Aspiring ‘investors’ tend to laugh at low-return strategies like keeping money in CD’s or paying down mortgages – and, as a long-term investing tool (now, that’s a tautology) they do suck.
But, as a short-term ‘money parking’ tool there’s nothing better … and there’s no time like the present to dust off those borin’ ol’ Ramseyesque strategies, as this article from the Tycoon Report suggests:
The most successful investors in the stock market aren’t always invested in stock. They’re only invested when the odds weigh heavily in their favor.
You must have the discipline to know when to stay out! For most people, this is one of the easiest concepts to grasp, yet the hardest to follow. This is something that comes with experience. It’s something that most people have to learn several times throughout their investment life.
People ask: “When do I know when it’s the right time to be in or out?” The answer is: If you’re asking that question, it’s time to stay out.
Otherwise, find an account or stable investment vehicle that offers you a nice interest rate. You can look at Treasuries, Certificates of Deposit, money market accounts or a bank or broker offering a relatively high-yielding interest rate.
The point is to sit in something safe while you wait for trades with a high probability of success to present themselves.
Savvy investors are willing to sit in a risk-free interest bearing account for years if need be, and you should get comfortable with taking the same stance. What’s likely tied for first place on the individual investor’s list of most common mistakes is the notion that if you’re not in the market, you’re not making money. Anxious and over-eager investors force trades at the wrong time, mainly because they’re afraid of missing the next big gain.
Fear of missing the next winner is a killer. Professional investors know that cash is a trade too.
I love that last line … that’s why I ripped it for the title to this post!
Right now, I am sitting in cash … and, I have been totally out of the market for a few weeks now even though there was a rally in between.
I am waiting for the right time – read: after the market starts climbing again (I’m happy to miss the absolute bottom) and I am sure that represents a longer-term trend OR until I find a stock that I feel won’t go much lower even if the market doesn’t rally for a while.
Same applies for real-estate, although I am actively looking for deals right now … residential isn’t my preference (I have plenty of exposure to that sector) as I am totally out of commercial right now and would like to get back in if the cash-on-cash returns improve a little (as they should as the recession takes hold, then eases a little).
Having said that I am in cash … it isn’t in your ordinary Mid-West Bank deposit account or CD … it’s legally earning 7.5% interest, hedged against the falling US dollar.
That’s why it’s often true that the rich get richer … because they have more investing options.
Still, the principle applies: sometimes, it’s OK to stay in cash or [AJC: perish the thought!] temporarily pay down a mortgage.