Sitting in cash? Now is the time to make money

By AARON KATSMAN
Updated: SEPTEMBER 2, 2015 23:19
money (photo credit: REUTERS)
money
(photo credit: REUTERS)
The way to make money is to buy when blood is running in the streets. – John D. Rockefeller
The news isn’t pretty. The stock market continues to drop. ISIS continues its murderous rampage. Chinese economic growth has dropped significantly. Canada has slipped into a recession. Iran is about to be given the keys to a nuclear weapon. Things don’t look so great, and it’s hard to find a silver lining in all this bad news. As a result, many investors have decided to liquidate their stock holdings.
But if you are a first-time investor, or just sitting on a pile of cash, this could be an ideal situation. This may turn out to be a once-in-a-lifetime opportunity. Why should novice investors or those with large cash positions take the risk now, when the markets are falling, to start investing?
Buy low and sell high
One of the most important rules in investing is to buy low and sell high. Although there is no sure way to declare that the market has finished falling, it is certain that the market would be cheaper after a 16 percent decline than it was 16% ago. In other words, the market is somewhat “on sale.” No one likes buying retail, and with the recent market pullback it could feel as if the investor is buying wholesale! There is no question that if Rami Levi supermarket was to run a 20%- to 30%-off sale, shoppers would be lined up around the block to have a chance to make purchases at rock-bottom prices.
Blue-chip companies like Johnson & Johnson or AT&T have dropped significantly, with no change in their specific business. They continue to pay very high dividends, and they can be bought at 15% to 20% off where they were trading a few weeks ago. I am not saying to run out and buy either one of these; they are just examples of what I am talking about.
Investors need to differentiate between the state of global corporations and the macroeconomic state of the global economy. While the economy stinks for all intents and purposes, the financial state of many top corporations is very strong. Earnings reports continue to show strong earnings growth with equally strong future outlooks.
In this recent market rout, attention has clearly been placed solely on the murky economic situation. No guarantees, but when a bit of calm returns to the markets, focus may very well shift back to corporate earnings and the realization that some very good companies are trading at very cheap levels.
Can you time the market? I often hear from my clients that they want to sell, and when the market goes back up, they will buy back stocks and make lots of money. As if it’s so easy! One of the biggest risks of trying to “time” the market is the potential of “missing” the market. This is when an investor, thinking the market will go down, reallocates his investments and places them in more-conservative investments. But while the money is on the sidelines, the market shoots up. The investor has, therefore, incorrectly timed the market and “missed” the best-performing months.
When the Dow Jones Industrial Average opened up down 1,000 points last week, panic set in and may investors decided to sell and wait on the sidelines until the market was going to move up. Well it took three days and the market had recovered that initial 1,000-point drop. If I had to guess, I would say 99% of those who sold on that very day didn’t time the market correctly. That means not only did they sell at very low levels, but they missed the huge move back up. The complete opposite of the buy low/sell high philosophy! Now what should you do? As those sitting with cash have learned, cash returns virtually zero in the way of interest. Long-term holding of cash not only costs you in returns but also in the loss of purchasing power due to inflation. Now may be the time to take advantage of the recent market plunge and take a look at starting to invest in stocks, especially dividend payers. To get started, consult with a financial adviser, who will help you to determine if stock investing is right for you.
The information contained in this article reflects the opinion of the author and not necessarily the opinion of Portfolio Resources Group, Inc., or its affiliates.
aaron@lighthousecapital.co.il Aaron Katsman is a licensed financial professional in Israel and the United States who helps people with US investment accounts. He is the author of the book Retirement GPS: How to Navigate Your Way to A Secure Financial Future with Global Investing.