Should I withdraw money from the stock market?

When the stock market fluctuates, investors get nervous. In many cases, this will prompt them to withdraw funds from the market and keep them in cash. After all, cash can be seen, physically held, and used at will—and the money on hand makes many people feel safer.

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

Key points

  • Although holding or switching to cash may feel good psychologically and help avoid short-term stock market volatility, it is not wise in the long run.
  • Once you cash out a stock whose price has fallen, you will switch from a book loss to an actual loss.
  • Cash does not increase in value; in fact, over time, inflation will weaken its purchasing power.
  • Cashing out after a market downturn means you buy high and sell low-this is the worst investment strategy in the world.
  • Instead of cashing out, consider rebalancing your holdings during downtime.

Benefits of holding cash

There are definitely some benefits to holding cash. When the stock market is in free fall, holding cash can help you avoid further losses. Even if the stock market does not fall on a certain day, it will always fall – or it will fall tomorrow. This possibility is called systemic risk, and it can be completely avoided by holding cash.

Cash also has a soothing effect psychologically. In times of crisis, you can see and touch. Unlike the rapid decrease in your brokerage account balance, the cash will still be in your pocket or bank account in the morning.

However, while switching to cash may make you feel good mentally and help you avoid short-term stock market volatility, it is unlikely to be a wise move in the long run.

When the loss is not a real loss

When your money is invested in stocks and the stock market drops, you may feel that you are losing money. But you really don’t. At this point, you only incurred paper losses.

However, if you sell your holdings and convert them to cash, you lock in losses. They changed from paper to reality. Although the book loss feels bad, long-term investors accept the stock market’s rise and fall. Maintaining a position when the market is falling is the only way your portfolio has a chance to benefit when the market rebounds.

An improvement in the market can bring you back to the break-even point, and may even make you profit in your pocket. In contrast, if you sell out, there is no hope of recovery.

Inflation is the cash killer

Although cash in hand (or your investment portfolio) seems to be a good way to prevent losses, cash cannot withstand inflation. Inflation is the rate at which the price level of goods and services rises. It is not as violent as it collapsed, but in the end, the impact could be just as devastating.

You may think your money is safe when it is cash, but over time, as inflation erodes its purchasing power, its value will be eroded. Of course, inflation will also affect the long-term return of stocks. However, you can adjust the weight of your holdings and portfolio to growth stocks. In contrast, you can’t do much with cash.

Opportunity cost of holding cash

Opportunity cost is the price you pay for taking a certain action.In other words, opportunity cost refers to the benefits of individuals, investors or companies missed When choosing an alternative.

As far as cash is concerned, withdrawing your funds from the stock market requires you to compare the growth of your cash portfolio with the potential gains in the stock market. In the long run, as inflation erodes your purchasing power, this will be negative growth. Historically, the stock market has been a better bet.

Opportunity cost is why financial advisors recommend against borrowing or withdrawing funds from 401(k), IRA, or other retirement savings instruments. Even if you eventually replace the money, you have already lost the opportunity to grow and compound your returns when you invest.

Be careful to buy high and sell low

Common sense may be the best argument against turning to cash. Selling your stock after a market downturn means you buy high and sell low. This will be the exact opposite of a good investment strategy. Although your instinct may tell you to save what is left, your instinct runs counter to the most basic investment principles. When your investments are in the darkest black, not when they are in the deepest red, the time to sell is back.

When you sell stocks and deposit the funds in cash, it is very likely 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 enter or exit the stock market is called market timing. If you cannot successfully predict the peak of the market and when to sell, it is almost impossible for you to do better if you predict its bottom and buy before it rises.

Bottom line

You are happy to buy when the price is high, because you expect it to continue to rise. Now it is very low, and you want it to fall forever. Both of these expectations represent wrong ideas. The stock market rarely moves in a straight line-no matter which direction it is in.

However, historically, it has risen. Yes, going through a downturn and bear market can be nerve-wracking. Rather than sell off, a better strategy is to rebalance your investment portfolio to adapt to market conditions and prospects, ensuring that you maintain the overall portfolio of assets you need. Investing in stocks should be a long-term effort that will benefit those who continue to invest in the long-term.

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