Liquidity: short-term reaction to market changes is bad, but what about reaction to personal changes?
I feel like I'm still pretty new at this stuff, so someone can correct me if I'm wrong, but it seems like you may need to narrow down the purpose for your investing more before you can really be appropriately advised. If this is money you might just decide you need 8 months down the road, but you've already thrown it into the market, yanking it back out again can have some significant consequences (taxes being one of the most out standing.) Is this money saved for a potential home? Is this money saved for retirement? All these considerations will affect the sorts of vehicles you choose. Obviously, life can blindside you and force your hand (you had an account set up for retirement, but you find yourself hit with a massive medical bill after an emergency situation and have no other resource but to full from it.) But if you are ANTICIPATING a life change, I might do some more soul searching before I plow in to the markets.
I'm trying to understand the odd dichotomy of investment accounts liquidity. (If cell phone companies managed to lock us into lengthy contracts, I'm surprised that the financial market hasn't.) You can cash out or modify your portfolio at any time, while at the same time the advisors say "don't think of that" - just put the money in and don't touch it for however many years your horizon is.
Unfortunately, the financial sector usually profits from investors shuffling their money around like it's a puck in a hockey game. So, often there is actually disincentives for advisers to recommend that you invest inexpensively and with an eye towards the long term.
When advisers tell you not to think about cashing out and to instead think about the long term, it's usually, because--historically--the longer your investment is left in the market the more the volatility is reduced. Essentially, this just means that the more years of return your have factoring in to your average, the less of an impact that a hand full of bad years here or there will have (suppose, for instance, you choose to invest for just this one year and the market produces a nauseating -3% return. Sucks to be you, and you take it out. But suppose that you instead let your money sit for the next fifty years. When you average your total returns over the lifetime of those 50 years, that -3 percent will just be a tiny blip on the chart of your lifetime returns, rather than a massive ravine in to which all your money has sunk. Volatility is just a measure of the variation in returns from an investment, and volatility, all other factors being equal, is reduced over time.
Looking at an investment account as short-term is foolish and usually related to panic moves. I get it. But what about personal changes? What if a year from now I feel more confident in my knowledge and want to shift a significant amount of my portfolio from managed to self-traded (funds, not stocks)? Or feel confident and want to shift to a riskier allocation model? Or add money to the account and switch to ETF's? Or buy a house?
You would would just want to read up more on investing to fully understand the consequences of all these scenarios. A lot of this will have to do with what sort of accounts you have. Are they tax deferred or not? Shifting things around in a tax deferred account isn't so big a deal (because making a profit off of a sale isn't going to effect your tax liability in that particular year), but shuffling investments around in a taxable account can put you in a position in which the additional taxes you owe at the end of the year eat up any profits you might have made from your short term investment. Moreover, you also want to be careful what you are paying to execute all these trades. If you're moving your money around because you're shifting your purpose frequently and each trade is incurring sales charges, you may make it close to impossible to actually make any money--no matter what your "return" on paper is.
I disagree that volatility is related to liquidity. If I cash an ETF now and it's a bad time, I see it as part of the risk, not of the liquidity.
This statement doesn't really make sense to me. Perhaps I don't understand what you mean, but I don't really know why volatility would be linked to liquidity. Liquidity is essentially the measure of how easily or quickly something can be converted to cash (a savings bond, for instance, has more liquidity than an antique desk, for instance, as the savings bond can easily be converted to cash, where as to convert the desk to cash you must find a buyer who is interested in antiques and wants to buy a desk) The way I can see volatility interacting with liquidity might be if you bought some stock that was in a nose dive, then tried to sell it and found there were few buyers interested in purchasing this stock. For this reason (the lack of liquidity of the stock) you had to hold the stock for longer and incur a greater loss. Is that what you mean?
In all, it seems to me that you need to narrow down why you're investing before you invest. Is it just to beat inflation? Because if you're going to spend a bulk of this money in the next year or two during the life change alluded to, the inflationary risk is pretty minimal. Maybe just consider stashing it in the highest yield savings account you can find until you nail down your investment priorities?