“Hold or Buy?”—Navigating Your Financial Strategy Through Changing Markets

When it comes to personal finance, one of the most pressing questions you may grapple with is whether to “hold” your cash or “buy” into the market. Particularly in uncertain economic times, it’s natural to wonder if your hard-earned dollars would be better kept in cash or invested in stocks, bonds, or other market assets.

As a fiduciary, fee-only retirement planning firm in Greenwood Village, CO, we aim to guide clients through perplexing financial decisions like this. In this blog, we delve into the dynamics of “hold or buy,” highlighting the importance of a balanced approach and how you can manage your assets effectively under varying market conditions.

Not an Either/Or Decision

First, let’s understand that the decision between holding and buying isn’t binary. Your financial strategy shouldn’t hinge on one or the other, but rather on a thoughtful mix of both.

Financial experts often talk about a concept called “asset allocation,” which is essentially the strategy of dividing your investments among different categories like stocks, bonds, and cash. Your ideal asset allocation depends on your situation, including your financial goals, time horizon until retirement, and tolerance for risk.

For example, if you’re nearing retirement, you might want a larger cash allocation to protect against market downturns. If you’re younger with a longer time horizon, you might lean more heavily on stocks for their higher potential returns, accepting the associated volatility.

What About Market Drops and Rises?

In volatile market conditions, you may feel tempted to move your investments into cash. The fear of seeing your portfolio value decline can be overwhelming.

However, historically, markets have tended to rise over long periods. Unless you need money in the short term, staying invested usually makes more sense than trying to time the market’s ups and downs. Market timing often leads to missing out on significant gains when the market rebounds.

Conversely, when the market is flourishing, it’s easy to feel that you should be fully invested. However, maintaining some level of cash allocation in bullish markets allows for liquidity and flexibility. You’ll have the freedom to seize opportunities, such as buying a great stock at a lower price during a temporary market downturn.

Your Strategy Depends on Your Situation

So, how much of your assets should be in cash versus the market? One popular rule of thumb is the “100 minus age” rule, which suggests that the percentage of your portfolio invested in stocks should be 100 minus your age, with the remainder in less volatile assets like bonds or cash. However, as life expectancy increases and many of us need our retirement savings to last longer, many financial experts recommend adjusting that rule to 110 or even 120 minus your age.

This rule can serve as a starting point, but it’s important to tailor your strategy to your circumstances. Some people might be comfortable with more risk and thus a higher percentage in stocks, while others might prefer a more conservative approach.

An important aspect of asset allocation is rebalancing, which is the process of realigning the proportions of your portfolio to your desired allocation. For example, if the stock market performs well and your stocks now represent a higher percentage of your portfolio than you intended, you’d sell some stocks and move that money into cash or bonds to maintain your preferred asset allocation.

Final Thoughts

The decision to “hold or buy” is not an either-or proposition. Both cash and investments have their roles in a well-balanced portfolio. Your ideal mix of cash and investments will depend on your situation, goals, and needs.

Remember, the point is not to chase the highest returns or try to predict market movements but to build a balanced, diversified portfolio that can help you achieve your financial goals, such as a comfortable retirement. A fiduciary financial advisor can provide personalized advice tailored to your individual needs.

We offer a complimentary 15-minute call to discuss your financial situation and concerns and share how we may be able to help.

This material was written in collaboration with artificial intelligence (ChatGPT) derived from sources believed to be accurate. This information should not be construed as investment, tax, or legal advice.

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