The market has fallen quite a bit recently. I know most people don’t like to see red in their portfolios, but if you have cash to buy stocks, a falling market can actually be your friend. Over the past couple years, as the market has moved steadily forward, I’ve remained cautious and defensive. I’ve kept cash in client accounts, despite the general market euphoria and a strong economy. I don’t want that cash to sit there forever, but I do want to be able to take advantage of a market correction. Back in 2008, I didn’t have cash positions in client accounts. Client accounts still did fine and outperformed the market on the way back up
, but it was a missed opportunity. Now, when markets are on the higher end of historical valuations, I’m looking to make sure we can take advantage of opportunities when they arise.
Of course, markets are notoriously unpredictable, so they can make you wait a long time for a correction, and no one can time when a correction bottoms out. The point isn’t to be precise with timing, it’s to balance probabilities in a way that allows you to get an edge on the market. Patience is key; it’s not easy to hold some cash back when the market is going up, or to put it in when the market is going down. Having the discipline and the patience to do those things, and to wait for the inventible long-term trends to emerge is how investors beat the market in the long run.
So, for now, I’m going to continue to have some patience and wait on the Fed to raise rates. I’m looking for the market to fall further. It might not, but such an occurrence is likely enough that I want to have a defensive stance now, and an aggressive one if markets fall further. When that happens, we can slowly use the cash holdings to add more stocks at deep value discounts.