One concept traders struggle with is that their investing capital doesn’t have to be invested at all times. There are times like the correction we’re going through now when you should have at least some of your money in cash in order to protect capital and to protect confidence.
1) One of the main reasons we should keep a larger than normal cash position during corrective markets is that 4 out of 5 stocks move with the general direction of the market…no matter how great the company. For example, during the financial crisis of 2008, Apple dropped from $200 down to $80, and that was right at the beginning of two of the biggest product launches in history (the iPad and iPhone).
2) Some of the best traders who ever lived, such as Jesse Livermore and Gerald Loeb, believe that you should only be in the market when probabilities are in your favor, and that the LESS you are in the market, the better.
3) According to the Harvard Business Review, since 1886, the US economy has been in a recession or depression 61% of the time. I realize that the stock market does not equal the economy, but they are somewhat related.
4) We always hear about dollar-cost averaging, buy and hold, and always be invested in the markets. These concepts sound great, but only during market up trends. When a correction comes, these concepts have hurt more investors than they have helped. For example, over the past 15 years we’ve seen two declines of over -50%! Keep in mind it takes a +100% gain to recover a -50% loss.
I simply respect and understand that it’s not always going to go up. When it declines, as it has the past few weeks, my goal is to protect client assets and to protect my confidence. This strategy of keeping large cash positions is more for traders and active money managers. If you are a long-term investor and don’t have the time to dedicate to your investments, I suggest you make the time…in case this correction gets worse. After all, it’s your money and if you’re not going to care for it, who will?
