Investing in stocks can be a great way to grow your savings over the long haul. However, that doesn’t mean that you’ll want to invest every last dollar you’ve saved up in the stock market. Tempting as it may be to maximize your cash and look for quality dividend and growth stocks to invest in, it’s not necessarily a bad idea to hold some of your cash in just a regular savings account.
During a crash, it could take years to recover
The North American markets have been doing very well of late, but there are concerns that tougher times may be ahead. And if that’s the case, holding shares could be problematic, especially for investors that may not be willing to hang onto their investments for years.
Take, for example, a blue-chip stock like Royal Bank of Canada (TSX:RY)(NYSE:RY). Under normal circumstances, this is going to be a great investment to hold. Not only does the bank continue to generate growth in its top and bottom lines, but it also provides investors with some solid dividend payments along the way.
However, if we go back over a decade back when we saw the last big downturn on the TSX, things weren’t going so well for the stock. In early 2009, RBC’s share price would fall to well below $30, a far cry from where it was two years prior to that when it was around double that value. Although it took about a year after the stock bottomed out for RBC to recover back to the highs it reached in early 2007, since the decline first began, it would end up taking close to three years for the stock to fully recover.
The problem for investors is that recessions can vary in duration and severity, and there’s no guarantee that a stock like RBC would be able to recover in the same amount of time when another recession hits.
RBC is one of the safest investments an investor can own on the TSX, and yet, it still lost half of its value during a two-year window. Not only would it have taken patience for investors to not sell during the free fall, but for many people, it wouldn’t have been possible to hang on for an additional year to wait out a recovery, as there would have been other pressing needs for cash during those tough economic times. And at the time, it would have been difficult to know that a recovery would take place and that things wouldn’t end up getting worse.
Investors should always look to diversify their investments. Although investing in a stock like RBC is never a bad idea over the long term, the above example shows that it’s not infallible, and that it too can succumb to the market’s struggles.
Holding your money in a savings account isn’t going to yield a great return, but that doesn’t mean it’s a bad option, especially during some concerning economic times when stocks could be headed for some big losses.
If there’s money that you know you might need over the course of the next couple of years, it may be a good idea to not hold that amount in stocks, as it could put you in a difficult situation if you need cash and your only option is to sell some underperforming stocks.