Investors have moved back into cash … the danger of being on the sidelines too long … do you have a plan to get back in? … a special event with Luke Lango tomorrow night
Stocks or cash?
That’s the core question many retail investors are struggling to answer today.
Recently, “cash” has been winning. The amount of investor capital sitting in money-market funds just notched an all-time high.
Here’s Bloomberg from its article titled “Money-Market Fund Assets Climb to Fresh Record $5.58 Trillion”:
About $14.37 billion poured into US money-market funds in the week through Aug. 30, according to data from the Investment Company Institute.
Total assets reached $5.58 trillion, versus $5.57 trillion the previous week.
Investors have piled into the money funds ever since the Federal Reserve began one of the most aggressive tightening cycles in decades last year to quell runaway inflation.
Now, on one hand, this is great. Today, investors can earn 5%+ on their cash from money market/savings accounts. This was unheard of just a few years ago as rates hovered near zero.
On the other hand, this leaves those same investors with a lingering question…
How and when will you get back into the stock market?
While holding cash is comforting, too much time on the sidelines will derail your investments goals
Getting out of stocks and into a safe 5% cash vehicle comes with an enormous opportunity cost.
The average yearly return of the S&P over the last 50 years is roughly 10.7%, with some variation depending on the study.
If we begin with a $100,000 lump sum and let it compound for 30 years at cash’s 5% rate verses the S&P’s 10.7% average rate, the difference is staggering.
Cash ends up climbing to $432,194.
The S&P crushes that, compounding to $2,110,710.
That’s a differential of nearly 4X.
Bottom line: If you want true financial security and a “spend as you want” retirement, you need a higher-returning investment vehicle to get you there.
So, circling back to today’s question…
If you’re not in stocks right now, what’s your plan to get back in?
The challenge of buying when you missed the first bullish move
A few years ago, before the introduction of ChatGPT, I put some money into C3.ai. It’s an AI stock that’s been on the receiving end of a tsunami of investor capital this year.
Unfortunately, I didn’t benefit from it.
Long before this year’s 300% price explosion, C3.ai was the victim of heavy selling pressure. Or rather, I was the victim of its heavy selling pressure.
In 2022, I hit my stop-loss with C3.at and sold at a loss. The following January when the stock erupted, I didn’t just suffer FOMO (the fear of missing out), I was tortured by what I’ll call ROMO – the reality of missing out. Had I held, I would have been sitting on some nice gains.
Though I wanted to buy back in my emotions stopped me. One of two thoughts got in my way:
– (As the stock was surging) The price has run up too much, too fast…wait until it pulls back.
– (As the stock was crashing) This could be just a prelude to a deeper decline…wait until you see a return to sustained bullishness.
Of course, by the time I was convinced of the return to sustained bullishness, I was back to worrying that the price had run-up too much, too fast.
If you weren’t heavily invested in January, you might be feeling the same thing right now
Perhaps you were on the sidelines for much of this year, watching the gains pile up, and now you’re facing a handful of questions…
– With rising oil prices, climbing treasury yields, a surging dollar, and the threat of reinflation, am I too late to the market?
– Is the weakness from August offering a good entry price now, or is it a prelude to a bigger drop considering the various red flags today?
– What are the best investments for my money today – not back in January, which I missed – but right now?
– If I want to buy, should I begin to nibble at some stocks today, or just leap in with my entire amount of investible cash?
No one can answer the first two questions with certainty.
As to the third, here at InvestorPlace, we’re proud to bring you the analysis of Louis Navellier, Eric Fry, and Luke Lango – three of the most respected names in the entire investment industry. We believe a balanced portfolio of their recommendations carries more than enough firepower to help investors reach even lofty financial goals.
But what about the fourth question – timing? That’s at the heart of today’s question about getting back into the stock market.
Finding the right balance between math and emotions
There’s the old investment adage that goes: “It’s not about timing the market, it’s about time in the market.”
This suggests investors should deploy their entire investible capital as one lump sum into the market immediately.
But then there’s the reality that investing directly before a market crash can destroy financial dreams. Loads of investors who retired in the months leading up to the Dot Com and Great Financial Crisis crashes will attest to that.
This suggests that dollar cost averaging is the preferred way to deploy your investment capital. In other words, rather than invest all at once, you methodically invest in smaller, equal amounts over time.
