If we set aside short-term traders who very often move into 100% cash positions, is there ever a right time for long-term investors with share portfolios to follow suit? In hindsight, we can all look back at periods in history when it would have been good to switch fully into cash but how many of us actually did so? Hindsight is a beautiful thing but is there ever a right time to go into cash in the real world?
Risk averse
You would have to say that anybody switching to all cash for their investments is risk averse but then again, is there not a risk of missing out on a rising market? The bottom line is that you need to feel comfortable when investing in any market, whether stocks and shares, property, etc, so it really does depend on the individual. In many ways it is a brave thing to move fully into cash because it means selling all of your investments and backing your own hunch that the markets are in for a down period.
When to sell?
If you have decided to go fully cash the next question is when do you sell your investments? Do you just sell them all in one go? Do you stagger sales? Do you sell your weakest investments first? In reality when you have decided to sell any share or any investment the only time you know the price is today. If you have decided to sell then there is no point delaying your decision, push ahead and bank as much cash as you can!
When to reinvest?
Whether you’re hunch that the markets were headed downwards was correct or not, there will come a time in the future when you will consider reinvesting. This then prompts the question, when do you reinvest and perhaps more importantly how do you reinvest? While many people will literally sell their investments in a relatively short space of time when they decide to move to cash, it may be sensible to drip feed your funds into the market when you decide to reinvest.
There will be stocks you been watching, you may decide to go for an index tracker fund or you may already have a list of stocks which you want to buy immediately. Once you decide your strategy you need to stick to it because it can be very easy to get distracted.
In the real world
In hindsight there have been times in years gone by when it would have been sensible to sell all of your investments and move into cash. The fact that interest rates are so low at the moment is irrelevant if the markets are in freefall and your strategy has proved correct. By simply maintaining your purchasing power going forward you will be outperforming your peers.
In the real world the vast majority of investors will keep a backbone of long-term investments, i.e. hedge their bets, while varying the cash element of their portfolio. Reducing your cash balance will boost your funds if the markets rise while increasing your cash balance will protect you on the downside. In a perfect world yes we would all sell everything and hold cash in the most difficult times but in reality it is simply a case of maintaining a long-term core of investments while varying, potentially sizeable, the cash element (or near cash element) of your portfolio.