This article was first published in the National Post on September 25, 2021. It is being republished with permission.

by Tom Bradley

One question keeps coming up in my discussions with investors: Is it time to raise cash?

The rationale behind the question is roughly the same: "I’ve done really well ... the stock market can’t keep going up forever (or is due for a big dip)," and there’s usually a concern that a troubling current event, such as rising inflation or regulatory uncertainty in China, will prevent stocks from going higher.

I have sympathy for these arguments. I said in my second quarter letter to clients that "it seems like a better time to be harvesting than planting." In our Founders Fund, we’ve been edging down the equity content in recent months.

Nonetheless, my answer to the cash question is a resounding "it depends."

It depends on a range of things, including why you’re asking, the purpose and time frame of the money you would get and whether you’ve strayed, or are thinking of straying, significantly from your investment plan.

This is an unsatisfactory answer for most people, so let’s review some circumstances where I can be more decisive. I’ll start with the noes.

The answer is no if you’re invested in a professionally managed balanced fund. You’ve turned the keys over to a fund manager, so let them adjust the portfolio based on their fundamental outlook and valuation work.

The answer is also no if you’re making a short-term call because you heard someone say the market is heading down. There’s no way to reliably call the market over the next quarter or year, let alone time the next correction.

Stock prices are driven by a multitude of factors in the short term. It’s impossible to know which ones investors will latch onto next, and the relationship between economics and markets is sloppy at best.

What makes it even harder is the need to get not one, but two decisions right. Yes, after you get out (difficult), you’ve got to get back in (more difficult).

And, keep in mind, you’re betting against the house when you go to cash. Stocks have consistently been a winning hand. Since 1960, a 50/50 portfolio of Canadian and foreign stocks has had an average annual return of almost 10%. If your time frame is measured in decades, don’t try to get too cute.

There are circumstances, however, where selling down your stocks makes sense.

If your portfolio has strayed from its intended asset mix, then, yes, it’s time to get back to plan. The divergence between bond and stock returns has been significant over the past year — bonds have had a negative return. If you haven’t made any adjustments to your 60/40 stock/bond portfolio, stocks now account for 65 to 67% of the mix, and rebalancing is appropriate.

The answer is also yes if you need money to do a kitchen renovation or book a long-awaited trip. Don’t hesitate to set the money aside.

There’s one other reason to lighten up on stocks and it relates to your age, or, should I say, aging. You are another year older and although your portfolio’s target mix shouldn’t change much from year to year, it may be time to dial down the risk a notch.

Let me be clear, I’m not talking about a short-term move, but rather a reset of your portfolio based on your age and life stage. A good time to do a review like this is when markets are calm, and returns have been good.

Is it time to raise cash? I encourage you to be guided by the purpose of the money as opposed to a hunch on where the market is going. You’ll make fewer unforced errors that way.

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