Dear Carrie: If I invest my savings in the stock market, how fast can I get cash if I need it quickly? —A Reader
Dear Reader, Thanks for asking a question that opens the door to a whole lot more discussion. The timing rules for selling stocks and other securities and getting the cash are pretty clear and I'll go over those for you. But what I'd like to emphasize is the importance of deciding upfront how much money to keep easily accessible and how much to invest.
Much of that decision depends on your timeframe because the way you should save and prepare for short-term needs is very different from how you should prepare for long-term goals. And it's the money you earmark for long-term goals that should be the focus of your investing in the stock market.
When you buy or sell securities, the official transfer of the securities to the buyer's account or the cash to the seller's account is called "settlement." Currently, for most stock market trades, settlement happens three business days after the trade is executed. An easy and common way to remember this is T+3, which stands for trade date plus an additional three days. For example, if your sell order executes on Monday, funds would generally be available by Thursday. Some brokerage firms may immediately "sweep" your money into an account that earns interest. To be on the safe side, it is always a good idea to ask your broker about how you can assure that all funds and securities can be delivered to you promptly.
The three-day settlement date applies to most security transactions, including stocks, bonds, municipal securities, exchange-traded funds, mutual funds traded through a brokerage firm, and limited partnerships that trade on an exchange. U.S. government securities, no-load mutual funds, and stock options settle on the next business day following the trade. As you can see, the time it takes to get your cash depends in part on what type of investments you hold.
Settlement details aside, how fast you can cash out is far less important than making sure you're ready to invest in the market in the first place.
—First, set your financial foundation. The first thing is to make sure you have an adequate rainy day fund. Even if you're young and healthy, you never know what might happen. Aim to put away enough money to cover six months' of necessary expenses in an FDIC-insured savings account. That's right—a no-risk savings account. That way, if something bad happens such as a layoff or a health problem, you're covered.
Next, think about how much of your additional savings you might want to earmark for short-term goals—for instance, the money you might be saving for a vacation, or even the down payment on a house you hope to buy in the next couple of years. You could put that money in a money market account.
—Then decide what money to invest. Investing in the stock market always involves volatility and a certain amount of risk. Therefore, you have to think long term so that you have a better chance of riding out the inevitable dips. Otherwise, you could get caught needing to sell at the wrong time and sustain a substantial loss. This is why your emergency funds should not be in the stock market.
Therefore, before you invest, first think about how soon you'll need to spend that money. If you'll need it in the next three-to-five years, think about using alternatives as discussed above. However, if you're preparing for retirement on another long-term goal, investing in the stock market can provide you with greater long-term growth potential.
It may seem counter-intuitive, but there can also be situations where you keep your money in the market too long. And that goes back to the idea of timeframe. For instance, a parent saving for a child's education should probably start gradually shifting the money out of the stock market over time. That way, the money will be less subject to market losses before the tuition bills are due. Again, it's not a question of how quickly one can get the cash out, but rather reducing exposure to the stock market so as not to
Your seemingly simple question about the time it takes to get your money out of the market has triggered a lot of other considerations. And one of the most important timing considerations of all is just to get started.
Once you have a firm financial foundation, I believe that investing in a diversified portfolio of securities is one of the best ways to help grow your long-term savings. Which brings me to one of the classic sayings about investing: "Time in the market is more important than timing the market." And if you're young and just getting started, time may be your greatest asset.
Carrie Schwab-Pomerantz, CERTIFIED FINANCIAL PLANNER(tm), is president of Charles Schwab Foundation and author of The Charles Schwab Guide to Finances After Fifty, available in bookstores nationwide. Read more at http://schwab.com/book. You can e-mail Carrie at [email protected] Information on this website is for educational purposes only. It is not intended to be a substitute for specific individualized tax, legal or investment planning advice. Where specific advice is necessary or appropriate, consult with a qualified tax advisor, CPA, financial planner or investment manager. Investing involves risk including loss of principal. Diversification strategies do not ensure a profit and do not protect against losses in declining markets. To find out more about Carrie Schwab-Pomerantz and read features by other Creators Syndicate writers and cartoonists, visit the Creators Syndicate website at www.creators.com.
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