Cash and stocks: how to decide

Since the 2008 financial crisis, the stock market has been in a long-term bull market, generating positive returns for several consecutive years. These returns are high enough to attract many investors to the stock market. This, coupled with the low interest rates offered by savings accounts, is attracting more investors to invest in stocks.

Let’s take a look at some important risk factors to consider when investing in cash and stocks and managing risk optimization.

Key points

  • Stocks have performed well in the past decade, and the interest rates offered by savings accounts continue to fall.
  • In order to seek income and return, investors are being attracted to make more risky investments.
  • However, investors must consider volatility and current interest rates when deciding the amount of cash and stocks to invest.
  • For investors hoping to gain exposure to stocks, a wise strategy is to include the dollar cost average (DCA) into an index fund.

Things to remember about stocks

The stock market has ups and downs, ups and downs, bull and bear markets are down. It is true that there have been many more ups and downs in the past few decades. During the 10-year period ending October 9, 2020, the S&P 500 Index rose by 195%, which is an annualized rate of return of +11.4%.

However, since it is difficult to predict where the market will go, the market timing is unwise. Conversely, instead of keeping cash on the sidelines, investors can allocate funds to index funds through the US Dollar Cost Averaging Method (DCA).

Having said that, one of the keys to increasing the portfolio is to minimize losses. The timing of the market for cash and strategic stock purchases is critical to minimizing losses.

Key considerations

volatility

Volatility is a key factor in investing in stocks. In other words, the speed or severity of price fluctuations. High volatility can cause investors to panic selling. Stock volatility may be beyond what many investors want to deal with every day.

Monetary Policy

Monetary policy is another factor that follows volatility. It can greatly affect the investment needs of the market and how investors allocate funds. Setting low interest rates can help stimulate borrowing, while higher interest rates will cause more investors to save. However, low interest rates mean lower interest rates for savings accounts and fixed income.

In 2015, the Federal Reserve raised the federal funds rate for the first time in seven years, eventually rising from 0% to 0.25%. Subsequently, the Federal Reserve set the federal funds rate range from 0.25% to 0.50% in 2015 to 2.25% to 2.5% in December 2018. However, the federal funds rate has been steadily falling since then and is now back to the range of 0% to 0.25% during the COVID-19 pandemic.

Corporate profitability

Corporate profits can be directly converted into stock prices. Although the company has been generating strong profits in the past few years, the epidemic is expected to put pressure on corporate profits for the foreseeable future.

This volatility has promoted broader corporate profit growth in the entire market, but has made stock investment generally attractive. As the global trade war intensifies, this situation may change, and trade will definitely affect the global world.

Or, many global international companies are also companies with the highest dividend payout ratio, which will also affect the decision of income investors between stocks and cash.

Cash and stocks

Investors deciding whether to invest in stocks or hold cash need to pay close attention to interest rates. One of the disadvantages of holding cash is that the purchasing power of your money will slowly deteriorate due to inflation. Currently, interest rates on savings accounts and Treasury bonds cannot keep up with inflation.

As of October 8, 2020, the 10-year U.S. Treasury bond interest rate is 0.78%. At the same time, the inflation rate for the 12 months ending in August was 1.3%. Nowadays, one of the big problems facing cash investors is that interest rates have been on a downward trend for many years and are still close to historical lows.

In other words, the following are some additional considerations for cash and stocks in 2020 and beyond.

  1. Is the company’s profits growing or stable? Many people may think that oil companies are a good choice because their stock prices have fallen. But buyers should be careful-the market may not be as stable and improving as some people expect.
  2. Is the current dividend payment stable? Dividends are a large part of the total return on your stock. If a company has a stable payout history and a relatively low payout ratio, then you might consider buying it.
  3. Given the current market conditions, is it safe to hold stocks in the next five years? In other words, do you have enough confidence in the value or growth prospects of the stock that it can withstand market fluctuations?

The amount you are willing to invest in cash and stocks will also be affected by your risk tolerance and investment goals. Investors who need funds for emergencies or are saving for high-priced purchases will want to invest more cash. Investors with higher risk tolerance and long-term investment horizons can put more money into stocks.

Bottom line

Where the stock market or the economy is heading and at what speed will vary depending on the investment professionals you care about. Although the solid returns after the financial crisis may not be replicated soon, the current low interest rates have prompted investors to stay away from cash.

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