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? ›

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.

Is it a good idea to 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.

At what age should you take your money out of the stock market? ›

There are no set ages to get into or to get out of the stock market. While older clients may want to reduce their investing risk as they age, this doesn't necessarily mean they should be totally out of the stock market.

Should I pull my money out of the stock market before it crashes? ›

Some investors believe that by selling during a downturn, they can wait out difficult market conditions and reinvest when the market looks better. However, timing the market is extremely difficult, and even professionals who attempt to do this fail more often than not. That's especially true with funds.

When should I take money out of my stocks? ›

When to sell a stock: 7 good reasons
  1. You've found something better. ...
  2. You made a mistake. ...
  3. The company's business outlook has changed. ...
  4. Tax reasons. ...
  5. Rebalancing your portfolio. ...
  6. Valuation no longer reflects business reality. ...
  7. You need the money. ...
  8. The stock has gone up.
Apr 19, 2024

What will the stock market do in 2024? ›

The S&P 500 generated an impressive 26.29% total return in 2023, rebounding from an 18.11% setback in 2022. Heading into 2024, investors are optimistic the same macroeconomic tailwinds that fueled the stock market's 2023 rally will propel the S&P 500 to new all-time highs in 2024.

Are people pulling out of the stock market? ›

The US stock market is shrinking, and investors are pulling their money out at a near-record pace as storm clouds gather over the US economy.

Do I lose all my money if the stock market crashes? ›

Do you lose all the money if the stock market crashes? No, a stock market crash only indicates a fall in prices where a majority of investors face losses but do not completely lose all the money. The money is lost only when the positions are sold during or after the crash.

Can you lose all your money in a 401k if the market crashes? ›

The worst thing you can do to your 401(k) is to cash out if the market crashes. Market downturns are generally short and minimal compared to the rebounds that follow. As long as you hold on to your investments during a bear market, you haven't lost anything.

Should I take my money out of the stock market during a recession? ›

Moving your portfolio from stocks to cash is an understandable instinct when savings rates are high and there are concerns about a possible recession. But it's important to remember that stock market investments are part of your long-term plan, and selling could have tax implications.

Should I keep all my money in the stock market? ›

Saving is generally seen as preferable for investors with short-term financial goals, a low risk tolerance, or those in need of an emergency fund. Investing may be the best option for people who already have a rainy-day fund and are focused on longer-term financial goals or those who have a higher risk tolerance.

What is the 3 5 7 rule in trading? ›

What is the 3 5 7 rule in trading? A risk management principle known as the “3-5-7” rule in trading advises diversifying one's financial holdings to reduce risk. The 3% rule states that you should never risk more than 3% of your whole trading capital on a single deal.

How do you know when to pull out of stocks? ›

Investors might sell their stocks is to adjust their portfolio or free up money. Investors might also sell a stock when it hits a price target, or the company's fundamentals have deteriorated. Still, investors might sell a stock for tax purposes or because they need the money in retirement for income.

Should I leave my money in the stock market or take it out? ›

Instead of selling out, a better strategy would be to rebalance your 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 sell my stocks now in a recession? ›

Day trading as an investment strategy is generally a bad idea. Don't sell just because your stocks went down. Last, but certainly not least, one thing that's extremely important to avoid during recessions is panic selling when stocks fall.

Should I take out my 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.

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