Some experts in the financial industry suggest that a creative shift toward more liquidity is beneficial, especially if your risk tolerance is low.
"With economic uncertainty ahead and stretched valuations on many financial assets, now is a good time to be accumulating liquidity that can be deployed later as opportunities arise," Bankrate chief financial analyst Greg McBride said.
Included in your assessment of how to shift your portfolio are your short-term goals, your tolerance for risk and the market’s volatility. Before making some decisions, take a look at the whole picture.
"But to bail out of stocks now, after they’ve fallen 10%, to put money in more liquid investments is only appropriate if your goals have changed," said McBride. "Otherwise, it’s just market timing, which is a recipe for underperformance."
How risk tolerance should steer you
McBride explained that risk tolerance changes as markets go up and down.
"I’m an advocate of investing based on your financial goals and using that as your guidepost," he said.
Predictably, everyone has a high risk tolerance when markets go straight up, but once volatility returns, investors suddenly aren’t so risk-tolerant, he said.
"Following your ever-changing risk tolerance would lead to buying high and selling low, over and over again," McBride continued.
How timing should affect asset allocation
When you decide about your investment goals, decisions and market responses, the timing of when you need your savings is a crucial determinant. If you are financing a child’s education, purchasing a residence, starting a new business or have other short-term needs, access to your liquid assets is a priority.
"Given the current market environment, I would recommend that if someone has a near-term expense, such as saving for a house, they consider keeping or directing funds to cash equivalents like savings accounts or money markets," said John Pilkington, senior financial adviser at Vanguard Personal Advisor Services. "With the near-term volatility of markets and rising interest rates, money market funds are likely to start providing more interest, along with stability of principal value."
Should you ride it out and stick with the market?
Kurt Spieler, chief investment officer at the First National Bank of Omaha, doesn’t advise investors to put more money in liquid investments due to the uncertainty in the global markets.
"The planning for liquid investments should occur before volatility, not after the market downturn," Spieler says. "Depending on their financial situation, investors may utilize some of their liquid investments so as to not sell their investment portfolio at lower prices."