Should I Take My Money Out of the Stock Market? (2024)

When stock markets become volatile, investors can get nervous. In many cases, this prompts them to take money out of the market and keep it in cash. Cash money, after all, can be seen, physically held, and spent at will—and having money on hand makes many people feel more secure.

But how smart is it really to sell assets for cash when the market turns? Read on to find out whether your money is better off in the market or under your mattress.

Key Takeaways

  • While holding or moving to cash might feel good mentally and help avoid short-term stock market volatility, it is unlikely to be wise over the long term.
  • Once you cash out a stock that's dropped in price, you move from a paper loss to an actual loss.
  • Cash doesn't grow in value; in fact, inflation erodes its purchasing power over time.
  • Cashing out after the market tanks means that you bought high and are selling low—the world's worst investment strategy.
  • Rather than cash out, consider rebalancing your holdings in downtimes.

Benefits of Holding Cash

There are definitely some benefits to holding cash. When the stock market is in free fall, holding cash helps you avoid further losses. Even if the stock market doesn't drop on a particular day, there is always the potential that it could have fallen—or will tomorrow. This possibility is known as systematic risk, and it can be completely avoided by holding cash.

Cash is also psychologically soothing. During troubled times, you can see and touch it. Unlike the rapidly dwindling balance in your brokerage account, cash will still be in your pocket or in your bank account in the morning.

However, while moving to cash might feel good mentally and help you avoid short-term stock market volatility, it is unlikely to be a wise move over the long term.

When a Loss Is Not Really a Loss

When your funds are invested in stocks and the stock market goes down, you may feel like you've lost money. But you really haven't. At this point, you've only incurred a paper loss.

However, if you sell your holdings and move to cash, you lock in your losses. They go from being paper to being real. While paper losses don't feel good, long-term investors accept that the stock market rises and falls. Maintaining your positions when the market is down is the only way that your portfolio will have a chance to benefit when the market rebounds.

A turnaround in the market can put you right back to break-even and maybe even put a profit in your pocket. In contrast, if you sell out, there's no hope of recovery.

Inflation Is a Cash Killer

While having cash in your hand (or your portfolio) seems like a great way to stem your losses, cash is no defense against inflation. Inflation is the rate at which the level of prices for goods and services rises. It's less dramatic than a crash, but eventually, the impact can be just as devastating.

You may think your money is safe when it's in cash, but over time, its value erodes as inflation nibbles away at its purchasing power. Of course, inflation can impact the returns on equities over the long term as well. But you can adjust your holdings and your portfolio's weightings towards growth-oriented stocks. In contrast, you can't do much with cash.

The Opportunity Cost of Holding Cash

Opportunity cost is the price you pay in order to pursue a certain action. Put another way, opportunity cost refers to the benefits an individual, investor or business misses out on when choosing one alternative over another.

In the case of cash, taking your money out of the stock market requires that you compare the growth of your cash portfolio, which will be negative over the long term as inflationerodes your purchasing power, against the potential gains in the stock market. Historically, the stock market has been the better bet.

Opportunity cost is the reason why financial advisors recommend against borrowing or withdrawing funds from a 401(k), IRA, or another retirement-savings vehicle. Even if you eventually replace the money, you've lost the chance for it to grow while invested, and for your earnings to compound.

Be Careful About Buying High and Selling Low

Common sense may be the best argument against moving to cash, and selling your stocks after the market tanks means that you bought high and are selling low. That would be the exact opposite of a good investing strategy. While your instincts may be telling you to save what you have left, your instincts are in direct opposition with the most basic tenet of investing. The time to sell was back when your investments were in the darkest black—not when they are deep in the red.

When you sell your stocks and put your money in cash, odds are that you will eventually reinvest in the stock market. The question then becomes, "when should you make this move?" Trying to choose the right time to get in or out of the stock market is referred to as market timing. If you were unable to successfully predict the market's peak and time to sell, it is highly unlikely that you'll be any better at predicting its bottom and buying in just before it rises.

