t feel good. And those prices may take many months to recover.
Won’t I Lose To The Upside While I Hold Cash?
The time to raise cash is when the market is gaining like crazy. Everyone is euphoric. They think there is no way to lose money. I see that a lot right now. Holding cash means you will not participate to the upside as much as you could. But you will still make money as the market peaks because you have 70% stocks. Don’t be greedy.
When Will The Market Drop?
No idea. We hold cash for when it does drop but we never try to predict the top. If I tried to, I would be wrong 100% of the time. I believe we are headed for a big drop at some point, don’t know when.