I recently sold my business and I will owe about $75,000 from the gain. According to my accountant, because of what I paid already in estimates I won’t have to pay the $75,000 until I file my 2016 tax return. Generally, I file my return at the end of March. My question is what do you think I should do with the money? Part of me says I should leave the money in the bank even though it’s not paying anything. The other part of me says that it is a waste to put the money in the bank and that I should consider investing the money. If I invested the money, I think I would put the money into the Vanguard S&P 500. My question to you is what do you think I should do? I should mention that I generally consider myself a moderate investor, leaning a little bit towards being aggressive.
Without question I think you should leave the money in the bank and, in fact, even if you said to me you were an aggressive investor , I would still tell you the same thing. The question isn’t if I think the market will be higher four months from now or if the Vanguard S&P 500 is a good fund or not. As far as I’m concerned, no one should be invested in the market for a four-month period. Anything and everything can happen over the short run and you don’t want to be in a situation where you’re forced to sell at an inopportune time.
As far as I am concerned, anyone who puts money into the market for a four-month period is not investing, they are gambling. One thing we should all know by now is that over the short run, markets can be very volatile. Just this year alone we’ve had our fair share of volatility as the markets tumbled the first couple of months of the year and also retreated immediately after the Brexit vote. On both of those occasions, markets eventually came back. You don’t want to be in the position where when the market is retreating you have to sell in order to cover your tax liability.
I recognize that when you invest in CDs and money market accounts your returns are extraordinarily low. I’m not happy by that; however, let’s not forget the primary goal, which is, in four months you will use this money to pay your taxes. Therefore, return is only a secondary consideration. Leaving the money in the bank is the only investment that will accomplish your primary goal and that is why I believe the only smart move is to leave it in a guaranteed account at the bank.
The reality is that interest rates are low and are going to be that way for a while. Even if the Federal Reserve raises interest rates at its December meeting, we are still going to see low rates of return on CDs and money market accounts. Despite the low rate return, for short-term money and emergency funds, there are no other realistic alternatives. However, one thing you can do is to shop rates around to see if you can receive higher rates of return. Credit unions and federally insured web-based banks will sometimes be more competitive with rates. The key is to always use a federally insured institution. One of the beauties of the internet is that it is much easier to shop rates around the country and to transact business with those institutions.
To be successful as an investor you must remain focused on your goals and objectives. Every time you invest money you should be asking yourself what your goal is with the money. If your goal is targeted at 20 years down the road, you don’t need to be overly concerned about short-term volatilities. On the other hand, if your goal is four months down the road, short-term volatilities should be extremely relevant. Investors need to invest based upon their goals and objectives, not what is happening in the market. Letting the market dictate how you invest is sort of like letting the tail wag the dog. As investors, we can’t afford to let that happen.