If you’re panicking in the current stock market turmoil and feeling the urge to sell, you’re not alone. But panic selling can hurt your long-term goals and leave you out of the game when the market recovers. Instead, in this time of declining markets, you actually might want to buy. Consider this famous Warren Buffett quote: “Be fearful when others are greedy, and be greedy only when others are fearful.”
In other words, the fear circulating in the markets could be a signal that now is a good time to invest excess cash.
While you don’t want to try to time the market—it’s a guessing game as to whether stock prices have hit their bottom or will continue to fall—it’s true that you can buy stocks at a much lower price than they were even a few weeks ago. Investing when markets are down can be a key part of your long-term buy-and-hold strategy. The returns could potentially yield significant returns, as they did following the 2007-2008 financial crisis.
To that point, Warren Buffet noted in a recent CNBC interview, “Most people are savers; they should want the market to go down. They should want to buy at a lower price.”
He added: “We’re buying businesses to own for 20 or 30 years … and we think the 20- and 30-year outlook is not changed by the coronavirus.”
Who Should Allocate Excess Cash to the Market?
Although bear markets like the one we’ve entered can be an opportune time to invest excess cash, not everyone should follow this strategy.
Your ability to invest more money into this market shouldn’t be determined solely by how much money you have in your bank accounts. You should also account for factors such as your job and income security.
For example, if you’re a business owner who had to temporarily close your business due to the coronavirus crisis, you may need liquidity to navigate this difficult situation. If you work at a B2B software company, you may be enjoying job security since the number of people working from home during this pandemic may create more demand for your product.
Regardless, you should have an adequate cash cushion that will cover your expenses in case your income sources dry up.
Another important factor is your age and retirement timeline. If you are retired or are getting close to retirement, you should invest excess cash only if you are unlikely to spend all your money even in worst-case scenarios or if you have a sufficient cash cushion to weather long economic downturns.
On the other hand, if you are a younger professional with job security, a sufficient cash cushion, and years to spare until you need the money, you may want to consider investing excess cash for the potentially significant growth over the long run.
How to Invest Excess Cash into the Market
As fiduciary financial advisors, we adhere to a long-term investment strategy based on the principle of diversification. Diversification—or owning a broad base of assets and asset classes—can help minimize long-term risk. When selecting potential investments for our clients, we make sure the assets will help maintain diversification in our clients’ portfolios.
You can help achieve this by investing in funds that cover a broad swath of the market. You’ll be able to reduce your risk over the long run, won’t have to play an ineffective guessing game of picking individual stocks, and potentially realize a return on your investment when the markets recover.
For example, rather than trying to decide whether Apple or Microsoft will perform better, you could invest in a fund that covers the technology sector. That way, you gain exposure to both companies. You’ll also own shares in many other companies and can enjoy their potential gains while insulating yourself against the risk of any individual company faltering.
Before investing into a down market, you should also evaluate your risk tolerance. In bull markets, many people believe that they are risk tolerant only to find out they are prone to panic when markets drop. It is times like these that are the real test. That makes now, in a highly variable market, an ideal time to calculate your stomach for risk.
Consider talking with a financial advisor who can help you determine the amount of risk and volatility that you are comfortable with so you can avoid panicking, stick to your long-term plan, and meet your overall personal financial goals.
This material was prepared by Kaleido Inc. from information derived from sources believed to be accurate. This information should not be construed as investment, tax or legal advice.