I recently sold a bunch of stocks and parked the money in my savings account. I did this because the recent market rally this month made me a little nervous about the next short term market cycle, and also because I’m saving for a down-payment. I’ve had a savings account for almost 10 years now and it’s where I usually put my capital if I’m planning on a large investment or purchase in the near future.
But individuals like myself aren’t the only ones using banks to save. The large institutional investors who manage millions of dollars for their clients can also park their assets with banks, sometimes even in multiple countries to make the best of their money and act quickly upon opportunities internationally. A bank account can help with hedge funds, by mitigating their risk to the capital markets. Hedge funds are like mutual funds, except they can undertake a wider range of investments which usually make them more risky than mutual funds. There are many types of bank accounts, but most banks offer at least some version of a checking account, and savings account. Known for their liquidity and better interest rates than putting money under the bed, savings accounts give us somewhere safe to put our money that we don’t intend to use on a regular basis. And hedge funds use bank accounts to normalize the risk tolerance in their portfolios. For example if a hedge fund wanted to profit from the ups and downs of a certain stock, they can short the company at a high price, make money when the stock comes down, and then put some of the winnings in a bank account so it can earn some interest while they wait for another opportunity to short again.
You’ve probably heard that corporations around the world are sitting on over half a trillion dollars in cash because they are cautious about the economy and the future well being of their shareholders. Well investors are the same way. Individuals and hedge funds are sitting on loads of money because we’re nervous about the markets and waiting for something new to invest in, and banks can facilitate that service of paying us while we wait with virtually no risk.
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Random Useless Fact: In the US, currently up to $250,000 in a savings account is insured by the Federal Deposit Insurance Corporation so even if the bank you’re with goes out of business, your money is guaranteed by the government. If you have more than that (if you happen to be so lucky,) you can open up multiple bank accounts to get around the limitation :0)
I totally need to learn more about investing. I don’t know enough to know when the market cycle may be heading into a rough time. So I’d probably just have to ride out those bad times. Since you’re saving up for a down payment, it does make a lot of sense to get some money out of the market while you can.
Sometimes riding out those bad times is the only thing we can do. At least you are consciously aware that you have to learn more about the markets. That already puts you ahead of those people who don’t even know what they don’t know (0.o)
Excellent points. Having cash on hand for a hedge fund is key so they can make movements as they wish. They’re really no different than an individual investor, as you say, just that they generally have much larger sums of cash. In this market, getting out and taking profits is as important as ever, especially if you have a goal that you’re shooting for.
Knowing when to get out while you’re still in the black is a hard, but helpful skill to have. You can never lose money by making a profit.
Instead of re-investing my dividends, I park them in money market type of account until I see an opportune time to buy. That way I still make some interest while I wait for the markets to level out after their latest dip.
You should start a hedge fund Steve. Sounds like you’ve figured it out :0)
I need to learn more about investing too, but right now, just living paycheck to paycheck and getting out of the hole I dug. Take it from me, do it now while you are young because life comes at you fast!
Good call! markets have been down the past couple days(until today!) It’s definitely true that the market is cyclical. I don’t think it’s a bad idea at all to lock in gains. Let’s say the market goes up 10% in 6 months. You sell your funds b/c you think the market’s gonna go down, oh wait, the market goes up another 5%. Who cares!? You already made 10%!! I wouldn’t mess around on the other end of the spectrum though b/c that’s how you lose a lot of money.
Yup, it’s pretty much all relative. I would be really happy to lock in a 10% gain for the year 🙂
Good call! Markets have gone down a bit this week(until today).. I don’t think there’s anything wrong with locking in gains but I definitely wouldn’t try and time the bottom of the market, that’s how people lose a lot of money.
If I make 10% off my investments in 6 months, it’s not a bad idea to sell off, if the market goes down, you’ve made even more money( by not losing it) and if it goes up, who cares you’ve made 10%. Problems arise when it keeps going up and up and then you finally jump back in and then it goes down.