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Trader Q&A: Should We Be All Cash in the Market Now?

Schwab’s trading specialists discuss the risks involved in limiting your portfolio’s diversity.

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Lou Mercer: Yeah. This is great stuff. Keep your charts out. I know we have some questions coming in, so let's take our first question from Vincent in Pennsylvania. Should we be all cash in the market now?

Lee Bohl: Again, it depends on your timeframe, like we've said over and over. For your long term investment goals, no, don't be out of the market, right? I mean, the market has gone up, what, average rate of return, eight to nine percent since, you know, 1900.

Lou Mercer: Yeah, something I hear all the time, though, is, "Lou, buy and hold just doesn't work." And when we actually digest into someone's account on what they were talking about, it's in 2000 they bought only dotcom companies, or in different -

Lee Bohl: Right.

Lou Mercer: - they buy only certain asset classes or certain sectors or certain industries.

Lee Bohl: Right.

Lou Mercer: And that's - the power of long term investing is really all about diversification. On a shorter term trading side, should we be in all cash?

Lee Bohl: Again, not all cash, but certainly, if we break that moving average that I showed you, I would certainly go more into cash. I never go all out anything. It just makes the decision too hard. Scaling in and scaling out of positions I find is psychologically a lot easier.

If you are going to follow some strategy, though, like I pointed out, like following that moving average, you have to be honest with yourself. You get out when the market falls below it, or you get less bullish. Would you be able to, if the market goes back above that moving average, to buy something back higher than you sold it? For a lot of people, they just can't do that. And -

Lou Mercer: And we saw that when people panicked and sold in 2008 or 2009. Even though they were right for a couple of months, they just couldn't get back in. And the market just kept going higher so quickly that they didn't want to get in. They got stuck in cash.

Lee Bohl: Right. So I guess what I would say is if you are going to use some sort of market timing type system, at least to, you know, grade your exposure to more bullish, to less bullish, be honest with yourself. Could you buy higher? That was the number one factor that increased how I was doing in my trading, was the ability to buy back something higher than I sold it if conditions warranted.

Lou Mercer: We're talking to Lee Bohl, chartered market technician, and Lee is the host of Charting the Markets on Tuesdays and Thursdays with Schwab.

Our next question, Erin in New Jersey, is the rise in real estate a sign of the next bubble? Oh, I see that she was in California. Real estate prices really have dramatically increased. What do you think?

Lee Bohl: Well, I mean, if you take a look at the Case-Shiller index of housing prices, they have been going up for sure, but nothing like we saw in 2007, 2008, before things started getting rough.

When I look at real estate, though, I do it more as a portfolio investment, as an asset allocation, and I do that with REITs. Okay? So I would say for sure REITs right now are not looking very strong, and the reason is we've had increasing interest rates, and generally, REITs pay out income, so they have been weak.

So I would say that in the real estate sector of the stock market, be cautious, especially if interest rates continue to rise. I'm not really an expert on housing prices in different parts of the country, though.

Lou Mercer: And that's what you see. Right now, the affordability index in California is extremely low, which usually kind of shows that people can't afford homes and prices can't continue to go home. But that's not really the case across the country. There still is more room there. So as an investment, be careful. If it's a home you're buying to live in, make sure you want to live there for a long time, because who knows where prices will be in two to five years.

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