I Have Cash! Is Now a Bad Time to Invest?!

Hey, hey, hey! Some cash just landed in your lap. Or perhaps you have a vested interest in your company, and now your stock is available to sell or transfer. What do you do with it? Do you keep it? Invest it elsewhere all at once as a lump sum and hope the market doesn’t fall (further)? Is it best to dollar-cost-average? WTF is dollar-cost-average?! But isn’t there about to be a recession?? Ahhh!! Let’s take a look!

Think First Before You Act With Your Cash

The knee-jerk reaction to getting a fat wad of cash is to spend it.

In most cases…don’t do that.

You are here on this website because you’ve likely decided to invest in your future. Or you are my mom. Or both. Either way I love you, just in different ways.

I’m going to assume that you, dear reader, are interested in passive index fund investing. We have found through our own investing strategy described here that this method is both the easiest and least-risky option. Other fantastic methods include real estate investment or business creation, but those options are generally far less passive and might carry a higher degree of risk.

There’s nothing inherently wrong with any of these investing methods, I just don’t have the expertise to spray you down in that arena.

Company Stock

If you work for a publicly-traded company, you may have been offered shares of the company stock as an added long-term incentive plan. These equity plans come in various flavors, shapes, and forms, and I won’t use this post to explain the nuances of equity plans. Here is a good place to start for the different types of equity plans.

Cutting to the chase, let’s say that you just had a number of shares vest. Those shares are now available for you to have your way with them. You can keep them and hope that the share value will grow, cash them out for the world’s greatest Chuck E. Cheese party, or invest them elsewhere.

What should you do?

Should you keep the shares?

What if you work for Apple and it’s 1991, and these shares could make you rich one day?! Perhaps you’ve seen your company stock grow tremendously, and you believe in your company’s long-term performance?

Should you sell your shares for cash and buy a new car?

Do you need a new car?

Should you sell the shares and reinvest in another investment?

Hmm, maybe we’re getting warmer. BUT…could investing in something less risky—yet sustainable—result in missed opportunity of a rapidly growing company with a promising future? 

Think in Terms of Percentage of Total Net Worth

Do you know your net worth? If not, please check out this post on calculating your net worth.

Once you have a clearer picture of your assets and debts, you can begin to make a more informed decision in this matter.

For most folks (us included), Mrs. CC and I don’t recommend investing more than 5% of total net worth in any single company.

Why? Ever heard of Enron?

The simple answer is that most individual companies have volatile stock performance. Sure, a company’s stock price can surge, but they can also tumble fantastically. Take a look at Tesla’s stock over the last year. Everyone loves Tesla and wants to give Elon Musk all their cash and a back rub.

Things are looking fantastic! For now…

But how about Southwestern Energy in June of 2008? Hot damn! Looks similar, eh?

Oh, and now today.

Do you want a large percentage of your savings tied up in a single company? I wouldn’t recommend it.

Bottom Line: Investing in a single company or venture is a high-risk proposition. You can become fabulously rich, or you can lose everything. To hedge your bets, most folks should invest no more than 5% of total net worth in these bad mama jamas.

Investing Cash in a Broad-Based Index Fund

In most cases, taking that money and investing in a broad-based index fund is ultimately going to be a good decision, no matter what Carl Carlton says. Let the power of diversification and the entire stock market work in your favor.

Are you going to get fabulously rich with an index fund?

Well, actually, yes…you very well may. But it won’t happen in a year. We want slow and steady. Over time, with steady growth (7% yearly on average) and regular investments, the compounding effects will generate a bitchin’ return.

Okay, But Is Investing All My Cash at Once Risky?

Now let’s forget about company stock. You’ve got money. Maybe you received an inheritance, or you sold a house or something. Who cares, you’ve just got some cash.

As we’ve discussed before, keeping surplus funds in a traditional savings or checking account is far from optimal for our financial future. It’s simply a losing battle to inflation. We need to get that money working for us.

