If you stayed the course and kept your money in stocks throughout the downs and ups of the financial crisis, then you're probably feeling pretty good about the way things have turned out, at least so far. But if you took your money off the table when the crisis hit and are still on the sidelines, you're probably wondering what your next step should be.
Stuck with cash
There's nothing as painful as watching the stock market soar while you're earning 1% or less in a cash account. Yet that's exactly what many people are going through right now. According to the Investment Company Institute, there's more than $3.37 trillion stashed away in money-market mutual funds. When you add that to all the money sitting in bank accounts and other short-term savings, you can see just how much work investors will have to do to get fully invested.
As if that weren't enough, investors face a host of challenges:
- Some people were fortunate enough to lock in relatively high rates on CDs and bonds when yields were a lot higher. As those investments mature, investors have to choose between renewing at much lower rates, keeping the money aside at even worse rates, or finding a brand new alternative.
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Stocks that offered investors good value earlier this year have made impressive gains during the market's rally. Companies like American Express
(NYSE:AXP) , Coach(NYSE:COH) , and Discover Financial(NYSE:DFS) have recovered most or all of their losses from 2008 and now trade at multiples to forward earnings that, while not crazy, are still far less attractive than they were just a few months ago. - With unemployment topping 10%, investors are understandably cautious about their personal finances. Keeping lots of cash around when rates are near zero hurts your income, but the possible need for that cash if a financial emergency happens has forced many to stay conservative.
Despite these challenges, the overall belief that things will get better seems to get stronger every day. Just yesterday, Warren Buffett declared that the financial panic is over, implying that investors need to get back to basics and put their money to work in the best way possible.
How to get back in the water
If you've been out of the market for a while, though, it's hard to know how best to get back in. Having missed a big rally, you could be putting money to work at exactly the wrong time. Yet people have made similar arguments for months as stocks have tenaciously kept rising.
If you're confident that stocks will rise from here, then you'd be best off to invest your available cash in one fell swoop. It would have taken rock-solid determination to do that earlier this year at the market's lows, but it would have been the right thing to do, as prices on stocks like Goldman Sachs
On the other hand, you may not be so confident that stocks will rise from their much-higher levels right now. Gradually working back into the market via dollar-cost averaging could give you greater peace of mind, and for stocks such as Apollo Group
Stay safe
Note, however, that even though returns on cash are next to nothing right now, you shouldn't feel compelled to invest all of your money in other assets. There are plenty of valid reasons for keeping a percentage of your overall portfolio in readily available cash in case you need it, whether it's for personal use or to take advantage of more attractive investment opportunities when they arise.
But if you have excess cash on the sidelines beyond what you'd reasonably need for emergencies, you should plan how you're going to get it back into the financial markets. Whether you get your spare cash invested all at once or over a longer period of time, taking action now should help you reap big future benefits.
Find out which stocks look the best for investors with cash to put into the market. Todd Wenning has the stocks that are the market's strongest buys.
