Are you worried about a correction in the near future since the S&P 500 Index has doubled since March of 2020 after the pandemic spurred selloff? Investor’s returns have been phenomenal during this time, but with the stock market being overvalued right now, it is very unlikely that the returns will double again without a correction.
If you also feel this way, you might be pondering pulling your money out of the stock market now to protect yourself from market volatility or reduce your risks. But keep in mind that cash typically goes down in value over time due to inflation.
Moving to cash right now at the time this article is written and the current inflation will slowly eat away at the value of your holdings and produce very little to no value to your portfolio. Most brokerage accounts pay very little interest and the average saving or checking accounts pay just a fraction of a percentage point. Some high-interest savings accounts such as the Ally savings or money market account can help you make some return on your cash while you are out of the stock market.
With your idle cash, you could pay off any high-interest loans or credit cards. Investing in an investment property is a good option if you want to be more hands-on being a landlord. Being a landlord could be more involved than you currently want to take on, so do your due diligence before purchasing an income property.
Buying bonds and cryptocurrency could be an option. Both have risks and different risks. Treasury bonds can effective at preserving capital than holding stocks and cash.
The consumer price index has jumped 5.4% higher in July 2021 versus a year ago (2020). Keep in mind that value stocks typically perform better in high-inflation environments, growth stocks tend to underperform, and all stocks are not impacted the same. So as one solution you could concentrate on moving your assets to value stocks versus moving to cash.
A better strategy might be to rebalance your asset allocation. If you are holding a lot of stocks, you could sell some stock and invest in more bonds and other less volatile assets. Making sure that you have an appropriate asset allocation for your goals, may help you keep from wondering whether it’s safer to pull your money out of the stock market.
It might be time to rebalance your portfolio after the massive run-up in stocks, especially if you are reaching the retirement age. Your age is a primary consideration in your allocation. With age, your risk tolerance decreases and you can’t afford any wild swings in the market.
If you adjust your allocation according to your age, can increase your wealth and meet your retirement goals. If you are in your 50s, consider allocating 60% of your portfolio to stocks and 40% to bonds. After you reach retirement, consider allocating 50-50%. You can adjust these numbers to match your risk tolerance.
The Rule of 100 and Rule of 110 could be some rules to consider. The Rule of 100 determines the percentage of stocks you should hold by subtracting your age from 100 and the Rule of 110 evolved from the Rule of 100 works the same way, but you subtract your age from 110 instead of 100. An example of Rule 100 is if you are 50, then hold 50% of your portfolio in stocks.
Also keep an emergency fund entirely in cash in case you need access to this money quickly.