The stock market has seen some wild swings recently, the sub prime market is almost devastated, and the real estate market is falling. With so much uncertainty, the best place to park your money is in cash. Cash is safe and liquid.
The stock market index has moved up and down in a huge range over the past few months. The Dow has closed with a spread of more than 100 points 32 times since June 1, 2007. Let’s take a look at the high volatility of the Dow from June 1 to September 11, 2007.
The Dow Index has rallied as much as 286.87 points on August 6, 2007. A few days later, on August 9, 2007, the market dropped by as much as 387.18 points. That is a spread of 647.05 points in three days. Imagine you are holding a company that trends with the Dow but on a wider scale. You will be seeing some wild movements and it may be difficult to stomach such volatility, especially if much of your money is in there.
I think it’s a good time to have more cash on hand and wait on the sidelines until this “mess” clears up. It will be also be a good opportunity to pick up some stocks for a cheaper price.
I have sold most of my stock positions in August and my money is mostly in cash. I will take this time and opportunity to do some research on companies. I look for solid companies that have a solid track record and great long term growth prospects but the shares are currently oversold. The deeply depressed stock price allows me to buy shares of the company for a discount and gives me a comfort of security. I feel the risk level is very low and at the same time there is great opportunity for reward. This strategy has always worked out well for me. Whenever I buy stocks with little downside to it, I do not have to fear of a big drop and if I’m patient enough, I usually end up reaping huge gains.
One great example is my purchase with the big pharma company, Pfizer. I bought shares of PFE at $21.25 on 12/5/2006. It was a time when shares of PFE were being dropped left and right, but the company was doing well. Around that time PFE also increased dividends. I held my shares of PFE for a little over a year and sold them earlier this year, at $24.85 on 3/6/2007. My gains came in at a nice 17% plus about a 4% dividend, so the total is roughly a 21% gain. Also, because I held my shares for at least one year, I would pay only 15% on long term capital gains tax on the investment.
Another market I like to invest in is the real estate market. The real estate market has risen for the past several years and has finally gone into a down trend. With the sub prime market crushed and home prices depreciating, a good place to park your money would be in cash.
I’m waiting patiently for a good opportunity to enter the real estate market. If I can buy at the right place and at the right time, I can end up with a property that will appreciate greatly over time.
I like being in cash positions because it allows me to be financially flexible. I can move my money in any market at any time. If I think the stock market is the place to go, I can immediately buy shares of stocks. If I think the real estate market has a good entry point, I can immediately shift my money to the real estate for a deposit or down payment. The liquidity is an important factor; it can make or break a deal.
Let’s look at a scenario where liquidity can help or hurt you. Imagine you see a very nice house for a bargain. The owner is trying to sell the house quick and asks you for a deposit. Your money is tied up and you tell the owner you need some time to free up your money. The owner cannot wait and sells the house to another person who can immediately put down the deposit. You have just lost a great investment opportunity.
Liquidity is important. Untied money allows you to pick up bargains quickly and move freely from one market to another to take advantage of opportunities. Cash is king.