Cash the side line has been a great allocation for this whole year. As the mantra goes, don’t fight the fed.
* https://awealthofcommonsense.com/2018/10/the-psychology-of-s...
By sitting in cash you're also losing money through inflation:
* https://ofdollarsanddata.com/the-cost-of-waiting/
At the end of the day you should always be invested, and if you're worried about market undulations then you should own some bonds. And besides reducing gyrations, bonds give another advantage: a source of 'dry powder'.
If stocks get "too high" you rebalance by selling off some equities and buying bonds to 'lock in' the returns. When stocks drop you rebalance again by selling off bonds and 'buying low' in equities. Bonds/diversification can really help returns:
* https://www.forbes.com/sites/investor/2010/12/17/the-lost-de...
At least in Canada you can get "all-in-one" ETFs that do this rebalancing automatically:
* https://www.youngandthrifty.ca/picking-the-best-all-in-one-e...
Also by sitting in Stocks, you not only lost 20% this year, but also 9% due to inflation for a total loss of ~30%+.
Cash is cash. It gets the job done. I'm not saying go 100% cash btw, but it has its place in this time of uncertainty. You cannot buy the dip if you're 100% invested, you have to be holding cash.
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I suggest holding 10% cash and rebalancing as needed. As the market goes up, you naturally sell stocks for more cash. As the market goes down, you naturally sell cash to buy more stock. This stabilizes the portfolio significantly.
But if you sold the stocks, you would have taken an immediate tax hit of ~20-35%, and you would have to time the bottom to get back in.
So, it's not at all clear that getting out makes sense. Depends on the depth of the decline, and that is unknowable.
> you would have to time the bottom to get back in.
Nah, you just rebalance at 10%.
People tout the "cash loses to inflation" mantra as an absolute - they forget that in large market downturns, cash availability compresses while assets become in greatly less demand. So cash being available when everyone desperately needs it, but few have it, gives cash a value explodes on a opportunity basis for a window of time.
* https://theirrelevantinvestor.com/2019/02/08/miss-the-worst-...
* https://aaiila.org/wp-content/uploads/2020/05/Tuchman-Best-a...
* https://www.capitalgroup.com/individual/planning/investing-f...
* https://www.cnbc.com/2021/03/24/this-chart-shows-why-investo...
I think a lot of the personal finance investing advice given to people in the vein of “solid advice for 90% of people to follow without too much expertise” is becoming some weird dogmatic religion. You must never time the market (even at a loose monetary policy induced bubble), you must always hold total market/sp500 ETFs (even when they’re filled with overpriced companies), you should diversify into bonds (the most garbage asset class available for the past 20 years, until the last 6 months, when they became only partially garbage).
This advice has gone from being labeled as generalist advice with asterisks, through many rounds of telephone, to now being something that invites angry replies if you disagree with it.
By holding stocks and not selling you have lost nothing:
* https://awealthofcommonsense.com/2014/02/worlds-worst-market...
"Losses" only occur when you lock them in. If your trading account is down now you have lost nothing—just like you haven't made money until you sell your holdings for cash.
Marking to market (looking at unrealized losses or gains, ie. the value of your portfolio before you sell) is useful if you trade on margin, use this as a collateral (borrowed against it), or plan to sell soon.
In all these cases, this is because you need to sell (directly or indirectly) and thus lock in whatever the current value is.
But until you sell, you have no actual (realized) loss (or gain).