Active money management means taking advantage of market volatility

At a financial planning workshop we recently hosted at MomCom Austin, we fielded the following question: with the stock market so unpredictable, should I be putting some of my money in cash?

The easy answer is yes, you should always have some money in cash. We advocate having six times your paycheck, or three month’s salary, in a money market account for easy access. This is your emergency fund for unexpected expenses like car repairs and medical emergencies. Keep this account replenished.

But that’s just the first level of the “should I move money to cash” conversation.

We are strong believers in transparency in your investments and the continuous ability to move your money to cash positions when the market calls for it. This is the essence of active money management and it allows us to avoid being fearful of market volatility. This is important because we know that market downturns can yield attractive buying opportunities. The key is to stay poised for investment opportunities when they arise.

Your age and your risk tolerance level will determine how much risk you should be taking in the equity market. In general, the closer you are to retirement, the less risk you should be taking.

As an alternative to cash, we look at individual corporate bonds with less than two years to maturity. The yield to maturity rate plays a key factor in our decision to purchase these bonds. We steer clear of bond funds and we avoid long-term bonds as well because we don’t like to lock ourselves into a rate for more than two years

Overall, though, we would caution against pure volatility being the deciding factor in moving your investments from the stock market to cash. By definition, volatility means the stock market is moving up as well as down and active money management allows investors to take advantage of that volatility. These conditions create opportunities for both purchases (in a down market) and gains (in an up market). We support a move to cash to ride out a sustained down market based on technical indicators, but we hesitate to suggest a fear-based move to cash. Too much caution can yield some seriously limited returns.