Should I Switch to Cash?

The more volatile the stock market, without guidance from a trusted CERTIFIED FINANCIAL PLANNER^™, the riskier it becomes for stockholders to gain an adequate return on investment and ensure their funds are secure. Because the stock market is more volatile now than it has been in the past, investors are beginning to deliberate whether they should move their investments to cash.

While stockholders are taking these measures to protect expenditures, that does not mean the decision to take your money out of the stock market is necessarily beneficial. Make sure to consider the advantages and disadvantages of moving investments to cash before deciding to pull out of the market.

Benefits of Holding Cash

Cash provides ready access to money when you need it. Investors like this feeling of security, especially during economic downturns. When investors pull out of the stock market, it’s often for the following reasons:

• Benefiting from liquidity: Cash is the most liquid asset because you can quickly convert it into other properties. Investors often withdraw from the stock market for better access to funds.
• Avoiding further losses: If the economy appears to be plummeting with no upturns, investors sometimes take their money out early because they fear losing more.
• Filling an emergency fund: Many people set money aside for unexpected expenses like repair bills or medical costs. If their emergency funds run low, investors might pull out of the stock market to fill their pockets for the next unexpected expense.
• Reducing portfolio volatility: Cash does not change in value as quickly as stocks do, so some might switch some of their stocks to cash to avoid the dramatic swings that stocks might suffer.

Disadvantages of Moving Investments to Cash

If you are thinking about switching to cash during a recession, first consider the pros and cons of doing so. On the one hand, holding your cash can create feelings of security and help you avoid losses. However, while pulling out of the stock market may feel safe, this decision may not benefit you in the long term.

There are far more disadvantages that come with moving your investments to cash, including:

• Timing it correctly: You never really know when the timing is right to switch to cash until after the fact. Making decisions to sell stocks based on fear can potentially harm future earnings.
• Locking in paper losses: When the stock and bond markets go down, you do not actually lose money unless you sell your holdings. However, when you switch to cash, you solidify your losses.
• Missing out on recovery: When you lock in your paper losses and remain in cash, you cannot earn a profit through recovery when the markets recover.
• Missing out on dividends: If you reinvest stocks that pay dividends, you will not receive the dividends and capital gain reinvestments that your investments pay you.
• Losing assets: Individuals who switch to cash typically lose a percentage of their assets.
• Feeling the effects of inflation: When you move to cash, inflation gradually causes your money’s purchasing power to decrease.

Why Switching Can Be Costly

The money you hold in stocks does not increase or decrease in value unless you pull out of the stock market and switch to cash. This concept is called “paper loss” — your investment loses value but you do not lose any actual money. When you withdraw stocks from the market, you suffer an out-of-pocket loss.

An example can illustrate this concept. Say you invest $1,000 in the stock market. Then, the market plummets, so your stocks only have a $500 value. You worry that it will continue to descend, so you withdraw your money, suffering a 50% loss. A few days or months later, the stock market rises, and your stocks return to their original value, except you have already withdrawn the money, so you lose these benefits.

Inflation also lessens your money’s value over time. That $500 you withdrew from the stock market loses value, decreasing your buying power. Stocks, on the other hand, tend to increase in value, even if they suffer short-term decreases. 

So, should you invest or save cash? As long as you have a solid investment portfolio, you will gain money by patiently waiting. Cash steadily loses value over time, so it is good to have some on hand but better to keep some invested where it gains value. 

Should I Move My Stocks to Cash?

It is often better to leave your stocks as-is rather than withdraw them from the stock market in favor of cash. In times of recession, people often hesitate to invest money because they prefer to save the money they have, rather than endure the risk of losing it during economic downturns. With investing, you should take a forward-looking perspective. Stocks may not look good today, but tomorrow or a few months from now, you might see significant improvements. Then, you will appreciate your growing stock value.

Situations exist where moving stocks to cash might benefit you, but these scenarios rarely occur. If you think you might benefit from moving stocks to cash, speak with an investment advisor about your options. These professionals will explain the pros and cons in more detail to help you decide. If you need immediate access to money, such as to pay an emergency expense, an advisor might agree that withdrawing your stocks benefits your situation. 

Refrain from switching to cash from fear of economic downturn. Instead, consider whether to hold cash or invest with a professional. Often, an advisor will reassure you that keeping your assets in the stock market will benefit you in the long term.

Investment Best Practices

Taking your money out of the stock market can have adverse effects. Instead, you should implement investment best practices into your money management routine for the best results:

• Diversify your portfolio: When you spread your investments over various markets and vehicles, you will reduce the risk of losses and increase your long-term returns.
• Work with an advisor: These consultants make informed financial adjustments to account for the changing markets. They will also evaluate your risk tolerance and use this assessment to create an individualized asset allocation strategy that works for you.
• Do not stress about paper losses: Try not to think about your paper losses too much. You do not check the value of your home every day, so why constantly monitor your investments?
• Reach your goals: Always remember that your investments are meant to help you achieve your financial goals.

Hire a CERTIFIED FINANCIAL PLANNER^™ at HSC Wealth Advisors

Let us help you manage your investments and reach your financial aspirations. At HSC Wealth Advisors, our fee-only wealth management firm has assisted clients in achieving their goals for over 30 years, so you can trust our CERTIFIED FINANCIAL PLANNERS^™ with your assets.

Contact us to get in touch with an advisor today! We will help you decide whether you should save cash or invest.