What do the returns behind each approach reveal?
Here’s Morgan Stanley:
In an analysis of more than 1,000 overlapping, historical seven-year periods, Morgan Stanley Wealth Management’s Global Investment Office found that lump-sum investing generated slightly higher annualized returns than dollar-cost averaging in more than 55% of cases.
For example, in an “aggressive” portfolio with high allocations to stocks, the lump-sum approach would have yielded a 0.41% higher return than dollar-cost averaging over 12 months.
The same general findings held true when we ran more than 10,000 forward-looking hypothetical simulations using the two approaches, with lump-sum investing becoming increasingly attractive relative to dollar-cost averaging the more the portfolio’s expected returns exceeded those of cash.
What Morgan Stanley doesn’t spell out, which would have been very helpful, is just how “underwater” an investor might find him/herself when lump-sum investing goes wrong – and for how long, on average.
In the absence of that information, each of us is left to decide which investment approach better fits our own temperaments.
For me, it’s dollar cost averaging. I’m willing to give up that 0.41% higher return (on average) per year as a form of insurance, insulating me from a knife-edge market drop that could drag down my net worth by double-digits were I to lump-sum invest at the wrong moment.
What’s the better fit for you?
Your homework today
If you’ve kept an outsized chunk of your net worth in cash this year, it’s time to be intentional about when you’ll get back into stocks.
To be clear, I’m not rushing you back into this market. Stay in cash as long as you want – as long as it’s intentional. What I want to help you avoid is investment inertia in which you remain in a 5% money market fund without truly thinking about it.
So, based on your unique mix of portfolio size, income, expenses, time until retirement, and so on, here are a few questions to answer:
- How much investible capital do you have ready to invest over the next 12 months (or longer if that’s your preference), whether you invest as a lump sum or dollar cost average?
- As you look at your portfolio today, what stocks, sectors, or asset classes do you want to buy (or buy more of if you already own)?
- Which default approach to timing – dollar cost average or lump sum investing – works best with your temperament?
- Getting more granular, look at the charts of the specific stocks/sectors/assets from your answer to question 2. Based on these charts, as well as your preferred valuation metrics, does it change your answer to question 3? Keep in mind, you can choose lump sum investing for some stocks and dollar cost averaging for other.
- Finally, based on the investments you want to add to your portfolio and the specific dollar amount you can invest over the next 12 months, what’s the specific allocation plan? Which stocks will receive how much money, and in what sequence?
Creating this roadmap will take you a long way toward avoiding both FOMO and ROMO as we approach 2024.
On a related note, tomorrow night Luke Lango is unveiling an artificial intelligence system that could be a fantastic way to help you get back into this market
After two years of working with an elite team of AI programmers, sinking over $4 million of research and development capital into the project, Luke has created a cutting-edge AI system named “Prometheus.”
Here is with more details:
[Prometheus] is an AI system trained on hundreds of thousands of financial market data points. And its singular goal is to pinpoint the exact moment a stock is ready to surge higher.
It leverages more than 50 technical and fundamental factors to tailor AI models for every applicable stock in the market. And it uses that data to ascertain the probability for a major breakout in a stock over the next month.
That is, Prometheus scans the entire stock market every week, and then uses that timely data to gauge the probability that a given stock will surge higher in price over the next few weeks.
Tomorrow night, Luke will demo Prometheus for the first time ever. He’ll show how the system works, the shockingly accurate results of its back-tests, and how it helps identify surging stocks even if the broad market is stumbling.
Circling back to our main question today, if you’ve been on the sidelines this year, Luke’s new AI tool could be a great way to help you ease back into the market. And given its goal of finding stocks that can jump 100%+ in four weeks or less, it certainly offers the firepower to help you stay on track with your investment goals.
Here’s Luke to take us out:
Have you ever wondered when the exact right moment is to invest in a stock? What if AI could do the heavy lifting for you? In essence, Prometheus pinpoints the exact moment any stock is about to hit a massive breakout.
On Tuesday evening, 7 p.m. Eastern, witness the precision, the intelligence, and the sheer power of Prometheus AI in action. For the first time in our company’s history, we’re giving you the power of AI to invest…
Have a good evening,
Jeff Remsburg
