Unstable stock markets make investors nervous, prompting them to pull out their money out of the market. Cash feels safer than investments because it can be seen, felt and spent at will. However, let’s weigh the pros and cons against each other and find out whether your money is safer under your mattress or in the market.
Systematic Risk
Holding on to cash definitely has its advantages, one of them being able to avoid ‘systematic risk’. That is, even if the stock market doesn’t fall on a particular day, there is always a potential risk that it could have fallen, and it can be avoided completely by holding cash. Cash is psychologically soothing as well, because unlike the dwindling balance in your brokerage account, cash can be seen and felt and will be in your pocket in the morning.
However, while moving to cash might feel more secure and help you avoid short-term stock market instability. It is unlikely to be a wise decision in the long run.
Upholding Your Investments:
When you suffer a loss in the stock market, you may feel like you have lost money, but you really haven’t. At this stage, it is a ‘paper loss’. A quick turnaround can out you right back on track and maybe even out some profit in your pocket. However, if you don’t maintain your position and sell out your holdings, you lock in your cash with no hope of recovery. Long-term investors accept that the market rises and falls and your only chance of benefiting from market rebounds is by upholding your investment.
Inflation:
Cash is no defense against inflation. As time goes on, the value of your money drops so keeping cash is not wise.
Benefits:
Opportunity cost refers to the benefits you could have received by taking an alternative action. Taking your money out of the stock market requires you to compare the growth of your cash portfolio, which will be negative about the long run as inflation decreases your purchasing power, against the potential gains in the stock market. Historically, the stock market has been proven to be a safer bet.
Market’s Peak:
Even when you sell out your holdings and put your money in cash, chances are that you will once again reinvest in the stock market. The real question is, when do you make this move? Trying to choose the right time to re-enter the market is called market timing. If you are unable to successfully predict the market’s peak and sell, it is very unlikely that you will be any better at predicting its low and buying in just before it rises.
Bad Approach:
Selling your stocks after the market tanks mean that you bought high and are selling low. These are not good investing strategies and common sense may be the nest argument against moving to cash. Your instincts may be telling you to run with what you have left, your instincts are pointing towards a bad approach.
Stay Invested:
You bought in when the price was high and expected it to rise even further and now that it is low, you think it will fall forever. If you analyze the markets over time, you will notice that they have gone up. Companies are running their businesses to make money and the long term favors those who stay invested.
Quit Only When Necessary:
Serious investors know that the market is no place for the weak-hearted. However, with disappearing pension plans and the future of social security in question, many of us are left with no other option.
Once you have studied the facts, you need to have a plan. Figure out how much money you need to cater to your future needs and develop a strategy to help yourportfolio get there. Find an asset allocation plan that meets your requirements and monitors your investments. Make sure to maintain your desired mix of investments, and when you have reached your goal, move your assets out of equities and into fewer volatile investments. Approaching the stock market strategically can help you keep your savings plan on track, despite fluctuating markets.
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