Should individuals invest cash now?

A common question that we been receiving over the last several months from prospects is “Is it too late to invest in the stock market”?  There are a number of people who have maintained very large cash positions since the great recession that ended in early 2009.  These people have watched as the S&P 500 index has gone from 677 to 2,000.

We deal with that question by first having the individual clarify what it is they’re trying to achieve.  Often individuals have some long-term goals and objectives such as leaving a legacy or ensuring that they do not outlive the money which requires investing in the stock markets.  Last week’s post dealt with “not outliving your money”:  Will-Your-Money-Last-as-Long-as-You-Do

However, even when they come to understand the necessity, they are reluctant to re-position a large amount of cash into the stock market especially as the stock market continues to hit record highs.  

So what should investors do now with cash?

Rose A 6-22-12 1As we are behavioral advisors,  we look not just to the financial understanding, but also to the human element involved in investing.   While we understand that investors would expect to earn a higher rate of return long-term for investing all of their investable cash now, we know there’s a behavioral aspect involved in that decision.

People tend to have a more pain when they have made a decision that appears to be incorrect.  If a person has decided that they have hundred thousand dollars that should be invested in the stock market in order to generate the returns that they will need to reach a certain goal, should they invest today or invest through time?

If they invested the entire $100,000 as a lump sum into the stock market today and the market suddenly declines, then they maybe extremely regretful.  If this regret results in a decision to reverse course and sell the position, the negative result will hurt the investors long-term returns.

If on the other hand, we have the investor invest the money systematically through time some of the regret is lessened.  By investing $10,000 a month over 10 months or $20,000 for five months, the investor can lessen the feelings of regret if the market declines initially while still allowing them to invest the cash in a better long-term investment.  This systematic investing is known as dollar cost averaging.

Does it make sense to dollar cost average? It does for many individuals. Standard financial analysis says dollar cost averaging will result in lower expect returns. However from our experience, dollar cost averaging will likely give investors a better expected investment experience. This investment experience results in far superior long-term actual results for the investor.

As I often say, I’m not trying to help investors have the best investment portfolio, but I’m trying to provide the best investment portfolio and investment experience for them in order to reach all of their lifetime goals.  By doing so we help them relate money to life.  Work with a financial coach who can help you with your behavioral investing.

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About Dan Crimmins

Dan Crimmins, co-founder of Crimmins Wealth Management, is a financial coach and fee only financial planner. Have a financial question? ASK DAN

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