Not everyone has a pile of cash lying around...... but, if you do whether big or small, then you might find it a little distressing that you aren't doing something with it. Do you still feel the sting from the economic crisis and are shying from investing? Well not to be Debbie-downer but there's a lot of people, including myself, that say that being in cash is your most risky holding. Many say that a significant reason for the recent stock rally is that investors feel safer in stocks than in cash. We have an environment where central banks are printing money like crazy. It is considered better to actually have an asset.. stocks, property, energy, and commodities versus having paper cash. Notice I haven't mentioned bonds as a safe investment. Remember when I asked where the next bubble was? Yes it's in bonds; a direct result of central banks artificially buying down interest rates. It is now difficult to get better than 2% interest on long-term bonds.. terrible. And when that bubble bursts and rates pop back up, the principle value of your bonds will sink. Take this advice and tread lightly on purchasing new bonds. (Tip : if you have older bonds, say pre-2009ish, they probably have a good interest rate and are worth keeping or selling now for a good profit).
Anyway, so back to the original question.. what to do with that lot of cash under your mattress? Well unfortunately there aren't too many places that you can safely put all of it at once. Investing is something that is best spread out over time.. a minimum of a year; better over many. Why? Because ultimately the markets are like the weather. You just can't predict with any high percentage where the market will be in 6 months or 2 years. Even most professional investors will admit that they are no good at timing markets. I personally think that, with experience, you can build confidence with some level of market timing, but it is still unreliable at best. A good strategy is to "ladder" your investment over time. This is why your 401k plans are effective because they "ladder" money month to month into the market regardless.. sometimes stocks are purchased at a high and sometimes at a low.. it averages. What you want to avoid is sitting on your pile until you get really hyped up over an investment, or until you think the market is at a major low. It will always surprise you.
Something else to be wary of... the "Pump and Dump" effect. Right now the stock market is at an all time high and a lot of people are excited about the profits in their portfolio. Now is a time when you will see a lot of "pumping", where financial services companies get everyday people excited to invest more money into the stock market... driving it even higher. Then, after Wall Street invests several short positions on the markets, coincidentally all sorts of negative financial news will emerge, which will scare the market down... making them money the whole roller coaster ride. If you follow financial news closely.. you will see the Wall Street machine driving the news media in this Pump and Dump roller coaster. You can defeat this by laddering your money into your investments over time.
As a final note, I do want to mention that as you ladder your money in, you can start to play with timing. Everything cycles up and cycles down..... if the market is in a visible trough, perhaps it will pay off to put in a little extra money at that time. Now that my portfolio is nearly fully vested, and more mature, I do focus more on waiting for troughs and downcycles. That should come later though! Don't just sit there collecting green paper.. come up with an extended schedule to give your money some legs.
Question for the week : What do you think will happen to the value of the US Dollar?
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