When the stock market has suffered a couple of really big slides in a row, like it did this week, the financial advice to those who are freaking out is always: Do not look at your account balances. But maybe, just this once, you should peek.
The advice still stands not to change anything in your portfolio; trying to time the market is a fool’s errand. What you need to look at is your cash.
The Federal Reserve’s most recent rise in interest rates and the flattening of the bond market means that there are better short-term options for your money than just a regular savings accounts. Also, a market dip is simply a good reminder that you should be looking at your accounts periodically to make sure you are sticking to the balance you want.
You might, for instance, look at your retirement or brokerage accounts and find that you have several thousands of dollars in dividends and yields that have not automatically reinvested. You might also have cash on hand in a savings account that has built up past the level you need for a buffer or for an emergency account.
How much cash is too much? While some financial advisers go with a percentage, like 10 percent of your net worth, Adam Grealish, director of investing for Betterment, prefers to look at it more like an equation.
“Make sure expenses are covered, then have a buffer, then an emergency fund, and then, after that, invest for time horizons,” he said.
For excess cash you need to keep on hand and safe, shopping is finally good for high-yield savings accounts and CDs.
“The sweet spot is one-year or two-year CD,” said Greg McBride, chief economist at Bankrate.com. Top rates are around 2.65 percent currently.
Anything shorter than a year CD is not that much different than a savings account, and anything longer is not giving rewards for tying up your money longer.
To create a laddering strategy, which pairs CDs of various durations, McBride recommended starting now with the shorter-duration CDs and then waiting until rates climb again to buy longer term.
Jeffrey Levine, a certified financial planner in New York, also recommended keeping excess cash in 3-month Treasuries, at around 2.26 percent, which have comparable rates to a one-year CD. You can buy those through your brokerage account.
What both Levine and McBride do not recommend right now are bonds, usually a safe harbor in a portfolio.
“I like cash better than I like bonds right now because of rising interest rates,” said McBride.
Buy the dip
If you have cash that you do not need to keep on hand, market dips are a good time to invest in stocks.
Cash that has accumulated in your retirement accounts is ripe for putting back in the mix, either all at once or spaced out over a period of time.
Inside of a retirement account, target-date funds will do this for you automatically. If you pick out your own mix of investments in your retirement accounts, most custodians will have an easy button to click to do automatic reinvestments and also automatic rebalancing so cash does not build up again.
For cash in brokerage or savings accounts, “Now’s a great time to put money to work,” said McBride, noting that on Thursday, stocks were 7 percent cheaper than they were two days earlier.
Betterment’s Grealish even recommended investing your emergency fund in a mix of stocks and bonds, because people tend not to touch that money for years.
But this runs contrary to most financial advice.
“If you don’t have adequate savings, then your cash needs to stay in cash,” said Greg McBride, chief economist at Bankrate.com.
As always, market dips should not cause panic. If you have a plan set up for your money, then just let it ride.
“This is why we diversify,” said McBride.
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