While cash loses value over time, it does give you one key advantage: optionality. Photo: Reyner Media, via Flickr.
It all started in August 2013. Up to that point, a regular schedule of buying one or two stocks per month -- regardless of market conditions -- simply made the most sense to me. Why try to time the market?
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Then, I read this piece by Morgan Housel: "What I Plan to Do When the Market Crashes." In it, Morgan argued that having a plan for the next market crash could be lucrative. He followed that up with an article the next month that delved further into the issue. In it, he encouraged building up a nice cash position for such crashes:
My stock purchasing habits didn't change much following these articles. But I kept coming back to Morgan's advice. Finally, last month, I decided to do something about it. Here's why.
We're long overdue for some type of market correctionAccording to Morgan's calculations, a 10% market correction usually hits every 11 months, and a 20% bear market every four years. I dug into the numbers myself. Here's what I found using data from S&P compiled by Yardeni Research that goes all the way back to 1929.
We last came out of a correction in September 2011, and emerged from the last bear market in March 2009. As the chart shows, historically speaking,we're entering into rarefied territory
Put another way: Failing a 10% dip by September, we will be living through the second-longest time period without a correction in 86 years! The only more extended period was from 1990 to 1998.
And as it stands now, we've only twice experienced a longer time frame between bear markets.
What I'm doing to prepareLooking at this information -- and combining it with the fact that many of the companies I'm investing in are trading at multiples that give me pause before I hit the "buy" button -- has driven me to action.
Over the past few months, my wife and I sold some investments that we are no longer interested in following. We also made sure we contributed the maximum to our Roth IRAs before the deadline for 2014. These two moves alone increased the cash position in our retirement portfolio from4% to a whopping 13%. That ties this for our largest holding!
Next, we created a list of the companies we'd like to buy -- based on our investment strategy and the fact that we are only in our mid-30s -- when the price is right. This list will look different for everyone, depending on investment style and time until retirement.
But to give you an idea for how we're approaching it, here are the four stocks on our list:
Author's calculations. Figures accurate as of April 24, 2015.
There's no guarantee that these stocks will ever reach these prices, and there's no guarantee I'll follow these guidelines to a tee. But the companies I like to invest in are often more volatile than the larger market, so I think there's at least a fair chance of getting close to these prices.
Don't sell everything you haveHere's an important point to remember: I'm still 87% invested in the stock market. I'm fully aware that I can't predict what will happen tomorrow, next month, or next year in the market.
If we look back to the one other time we went so long between corrections -- from 1990 to 1998 -- the stock market advanced a grand total of 384%. Anyone who sold out in June 1994 -- 44 months after the last correction, which is the point we're at right now in this cycle -- would have gained only 182%.
There's nothing to say the same couldn't happen here, which is why I'm only building up a 13% cushion. Only time will tell if this is a truly useful strategy, but I like my odds, and believe building up a cash position now could enable me to reach retirement -- or at least financial independence -- even earlier.
The article Retirement Planning: Forget Stocks, Im Hoarding My Cash. Heres Why originally appeared on Fool.com.
Brian Stoffel owns shares of Facebook and Twitter. The Motley Fool recommends Chipotle Mexican Grill, Facebook, Tesla Motors, Twitter, and Under Armour. The Motley Fool owns shares of Chipotle Mexican Grill, Facebook, Tesla Motors, Twitter, and Under Armour. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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