The stock market is improving and poised to continue its upward trend for at least a year or two, according to many market watchers. So how much of your portfolio should you invest for growth, and how much do you keep liquid?
Back in the day, we all felt more secure in our jobs, housing prices and the stock market's performance. The old rules of thumb regarding liquidity can appear fairly glib now. Three to six months of living expenses were supposed to be sufficient to cover a temporary loss of income. After all, in the event of sudden unemployment, you'd be off to the next career in no time. In the meantime, there was the easy availability of a home equity line of credit, or a slew of credit cards that could be temporarily stretched.
Then the financial crisis gathered steam, sending everyone into a sinkhole that culminated with the stock market drop in 2009, the housing debacle that just keeps on rolling downhill, and the credit crunch. No doubt, most people's view of the amount of liquid assets needed to sustain a personal financial downturn shifted drastically, and in many cases, became the kind of life lesson they would rather not have learned the hard way.
So here we are a couple of years later, and feeling many decades wiser. The stock market is recovering quickly and the economy is showing signs of improvement. Jobs are still scarce, and the housing recovery is lagging, but investors are becoming optimistic again. If the stock market is due for a prolonged bullish period, who wants to be left sitting on the bench? The conundrum seems especially acute when safe, liquid investments such as savings accounts and CDs are still piddling around with low yields, and could be for some time.
Wealthy investors are accustomed to tying up their money for long periods to earn higher returns, and they have opportunities that regular investors don't. Examples include hedge funds and private placements that require high minimums and lockup periods, and often there's an equity stake in a family business.
Still, even without the availability of private investment offerings, everyone can benefit from one tactic of the wealthy. Those who were able to keep discretionary cash on the sidelines have had the ability to quickly deploy it to higher-yielding investments when the timing is right. It's this nimbleness with their cash, combined with wise investment choices, that makes them rich and keeps them that way.
So how much liquidity should you maintain in your portfolio? That, of course, depends on how spooked you are by investment losses, how much time you have to make up for losses before retirement, and how smart you are about investing. One lesson learned after the market crash is that chasing high returns without a safety net is not the wisest strategy.
How much of your portfolio are you planning to keep liquid?
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