At the time of this writing, the stock market (S&P 500) is fast approaching the previous February 2020 highs and I get the above question often given the recent run up of the stock market.
Investors want to protect thier equity investment and any gains. The premise of the question though, is a consideration to act and exit the market, and go all into cash. That sort of action results in attempting to time the market. Fundamentally, we know that attempts to predict and/or to time the market puts the investor in a zero opportunity to add additional profits if the market continues to go higher. If the reverse were occurring and the market and our investments have fallen in value, investors will often ask me – when is the right time to get in?
These questions represent the fact that many investors don’t know how to self-manage their investments and that is exactly why I created the TradeMyTrades Risk-Cash Indicator. I was that investor – no clue, no angle, and dependent on dollar cost averaging which had my total portfolio exposed to risk.
The TradeMyTrades Risk-Cash Ratios give the investor an ability to know what actions to take as the market moves up and down. The Ratio system was designed around 3 assumptions:
- The market will over-time continue to move up as it has done historically.
- The market will experience dips, pull-backs, and corrections.
- The long-term investor desires an investment system that provides a margin of safety.
The Risk-Cash Indicator is currently suggesting that a high of 80% of the investors portfolio should be invested in the market and at least 20% of the portfolio held in cash. If the stock market and investment equities continue to rise, the Risk-Cash Ratios will adjust to the price action and ultimately suggest lower percentages for the invested portion of the portfolio and higher percentages in cash. Thus, reducing the exposure of the portfolio to risk.
The Risk-Cash Ratios guide the investor to be proactive based on current market price action and is preparing us for the certain upcoming dip, pull-back, or correction. When the certain downturn occurs, an available cash pool to purchase equity shares at lower prices increases our potential for even higher future reward. The Risk-Cash Ratios automatically transfors the investor to become a Value Investor and is the key to ultimately buying low and one day selling high.
It should be emphasized that to attempt to time the market and exit too early diminishes potential portfolio growth. Caution is certainly advised given the current market. Use of the Risk-Cash Ratios regularly as a guide ensures the investor has a reasonable cash position for future purchases and a reduction of overall risk.
When the market and equity values move lower, the Risk-Cash Ratios will systematically suggest using cash to increase the invested portion of the portfolio. As the market and equities move up and down, the Risk-Cash Ratios adjust accordingly and keeps the investor in tune with the market and with a ‘margin of safety’.
Following the TradeMyTrades Risk-Cash Ratios are simple and requires little effort and minimal time. The TradeMyTrades Risk-Cash Ratios are flexible in that it can be used with continuous investment programs where regular contributions are made or it can be used with limited amount investments.
Contact us to learn more about the TradeMyTrades Risk-Cash Ratios and how TradeMyTrades can support your investments in the Thrift Savings Plan, 401k, 403b, IRA, or other.
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