Stocks fell on Friday after Federal Reserve Chairman Jerome Powell gave every indication that the central bank will continue to raise interest rates to fight inflation.
Investors with a weak stomach for volatility may wonder if it’s better to stay in cash in these volatile markets. In the continuation of our series, “What to do in a bear market,” Yahoo Finance asked experts whether holding cash is wise given the way inflation eats away at savings.
Do you recommend holding cash in these volatile markets, even with high inflation levels?
“Even with these volatile markets coupled with high inflation, we believe investors should continue to invest. Cash is hard to time perfectly, since the market is hard to time perfectly,” Greg Bassuk, CEO of AXS Investments in New York, told Yahoo Finance. whereas if the market soars higher, they regret holding cash.”
Basuk pointed to the July rally as an example of the dilemma of holding cash. With U.S. stocks up 9% in July, one of the best months for stocks ever, “cash allocations were a source of investor regret. Solution? Stay invested.”
Some strategists stress that continued higher interest rates are poised to push markets lower in the coming months. So cash on margin could be used for a lower entry point.
At the end of the day, one expert pointed out, investors should own a portfolio that matches their financial goals and personal tolerance for market volatility.
“For investors with relatively short time horizons, such as retirees, some level of cash holding may make sense,” said James Solloway, Chief Market Strategist at SEI. “The same may be true for investors with a relatively low tolerance for market volatility, but this comes at a cost given that cash tends to be the lowest performing financial asset class over any significant period of time.”
Solloway adds that any decision to exit the market “must be relatively timely and requires a subsequent and similarly timely decision to re-enter the market. And when you consider that the true tops and bottoms of the market can only be identified much later In fact, it should become apparent that market timing efforts are far more likely to impose net costs on an investor’s portfolio over the long term.”
If holding cash is recommended, how much portfolio?
“While we do not recommend holding cash for investment purposesit is prudent for investors to maintain moderate cash positions of around 5% of their portfolio for the ability to quickly put ‘dry powder’ to work in these volatile times,” said Bassuk of AXS Investments.
One expert says that “cash should only be kept for known expenses that will occur within the next 3-6 months.”
“We’d rather have short-term investment-grade fixed income today than cash for anything more than short-term liabilities,” Alex Chaloff, Co-Head of Investment Strategy at Bernstein Private Wealth Management, told Yahoo Finance. “While short-duration instruments are outperforming cash today by a significant margin, neither are keeping pace with current high levels of inflation.”
Keeping a retirement timeline in mind is also important.
“For those with a long way to go until retirement, and given the current economic environment, an emergency fund with 6-12 months of reserves is usually sufficient,” Rachelle Tubongbanua, a private wealth advisor at US Bank Private Wealth Management, told Yahoo Finance. “For those closer to retirement or retirement, an emergency fund with a 12-24 month reserve is usually ideal, especially during volatile times like we are experiencing today.”
Is there a better alternative than holding cash?
Depending on your time horizon and risk tolerance, there are investment options available other than holding cash.
“If you’re looking for a non-emergency fund option that’s relatively short-term and low-risk, a staggered bond portfolio (bonds maturing on different dates) can provide that,” Tubongbanua said. “The bonds are backed by the full credit of the government and there is also a tax benefit as the income is exempt from state and local taxes.”
Tubongbanua noted that bond yields have risen sharply in recent months and provide better returns compared to savings or money market accounts.
In addition, liquidity alternatives are also a way to remain exposed to stocks during uptrends while still offering hedging.
“Liquid alternatives represent the best of both worlds: A way to stay invested for upside participation in the stock market with built-in risk mitigation needed to weather the volatile and high inflation storm,” said Bassuk.
Click here for the latest stock market news and in-depth analysis, including the events that move stocks
Read the latest financial and business news from Yahoo Finance
Download the Yahoo Finance app for apple the Android
Follow Yahoo Finance at Twitter, Facebook, Instagram, Flipboard, LinkedInand YouTube