The question then becomes whether it’s best to throw it all in the market at once (lump sum investing), or sprinkle the money in regularly-spaced allotments (dollar-cost-averaging), say once a month or so. A lot of this is going to be ultimately decided by your personal psychology and what helps you sleep at night, but let’s examine what the research suggests.

Dollar-Cost Averaging VS Lump Sum Investing

Most passive investors, including us, participate in dollar-cost averaging (DCA) during normal times, whereby regular deposits are made to investing accounts over a long period of time and at different purchase price points. Say, for instance, 401(k) contributions deducted from each paycheck.

You can imagine a situation where a large pile of money lands in your lap, and you might be hesitant to invest all that money at once. Is it less risky to dollar-cost average, spreading the investment over many weeks and months in regular intervals?

Lump-Sum Outperforms, but…

This study by Vanguard suggests that lump-sum investing typically outperforms over the long-term. Historically speaking, throwing all that money in the market at once (lump-sum investing) is likely to generate better long-term returns. Because, as we know, the market always goes up.

However, this article by Ben Carlson rightfully points out that the long-term range of possible outcomes on a DCA investing strategy is much “tighter,” with a lower standard deviation. In layman’s terms, lump-sum investing will likely outperform, but the difference between the best- and worst-case scenarios are quite large.

So, wouldn’t it really suck if you dumped a bunch of money in the market and the market tanked by 20%? Studies be damned, that would not be fun! You could have bought shares on a 20% sale! Now you have to wait for the market to climb back out of that hole for you to make returns on your new investment. And that could take years!

So yes, DCA investing does hedge against market volatility. However, as the common risk vs. reward debate goes, you are usually bypassing greater reward when reducing risk.

Bottom Line: Lump-sum investing is generally shown to generate better long-term returns, but DCA investing may hedge against short-term market volatility. Investor psychology is number one when deciding which method to use for a cash windfall. None of us can predict market performance. If choosing a DCA approach for a cash windfall, it is recommended to keep the investing period to a year or less in evenly timed intervals.

My Experience with Cash Windfalls

The impetus for writing this post is two-fold:

• As a former corporate employee, I was granted stock interest through all my previous employers. This stock becomes available to sell once or twice a year after a three-year vesting period (typically).
• My company was recently acquired by a competitor. I chose not to continue on with the acquiring company, so I received a generous one-time lump-sum payment as a severance package.
• At the time of writing, the market is in a volatile state and that has everyone’s panties in a very twisted wad. A mangled wad of volatility.

Here’s how we chose to use this unexpected windfall of cash:

Stock Vesting

Historically, at least since I’ve been at least half-optimized with my finances, I’ve immediately sold the company stock and put that money straight into our favorite stock index fund, VTSAX. This is not some affiliate endorsement for Vanguard (and I have no relationship with them, although I’d love if I did); they simply offer some of the best index funds around.

For all the reasons listed above, I don’t care to roll the dice with a single company. I chose each time to invest my money in the stock market as a whole (VTSAX), smoothing the ride and likely producing much better long-term returns.

Mechanically, I always sold the stock on the vesting date, transferring the after-tax proceeds to my personal brokerage account with Vanguard. There, I immediately bought shares of VTSAX with the transferred company stock. In all cases, I made a single lump-sum investment.

End of story.

Severance Cash Payout

When I was “severed” from my company (that’s funny to me, sorry), I was paid a generous one-time cash payout including forward salary, COBRA insurance coverage (also funny to me), and vesting of the remaining unvested company stock I held.

This payout didn’t make us financially independent by any means (we created our own luck), but this was a lucky and unexpected bit of padding to our figures.

You might assume that I just threw it all in as a lump-sum investment to VTSAX as I’ve always done with stock money.

I didn’t.

I Bought Some Toys

Gasp!!! Mr. CC bought unnecessary items??

