Stocks are looking frothy. Should I raise cash to prepare for a correction?

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Choose an allocation of stocks and fixed income that suits your risk tolerance, then resist the urge to tinker with your portfolio

My wife and I manage more than $2-million of assets in several accounts with TD Direct Investing, including a registered retirement savings plan, registered retirement income fund and tax-free savings accounts. We are thinking it is prudent to draw down something in the order of 20 per cent to 25 per cent because we fear the market is getting a bit frothy.

I understand your desire to protect your capital. But the truth is that you don’t know where markets are going next. Nobody does. If you sell and a correction comes, you’ll feel like a genius. If you’re wrong and stock prices rise, you’ll be kicking yourself. Then you’ll have another decision to make: Do you get back in, possibly at higher prices, or keep waiting for that elusive correction?

If you do decide to sell some of your stocks, you have a few options for parking your cash. Since you are a TD Direct Investing client, a simple option is the TD Investment Savings Account, which currently yields 4.3 per cent, calculated daily and paid monthly. In early April, TCSH’s inaugural distribution was 28.5 cents per unit. That was followed by 23.6 cents in May, 22 cents in June and 20 cents on July 8, the most recent payment. TD Asset Management’s website lists the portfolio’s yield-to-maturity – that is, the yield assuming all securities were held to maturity and redeemed at face value – at 4.88 per cent. Subtracting the maximum management fee of 0.15 per cent produces a net yield-to-maturity of 4.73 per cent.

 

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