Anyone prudent or lucky enough to have cash sitting in their account has been rewarded during the past two months as virtually every asset class has suffered. However, history suggests that the clock might be ticking when it comes to putting your cash to work.
You don’t need to rush out and use margin in your account to buy up every ETF. Instead, formulate an asset allocation strategy and a “buy list” so that when the time presents itself, such as the August 2015 sell-off, you’re not left scrambling or panicking.
Sitting on the Sidelines Has Its Risks
While it’s true that cash is a respectable position, it’s undeniable that younger investors with long-term investment horizons should seek higher returns. To do this, you have to invest and take risk in other corners of the market. Much to the surprise of many, staying in cash for too long bears its own set of drawbacks; that is to say, investors risk missing out on more attractive returns in other asset classes.
Cullen Roche at Pragmatic Capitalism does an excellent job of illustrating why sitting on the sidelines for too long could be a costly move. He writes, “If we look at the two primary asset classes, stocks and bonds, cash has only outperformed both in the same year 10 times in the last 90 years. So this is a pretty unusual event…When this occurs both stocks and bonds tend to bounce back very strong."
Stocks have rebounded on average upwards of 14% over one-, two-, and three-year horizons, whereas bonds have managed to average upwards of 6% over the same time periods.
Putting Your Cash to Work
Thanks to the proliferation of ETFs, investors have a multitude of vehicles at their disposal to help put their strategies into play.
Below is a list of suggested approaches to consider if you’re looking to put some cash to work in the current market environment:
- Invest abroad, but avoid China-related economies. If you need help getting started, Research Affiliates offers a free, useful tool that illustrates return/risk characteristics for a host of countries (that are accessible via ETFs).
To find the “best fit” fund, use the ETFdb Country Exposure Tool.
- Consider Inverse ETFs for hedging your portfolio without taking an outright short-sale position.
- There are also Bond ETFs that are well positioned for a rising-rate environment.
The Bottom Line
Thanks to the plethora of ETFs available, investors have more than ample choice when it comes to putting their cash to work, whether it’s through stocks, bonds, or virtually any other asset class out there. Remember that ETFs are designed to simplify the investment process, so don’t feel burdened to put money into any products that are outside of your comfort zone (whether it’s risk- or product-complexity related) just for the sake of putting cash to work.
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