Whenever there’s market turbulence — say from elections, a pandemic or just new market highs — you will hear arguments from big-time investors about whether be fully invested in stocks or or have money sitting in cash.
This is obviously a personal preference, but if you are sitting in cash and you want to do something proactive with it, here are three good options for buying back into stocks.
Open a Roth IRA
One of the best things you can do with your cash right now is put it into a Roth IRA.
If you earn an income, subject to certain limits, you can make that money tax free, forever. Plus if you put in $5,000 into a Roth IRA today and then needed to pull some or all of it out a year or even five years from now, you can do that without being taxed on it.
Contributions can be taken out penalty and tax-free, but not gains. However, your gains are not taxed and withdrawals later are not taxed either.
That’s hard to beat. In that sense a Roth IRA essentially acts like a bank. You can pull money out if needed, usually within one business day.
Buy index funds
Worried about picking individual stocks? Stop worrying and buy a an index fund instead.
Best for most investors is the an index fund which matches the S&P 500. These funds will focus on more medium- to large-cap companies representing 500 companies in total, and can tend to be less volatile. A popular version of this fund is the SPDR S&P 500 ETF Trust (SPY).
A fund that tracks the Russell 2000 is made up of small-cap companies. You could see higher returns but that comes with more potential risk. Here, consider the iShares Russell 2000 ETF (IWM).
This is the method I follow for my portfolio. This method does require more knowledge and experience since you will be looking at individual companies rather than index funds made up of hundreds of companies, but anyone is capable of doing it.
The goal here is to find companies that you can understand and that you can buy on sale — for whatever reason, the price is too low for the underlying value of the company itself.
Think of it like buying a $10 bill for $5. All it takes is a handful of really strong companies that you can buy cheaply and you can see your money compound year after year for decades.
Two key factors to remember with this method are: Stick with companies that you can understand, and make sure you are getting them at a price well under their actual value.