August is traditionally a slow month in the markets, with low trading volumes and fewer headlines. A trade war between the world’s top two economies changes a lot.
After a rough week of stock-market volatility (^VIX) – the Dow had its worst one-day percentage drop of the year on Monday – the major U.S. indices are finally in the green. This is thanks in part to positive news out of China regarding its yuan and a better-than-expected trading report (China saw a 3.3% rise in exports compared with a year earlier).
While waiting for the next move in the U.S.-China trade dispute, investors might be tempted to cash out before tensions rise higher – and risk more damage to their portfolios. With so much concern over growth around the globe, here’s why one chief investment officer says it’s best not to cash out of stocks.
Reason #1: Tax concerns
“You shouldn’t be in the market at all then. Don’t ever go all in on cash,” Kim Forest, CIO of Bokeh Capital told Yahoo Finance. “If it’s a taxable account, you’re going to have to pay taxes on those stocks that have gains. That’s a big consideration.”
Reason #2: Predicting the future
“People are horrible at market timing. Nobody really knows the future,” Forest said. “You might think that having that cash is going to save you. But that cash is supposed to grow over time. If you’re in the market, you have to just get used to that asset value going up and down with the market.”
Reason #3: Keeping faith
Stocks go up over the long run: “You just have to believe that in time there’s going to be growth; and the growth is going to show up in those stocks and that is going to show in your portfolio,” Forest said.
A Fidelity report from earlier this year is a good example of why holding on is in most long-term investors’ interest: The investment giant examined the 1.64 million portfolios that were around at the end of March 2009, around the low point of the Great Recession, and that are still around today. In the decade between Q1 2009 and 2019, the average 401(k) balance, which had been $52,600, grew 466% to $297,700 – or an 18.93% increase per year.
Yes, having a cash cushion is good for major financial setbacks, but too much of it means you’ll lose purchasing power to inflation.
Says Forest: “Don’t go to cash, please.”