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When Do I Invest My Excess Cash?

When Do I Invest My Excess Cash?

August 08, 2022

This calendar year has been pretty challenging for most investors. As I write this, the value of the S&P 500 index, the 500 largest US companies, is about 4,130. It’s been as high as 4,819 and as low as 3,637. That’s about a 25% decline from top to bottom. If you are like a lot of people, you may have some cash at the bank that you would like to invest, but with markets down, you are worried about buying into further losses.

It's very understandable. The Behavioral Science concept of Prospect Theory (Kahneman & Tversky, 1979) tells us that for most people the psychological pain of a loss is twice as powerful as a gain. So, of course, your emotions tell you not to put money into investments in a year when things have been so bad.

But, if this money is intended for your use in retirement, and if that retirement is more than three years in the future, I would suggest you NEED to invest that money now. One of the key goals of retirement savings is to get money growing faster than inflation. With inflation rising this year, you need your savings growing to keep pace. And, history tells us that investing in stocks in quality U.S. companies is one of the best investments for keeping ahead of inflation.

So, if you know that this is retirement money, it’s going to be used to own stocks at some point. Then we need to decide when we move from cash to stocks. The financial planning research is clear, for long-term investment goals, a pool of money should be invested as soon as possible. This is because stocks increase about three-quarters of the time and fall about one-quarter of the time. Money invested now has more time to grow and compound dividends than money invested later.

What If  We Have Not Reached the Bottom?

Some people will hesitate to invest now because they are sure that the market will fall still more before it begins to rise again. This sounds like market timing. (Trying to invest at the market bottom and sell at the market top.) Academic research shows that this is VERY hard to do. I suggest that it’s impossible to do.

If you insist on waiting for the bottom anyway, let’s think about what the bottom would look like for the S&P 500 index.

  • Today we are at about 4,130.
  • The recent low was 3,637. (Which is about 25% off the prior record high of 4,819.)
  • Maybe the next true bottom is 3,200? (That would be down 33.6% from the peak.) That would be down 22.5% from current levels.

So, maybe we can plan to invest all your cash when the S&P 500 hits 3,200. But first, we need your cash to be in an investment account sitting in the money market while we wait. That gets the money out of your checkbook and into the “investment” account. Then when the market falls enough, we can invest.

That is if it ever hits 3,200 again . . .  I can’t guarantee that it ever will.

What If We Already Bottomed?

Since I believe that we can’t effectively time the markets, let’s say we already missed the bottom. What does that mean?

Well, my favorite economist projects that U.S. stocks will average about 6% a year over the next 10 years. This is meaningfully less than they have earned in the last 10 years (about 12.95% with dividends reinvested). And, it’s still almost double the historical average inflation rate of 3.27% from 1914 to 2022.

If that conservative projection is correct, the S&P 500 should hit 8,260 in August 2034. That’s based on the Rule of 72 that says investment double in value based on the growth rate divided into 72. In this case, a 6% annual return will double your principal in 12 years. But you need to be invested for 12 years at 6% to get that growth.

So, why not get started now?

You might find that all this seems a bit complex and that there are a lot of factors in your specific situation that should be considered. If you would like to talk with an experienced, well-trained CERTIFIED FINANCIAL PLANNER™ professional, then please follow this LINK to find a time for you and me to talk. I would be honored to assist you. The first conversation is always free and my goal will be to help you as much as I can during that first visit.

If you would like to find a few CFP professionals in your area with whom to visit, a great place to start is right here.

As you visit with financial planners, I suggest a couple things to check:

  • Is the advisor always the client’s advocate – a fiduciary advisor?
  • Is the advisor paid by clients, not financial product manufacturer or distribution network? That would be a fee-only advisor.

These two points help assure that you are working with a professional who is committed to your best interest at all times. It seems sort of obvious to me that a professional would work in this way, but it’s not automatic.

A fiduciary, fee-first, CFP® professional can help you make great retirement income choices and develop a comprehensive financial plan that is driven by your goals and priorities and addresses all aspects of your financial life. With a big-picture approach, you will be better prepared to understand your options at every step along the way.

Yes, I am a CFP® professional. I’m always a fiduciary and I work on a fee basis. And yes, I’m still taking on a few great families to be part of my financial planning practice.

If this article has you thinking about your own circumstances, contact my office at I am always happy to meet with people who are working on their retirement plans. Dunncreek Advisors does not provide legal or tax advice, nor is this article intended to do so.