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Answer by Adam Nash, CEO of Wealthfront, on Quora.

Q: In the current market situation, what would you recommend doing with cash on the order of $50,000?

Let me start out by saying that everyone's financial situation is different, so frankly, the real world answer realistically could vary a lot.

However, in general, at Wealthfront we strongly advocate that the first priority for individuals to be healthy financially is to make sure that they pay off expensive debt, spend less than they make, and build up an emergency fund of 3-6 months of expenses before they approach long term investment. An emergency fund should be allocated to an FDIC insured savings account - it is not there to make you money, it is there to protect your long term investments from short-term, unexpected expenses.

Assuming that is taken care of, Wealthfront recommends investing the money into a low cost, tax efficient, fully diversified portfolio. The DALBAR research clearly shows that individual investors dramatically underperform the markets, largely for two reasons. They pay too much in fees and they make behavioral errors with their investments. Marketing timing is the number one behavioral mistake investors make - they think too much about "the current market situation". Markets go up, and markets go down. The benefit of a long term, passive investment strategy is that you can automate your savings and investment and ignore the emotional day-to-day movements of the market. The best thing you can do is expose yourself to the power of compounding, keep fees low, stay diversified and be smart about taxes.

 

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