Following a big market drop, when anyone asks me if it’s a good buying opportunity my knee-jerk reaction is to ask why they have extra cash sitting around to begin with (without judgment, of course). With a few tweaks to your savings system and emergency plan, you can remove that question from your life forever.
I’ll admit that during the coronavirus-induced crash I checked all my non-recurring expense savings accounts (travel, charity, and house renovations), to see if I had extra cash to invest after the market’s first 10% drop. I suppose it’s good I didn’t, because it would’ve meant I wasn’t following the advice I give to clients – to systemize your saving and investing so you never end up hoarding cash for no reason.
So, when is a good time to invest? It’s one of the most common questions I hear. I think it was investment guru Nick Murray who once replied “yesterday.” Nick also said, “Timing the market is a fool’s game, whereas time in the market is your greatest natural advantage.” A buying opportunity only occurs if you’ve been sitting on too much cash to begin with. How do we prevent that from happening?
Aligning Money with Goals and Concerns
Start by isolating money for emergencies and near-term goals from your nest-egg portfolio. The latter should be earmarked to replace and/or subsidize your work income later in life. In short, all of your dollars should know their place and have a purpose.
To be prepared for an emergency cash flow shortage, plan to use your bank account for the majority of these situations, not your investment portfolio. There are countless opinions on how many months’ worth of expenses to keep in the bank. You can get Neela Hummel’s perspective about an emergency plan, or my ideas for putting a kibosh on the rainy day fund, to name a few.
Long-term/big-ticket future expenses (college education, home down payment, etc.) should also be isolated from the nest-egg portfolio. Depending on the priority level of these expenses, you can determine with your advisor what risk level is appropriate for this money. For example, if you’re set on buying a home in the next year or so, and you know you’ll need at least $200,000 for the down payment, that money should probably be in low-risk bonds or cash.
The Accidental Buying Opportunity
That said, windfalls will happen — whether from an inheritance or because your work earnings escalated for months before you got a chance to get clear about your overall priorities. You may also have income where the timing and amounts are variable, such as executive compensation, commissions, bonuses, or royalties. For that type of income, you can plan ahead for how you’ll handle its arrival regardless of amount. In other words, you don’t want to let cash just sit in the bank until it feels like a good time to invest.
If you’re clear you want surplus cash to be part of your future nest egg, the answer to the when-should-I-invest question is always “Now,” regardless of where the markets are or perception about the state of the economy.
At this point, you’ve proudly denied yourself any chance of ever having a buying opportunity, because all your dollars have a clear purpose. You’ll never have to wonder if it’s a good time to invest, because you’re sticking to a code where all your income is either spent or immediately forwarded to its designated bucket. You will have removed the question from your investment experience altogether, and forever.