Zacks Investment Management

Zeke M. from Detroit, MI asks: Good Morning Mitch, I managed to stay invested through 2020 and have seen the market soar to new highs. That said, I’ve been accumulating cash over the last year and have been waiting for a dip to put it to work. Any thoughts on when/how to deploy that cash?

Mitch’s Response:

Thanks for writing, Zeke, and my hat is off to you for staying invested throughout the last year. Staying invested was no easy feat, given the steep bear market and all the uncertainties surrounding it. Uncertainties, I should add, that largely still exist today. My advice to investors throughout the last year was to keep a steady hand – I’m glad you followed through.

Before I answer your question, I’d like to start with a question of my own: how long have you been waiting on the sidelines with your accumulated cash? I ask this question because I often see investors looking to “buy the dip,” but I rarely see investors taking stock of how much benefit was gained from waiting.

Let me explain: as I write, the S&P 500 is trading around 3,900. If you’re waiting for a -10% or a -15% dip, which historically is a healthy correction range, then that means you’re waiting for the S&P 500 at either 3,510 (-10%) or 3,315 (-15%).¹ The S&P 500 traded at those levels in October and November of last year. Were you waiting on the sidelines then? In other words, would you have been better off just investing your accumulated cash in September or October, and starting the compound interest clock then? Remember, it’s time in the market – not timing the market.

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I understand the difficulty of investing cash when the market has been rallying steadily for such a long period. There’s the difficult feeling that you may be investing at a local top, which is a tough pill to swallow especially if the market enters a correction just as you invest. But if your goals are long-term, and you’re investing this money for the next 10, 20, or even 40 years, then timing does not matter as much as our minds lead us to believe, in my view. It’s time in the market, not timing the market.

As for how to deploy your cash once you’re ready to invest, that is a challenging question to ask given I don’t know your current asset allocation or your goals/risk tolerance. But looking ahead in 2021, from an equity standpoint, we expect a few trends to take hold. I can see a rotation from growth outperformance to value outperformance, particularly if interest rates tick higher over the course of the year – which I think they will. I could also see some early bull cycle trends taking hold, like small continuing to outperform large and cyclicals outperforming defensives. I like an equity portfolio positioned to earnings growth, as my long-time readers know, and that’s where I think strong year-over-year earnings will be generated in 2021.     

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Disclosure