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Hi all,
I am a new sunscriber. Would like to get your thoughts on the topic of increasing cash position vs. stay invested when the market is high. As we know, the current US market is fully / over-priced, Mr. Warren Buffett has been increasing Berkshire’s cash position and pausing major buying (in the US market). There are tendency to exit equity market (or reduce position). On the other hand, we often heard we should stay invested and not interrupt the compounding process of equities – there are cases that if investors stay the course, even if there is a crash, many of the good companies their stocks went back to yield very good returns . So how do we make sense on the current market, what might be the prudent approach? Would love to have your thoughts.
Thanks. -Daniel
Doesn’t it matter too what the time horizon may be for needing or using the investments and what they are to be used for?
I think that definitely matters in terms of whether the money should be in stocks in the first place. But that seems more a question of “should I pull this money from the market now because I’ll soon need it,” not “should I pull this money now because the market is overpriced.”
That affects the asset allocation.
“As we know, the current US market is fully / over-priced…”
I don’t know that.
“Mr. Warren Buffett has been increasing Berkshire’s cash position and pausing major buying…”
He’s doing that for a different reason than you or I should.
“There are tendency to exit equity market (or reduce position).”
Charlie Munger would say that he became rich because so many people made investing mistakes. This would be one such.
“On the other hand, we often heard we should stay invested and not interrupt the compounding process of equities…”
That is the ticket to amassing wealth.
“… what might be the prudent approach?”
The answers are above.
I think you have gotten some salient advice already so I will try not to repeat what has already been said.
I think trying to hoard cash because the market is overpriced and then deploying that cash when you think the opportunity is there is fool’s gold. You might have a moment or two, but over time the sheer anxiety of trying to predict when you deploying that cash vs when to sell equity is not worth it
Keep 2-3 years liquidity for expenses and leave the rest invested in a manner to support your goals. The liquidity helps you avoid selling in down markets and you can have significant gains during the boom times. Good luck.
Step one: determine your asset allocation
Step two: invest accordingly in low cost index funds
Step three: do nothing
You might rebalance occasionally – I consider it once a year when I take my RMDs, some people wait for a 5% drift in their allocation. If you have new money to invest, read Jonathan’s recent article on dollar cost averaging.
Some people have trouble with step three. I have found that benign neglect allows compounding to work its magic.
Daniel, I’m only speaking for myself here. I gave up trying to figure out the markets, I just don’t have the energy… Or the smarts. I can’t figure out when the bubble is going to burst, or when we hit the bottom.
When I go to Google finance and click on any index, and look at the maximum time period, it seems like staying invested works pretty darned good.
If you raise this cash, and the market retracts 20%, would you have the courage to pour it all back in or be paralyzed by the fear that another 20% move is coming?
Most people don’t have the gumption to make that kind of move and end up missing the top and don’t participate in the rally off the crash.
In the past, I’ve overweighted stocks during stock market declines and have done so with success. It’s a strategy I describe here:
https://humbledollar.com/2022/10/my-investment-sin/
By contrast, I have no sense for whether and when to underweight stocks during periods of rising markets. Unlike market declines, where the most you can lose is 100%, there’s no upper limit on a market rally and hence no obvious point at which to say “sell.” Moreover, valuation metrics don’t offer a reliable sell signal:
https://humbledollar.com/2019/11/signal-failure/
Thus, while I might tactically over-allocate to stocks during a market decline, I wouldn’t be inclined to under-allocate during a rally. Instead, I’d settle on a target mix of stocks, bonds and cash and rebalance back to that mix as the stock market rises.