This morning, I want to share some perspective of approximately 20 years of financial planning.
Big financial life events happen; Some are planned, and many are not.
I am referring to the sale of a piece of real estate, a business, or receiving an inheritance.
It is human nature to say: “I don’t know what I want to do with this money yet, therefore I am going to park it in cash.”
I completely agree that you should not deploy cash until you have a well thought-out plan for the money in the context of your overall financial plan.
As it comes to cash, you still have to hold yourself accountable, because the “safety” of a savings account will lull you to sleep.
Here’s some advice based on my 20 years:
(Inheritance) For the death of a loved one, give yourself some grace. You have a year to work the cash into your plan.
For all other scenarios (real estate sale, business sale, other windfalls) take no longer than three months.
Why is this critically important?
Getting lulled to sleep in cash is easy if you’re not holding yourself accountable, life gets busy. One month turns into three, three turns into a year, one year turns into two years. Before you know it, this significant chunk of cash has been sidelined for multiple years.
You may have heard us reference the three barbarians coming to attack your financial castle, and this cash hoarding behavior tends to trigger one of the most powerful “barbarians:” The “behavior barbarian.”
People find themselves justifying the behavior: “I can’t invest now; look how much higher the stock market is today than when I received the money. I missed it.”
“I can’t buy a new piece of investment property today, look at how much more expensive the real estate market is than it was. I missed it.”
Then they utter this potentially even more dangerous phrase: “I’m just going to wait for a correction, a downturn. I’ll strike when the buying opportunities right!”
What happens when the correction inevitably comes? No one invests. No one.
Why?
Because it’s REALLY hard to invest “safe cash” during times of financial panic and uncertainty.
The next stage of this sideline behavior is: “Let’s wait until things get better.”
Too late. By the time you’re feeling comfortable getting off the sidelines you’ve missed the early recovery and the markets are typically already charging higher, creating a cycle (“I missed it…”).
Do you see the issue here: There is never an “all clear signal” and by waiting you’re simply allowing time and the potential opportunity of reaping investment returns much greater than what the banks paying you, to pass you by.
It’s important to note here, the historical annualized return of the S&P500® (the broad-based index of the largest 500 American based companies) is 7.8%. Compare that with your High-Yield Savings Account barely earning 4.00%, over time that is a lot of compounding to let pass you by.
Not holding yourself accountable to decide on how to work your cash into your financial plan can easily trigger a spiral of unintended consequences and missed opportunities.
Don’t overcomplicate your decision-making progress. Establish a financial plan for you and your families most cherished goals. Your family’s most cherished goals will determine your plan. Your plan determines your portfolio.
If you happen to find yourself in this situation, take a deep breath, give yourself some grace. But it’s time to do something about it and move forward with intention. We can’t change the past, but we can build a plan with confidence for the future.
If you or someone you’re close to is a high-achieving professional that could use help aligning their finances and establishing a financial plan, please reach out to us, we’re accepting new clients and eager to help.
Cheers, Nic
This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors or will yield positive outcomes. Investing involves risks including possible loss of principal.