The Bottom Line

You were happy to buy when the price was high because you expected it to keep ascending endlessly. Now that it is low, you expect it to fall forever. Both expectations represent erroneous thinking. The stock market rarely moves in a straight line—in either direction.

However, historically it has gone up. Yes, living through downturns and bear markets can be nerve-wracking. Instead of selling out, a better strategy would be to rebalanceyour portfolio to correspond with market conditions and outlook, making sure to maintain your overall desired mix of assets. Investing in equities should be a long-term endeavor, and the long-term favors those who stay invested.

Should I Take My Money Out of the Stock Market? (2024)

FAQs

Should I Take My Money Out of the Stock Market? ›

Key Takeaways. While holding or moving to cash might feel good mentally and help avoid short-term stock market volatility, it is unlikely to be wise over the long term. Once you cash out a stock that's dropped in price, you move from a paper loss to an actual loss.

Should you take your money out of the stock market? ›

It can be nerve-wracking to watch your portfolio consistently drop during bear market periods. After all, nobody likes losing money; that goes against the whole purpose of investing. However, pulling your money out of the stock market during down periods can often do more harm than good in the long term.

Should you take your money out of the stock market before a recession? ›

It may make for some temporary uneasiness, but if you leave your portfolio alone, you'll set yourself up to get through this downturn unscathed. If you sell investments out of panic, you might lock in losses you never quite manage to fully recover from.

Is it time to exit the stock market? ›

Mostly it is advised to stay with a stock for a long period of time or for a long term, but if you are turning out to sell or exit that stock you must have a strong reason to do so. The ultimate goal of investing in a stock is to see profits and exiting without that might not be the best thing to do.

Should I take out profit from stocks? ›

How long should you hold? Here's a specific rule to help boost your prospects for long-term stock investing success: Once your stock has broken out, take most of your profits when they reach 20% to 25%. If market conditions are choppy and decent gains are hard to come by, then you could exit the entire position.

What is the stock market prediction for 2024? ›

The market sees a greater than 80% chance of at least five rate cuts from current levels by the end of 2024. Investor optimism about the economic outlook has improved dramatically from a year ago, but there's still a risk that Fed policy tightening could tip the economy into a recession in 2024.

Should I keep my money in the bank or stock market? ›

If you think you will need the money in the near-term (less than two to three years), avoid investing it because of the additional risk you take on by putting your money in the market. Instead, put this cash into a savings account that offers more security.

Where is your money safest during a recession? ›

Where to put money during a recession. Putting money in savings accounts, money market accounts, and CDs keeps your money safe in an FDIC-insured bank account (or NCUA-insured credit union account). Alternatively, invest in the stock market with a broker.

Is cash king during a recession? ›

Cash Is King During a Recession

As companies cut back and job losses mount, “it's better to be safe than sorry and beef up cash reserves during times of high employment.” However, selling investments to get cash in anticipation of a recession is risky. You might sell prematurely and get trapped in cash as markets rise.

Is it good to stay in the stock market? ›

Potential for High Returns: Historically, the stock market has provided the potential for some of the highest returns compared to other investment options over the long term. While there are no guarantees, investing in stocks can offer the opportunity for capital appreciation.

At what percent return should you sell stock? ›

Focus on getting base hits. To grow your portfolio substantially, take most gains in the 20%-25% range. Though contrary to human nature, the best way to sell a stock is while it's on the way up, still advancing and looking strong to everyone.

Should I cut my losses and get out of the stock market? ›

The golden rule of stock investing dictates cutting your losses when they fall 10 percent from the price paid, but common wisdom just might be wrong. Instead, use some common sense to determine if it's time to hold or fold. Diversification.

Who keeps the money you lose in the stock market? ›

No one, including the company that issued the stock, pockets the money from your declining stock price. The money reflected by changes in stock prices isn't tallied and given to some investor. The changes in price are simply an independent by-product of supply and demand and corresponding investor transactions.

How hard is it to get your money out of the stock market? ›

Yes, you can pull money out of a brokerage account with a bank account transfer, a wire transfer, or by requesting a check. You can only withdraw cash, so if you want to withdraw more than your cash balance, you'll need to sell investments first.

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