Stocks plunged on Friday after Federal Reserve Chairman Jerome Powell gave every indication that the central bank would continue to raise interest rates to fight inflation.

Investors with a weak stomach for volatility may wonder if it’s best to stay in cash during these volatile markets. Continuing our “What to do in a bear market” series, Yahoo Finance asked the experts if it makes sense to hold cash given the way inflation is eating away at savings.

Do you recommend holding cash during these volatile markets, even with high levels of inflation?

“Even with these volatile markets coupled with high inflation, we believe investors need to stay invested. It’s hard to time cash perfectly because the market is hard to time perfectly,” said Greg Bassuk, CEO of AXS Investments. in New York, at Yahoo Finance, whereas if the market catapults higher, they regret holding cash.”

Bassuk cited the July rally as an example of the dilemma of holding cash. With US stocks up 9% in July, one of the best months ever for equities, “cash allocations have been a source of remorse for investors. The solution ? Stay invested.

Some strategists are pointing out that a continued rise in interest rates is poised to send markets lower in the coming months. So the margin money could be used for a lower entry point.

“We continue to remain very defensive, with a lot of cash. We wanna see which way they’re going[la Fed]Eddie Ghabour, managing partner at KeyAdvisors Group, told Yahoo Finance Live recently. “Our money is betting they’re tighter and longer than what the market is actually positioned for. And then we’ll have a better entry point in the 4th quarter to dive back into stocks.”[TheFed}goin”EddieGhabourmanagingpartneratKeyAdvisorsGrouprecentlytoldYahooFinanceLive“OurmoneyisbettingthattheytightenhigherandlongerthanwhatthemarketisactuallypositionedforAndthenwe’llhaveabetterentrypointinthe4thquartertodipbackintotheequityside”[TheFed}goin”EddieGhabourmanagingpartneratKeyAdvisorsGrouprecentlytoldYahooFinanceLive“OurmoneyisbettingthattheytightenhigherandlongerthanwhatthemarketisactuallypositionedforAndthenwe’llhaveabetterentrypointinthe4thquartertodipbackintotheequityside”

Ultimately, one expert pointed out, investors should own a portfolio well-suited to their financial goals and personal tolerance for market volatility.

US dollar banknotes are pictured in Buenos Aires, June 23, 2022. (Photo by Luis ROBAYO / AFP) (Photo by LUIS ROBAYO/AFP via Getty Images)

“For investors with relatively short time horizons, such as retirees, some level of cash can make sense,” said James Solloway, chief market strategist at SEI. “The same could be true for investors with a relatively low tolerance for market volatility, but this comes at a cost given that cash tends to be the lowest-earning financial asset class over any period of time. meaningful.”

Solloway adds that any decision to exit the market “must be relatively timely and requires a subsequent and equally timely decision to re-enter the market. And once you take into account that actual market peaks and troughs are only identifiable well after the In fact, it should become apparent that market timing attempts are far more likely to impose a net cost on a long-term investor’s portfolio.”

If holding cash is recommended, what proportion of a portfolio?

“While we do not recommend holding cash for for investment purposesit’s prudent for investors to maintain modest cash positions of around 5% of their portfolios so they can quickly put ‘dry powder’ to work in these volatile times,” said Bassuk of AXS Investments.

One expert said “cash should only be held for known expenses that will occur in the next 3-6 months.”

“We would rather hold short-duration, investment-grade fixed-income today than cash for anything longer than short-term liabilities,” said Alex Chaloff, co-head of strategy at investment at Bernstein Private Wealth Management, at Yahoo Finance. “While short-term instruments outperform cash today by a substantial margin, neither is keeping up with the current high levels of inflation.”

It’s also important to keep a retirement schedule in mind.

“For those with a long road to retirement and given the current economic environment, an emergency fund of 6 to 12 months of reserves is usually sufficient,” said Rachelle Tubongbanua, private wealth advisor at U.S. Bank Private Wealth Management at Yahoo Finance. “For those close to retirement or retirement, an emergency fund of 12 to 24 months reserve is usually ideal, especially in volatile times like the one we are experiencing today.”

Is there a better alternative to holding cash?

Depending on your time horizon and risk tolerance, there are investment options other than holding cash.

“If you’re looking for an option for relatively short-term, low-risk non-emergency funds, a laddered cash portfolio (bonds that mature on different dates) can provide that,” Tubongbanua said. “Treasury bonds are backed by the full confidence of the government, and there is also a tax advantage, as the income is exempt from state and local taxes.”

Tubongbanua noted that Treasury yields have risen significantly in recent months and offer a better return compared to savings or money market accounts.

Additionally, liquid alternatives are also a way to stay exposed to stocks on bullish moves while providing cover.

“Liquid alternatives represent the best of both worlds: a way to stay invested for upside equity market participation with the built-in risk mitigation needed to weather the volatile and high inflationary storm,” Bassuk said.

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