Sitting on Cash? A Financial Plan Helps You Decide When and Where to Invest

  • Personal finance
  • 11/6/2019
Businesswoman Going Over Financial Plans with Couple

A goals-based approach to financial planning gives you options and gets you past the indecision on what to do with idle cash.

Whether it comes from the sale of a business, an inheritance, a lump sum payout from a pension plan, or some other source, having excess cash to invest is a great problem to have. Most financial advisors will tell you to put that money to work as soon as possible, but second guessing and inaction often stand in the way. When the market appears to be high, you may be inclined to wait for the next correction. When markets are falling, you may think it prudent to wait for them to fall just a bit further.

Stressing over the mathematical merits of dollar-cost averaging versus investing the entire sum immediately versus waiting for a market correction is completely moot without a thoughtful plan to follow.

When clients ask what to do in this position, there is no universal strategy that can be implemented with a simple flick of a magic wand. Everyone comes to the situation with a different risk profile and a different story of how they came into a large sum of cash. What you don’t want to happen is for those funds to become so intimidating that you simply freeze and do nothing.

This is where a financial adviser can help you develop and implement a plan that allows you to make decisions with greater confidence. By testing multiple portfolio combinations, return assumptions, and worst-case scenarios, you can feel comfortable knowing that you have taken steps to withstand the next bear market by sticking to your plan.

“Investing is simple, but not easy”

That quote from mega-investor Warren Buffet has never been more relevant than during the current bull market, perhaps one of the most unloved bull markets in history. The media have proclaimed the upward trend dead several times, and each new high has been met with a stronger and stronger sense of skepticism.

The Easy Money Has Been Made S and P Total Return

So what should you do if you’re sitting on a pile of cash in a market like this? There are those who will advise you to take a certain action based on the current shape of the bond yield curve (have you heard that it’s inverted?) or the elevated price-to-earnings ratios across most major stock markets.

When standing on the precipice, finally ready to invest that excess cash, you may still have questions in the back of your mind: What happens if I invest at the very top of the market? What if my account is down 20% only three months from now? But stressing over the mathematical merits of dollar-cost averaging versus investing the entire sum immediately versus waiting for a market correction is completely moot without a thoughtful plan to follow.

Have patience and a plan

For an example of what patience and a plan can do for you, let’s flash back to October 2007 when the S&P 500 was trading at an all-time high. As the Great Recession unfolded, a new investment into a 60/40 balanced stock/bond portfolio would have fallen nearly 32% from the highs in October 2007 to the lows in March 2009. However, if you were able to remain invested through the worst bear market in more than 75 years, that 60/40 portfolio would have recovered in only three years. Even an all-stock investment in October 2007 would have exceeded its initial value by March 2012.

Portfolio Returns Equities vs Equity and Fixed Income Blend

We all know that even the professionals cannot successfully time the market, but that doesn’t stop us from turning on CNBC the moment things start to turn sour. Without a plan of action, even that advice from the media begins to feel prudent. But those who have given real thought to their goals and armed themselves with a well-built financial plan are the ones best able to shut out the noise.

How we can help

When it comes time to decide what to do with that idle cash, a financial plan can free you from indecision and give you the necessary context to stay the course. Our wealth advisory professionals will help you watch over your plan and monitor your financial situation to make sure you stay on track to achieving your goals.

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