I’ll go into this more in a future post, but here’s the short story:

Because I sort of quit my job, I wanted to go ahead and make some purchases while I still had income. These purchases included a new laptop, and biggest of all, a new truck and camper setup for extended road travel. We sold our Subaru Outback, so we’re still hanging as a one-car household.

These are big, grossly un-frugal purchases that I do not take lightly. In fact, I had a few restless nights when debating dropping money like this. After all, we’ve spent years with a sustainably frugal spending profile.

It hurt to drop thousands of dollars at once on “things,” but I firmly believe these “things” will bring a lot of value in the near-term. Stay tuned for more on that.

Investing the Rest: A DCA Approach

After we finished buying “things,” we still had some surplus severance cash that hit our checking account in mid-February. We were abroad on questionable WIFI sources, so we decided to wait until we returned home to consider our investing options.

After we returned home from Sicily in late February, world events were really starting to heat up. Everyone was (and is still) going bat-shit crazy about the dreaded Coronavirus. As such, market volatility was becoming…well…volatile. A fitting match to global psychology over what is a mild cold for most people.**

Wait Until the Bottom?

The immediate reaction is to “wait and see” what happens with the market. Of course, it would be ideal if we could just “wait until the bottom” and then lump-sum invest all the cash at once…RIGHT?

But as we’ve already discussed, the bottom is only seen in hindsight, and the upward rebound is often hard and dramatic. FOMO is real.

(Related Post: You Know a Recession is Coming, Right?)

We know that getting in the market ASAP is almost always a winning bet, but something felt wrong.

And sure enough, last week the S&P 500 dropped dramatically, over 10% into correction territory. Now that doesn’t bother me. If you can’t handle a 10% (or 20%, or 30%, or even 50%+) drop, you are in the wrong game. I’m serious, resilience is essential for short-term market volatility.

(Related Post: We Lost Thousands of Dollars in the Stock Market, and That’s Okay)

We must recognize market drops for their ephemeral nature: here today, gone tomorrow. Temporary may mean years, but this too shall pass, as it always has before. Don’t believe me, ask this guy.

However, I’m glad we made the decision in the week prior to go ahead and hedge our bets, using a dollar-cost-average strategy to invest once per week in equal amounts until the money is all invested. So that’s what we’re doing. Will it be the best strategy? I don’t know. But it’s better than not investing at all.

Because, as we know, fear is an investor’s worst enemy.

A Summary: Cash Rules Nothing Around You

Although we all know Method Man to be a man of wisdom, I’m going to politely disagree with his iconic statement:

Cash Rules Everything Around Me…

Mr. Method, that cash needs to be invested if we want to fight a valiant battle against inflation (the rising cost of goods and services each year).

For the typical investor, especially in a wealth-accumulation phase, cash should be put to work. We obviously need to pay the bills and have perhaps some semblance of an emergency fund (and even that is disputed at times), but otherwise piles of uninvested cash is really hurting us in the long run.

And sometimes in life an unexpected sum of cash lands in our laps, and we’re (hopefully) forced to make a responsible decision.

Do we make a value purchase?

Do we invest it? All at once, or little by little?

Ultimately, we recommend the investing approach for any long-term goals. Get that money into a broad-based and low-cost index fund, or some other investing vehicle of your choosing. Whether you prefer to throw it all in at once or drop it in evenly-spaced increments is ultimately defined by what helps you sleep at night. A lump-sum approach will probably generate better long-term returns. But if you are the unlucky one to drop thousands in right before a big crash…well…maybe not.

Either outcome, over the span of many years, is very likely more fruitful than not investing at all.

So, what would you do with a wad of cash right now?

**May 2020 edit: With the gift of hindsight, I now see that my dismissiveness of the coronavirus was wrong. While symptoms are mild for many, we now know that hundreds of thousands of people have lost their lives and the global economy is severely impacted. The original text is preserved here as a reflection of the times and general outlook in late February and early March of this year.

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