It's no secret that the stock market is risky for the average investor. In fact, it's been said that the stock market is only suitable for risk-tolerant investors. So, how do you know if you should move your money out of stocks?
Well, there are a few things you need to consider: your risk tolerance, current market volatility, investment horizon, and more. It can be difficult to know if you should sell or stay in the markets for the long run. By the end of this article, you should have a better idea of how to make the decision that is best for you.
11 Things to consider before moving your money out of stocks
Each investor has different circumstances, and each investment is different. No two investors are the exact same. We are all in different situations and have different investor profiles. But this can work as a framework for you to start thinking about when it might make sense to cash out your investments.
Here are a few key things to think about before you make any decisions about moving your money out of the markets:
1. Risk tolerance
Your risk tolerance - This is probably the most important factor to consider. How much risk are you comfortable taking on? If you're risk-averse, then the stock market may not be suitable for you.
On the other hand, if you're okay with a little bit of volatility, then you may be able to stomach the ups and downs of the markets. For example, if the recession is looming and your entire portfolio is in high beta stocks, you may want to rethink your position.
This is because the volatility might cause you to panic and sell at a loss. If you know you can't handle the roller coaster ride, it might be time to take some money off the table. But on the contrary, if you can still sleep soundly at night knowing your portfolio might drop 20% or more in a bear market, then you may be okay staying in the markets.
There's no right or wrong answer here. It all depends on your personal risk tolerance. It can be easy to tell yourself that you have a high-risk tolerance when the markets are going up. But it's a different story when the markets are crashing. This is why it's so important to be honest with yourself and understand your true risk tolerance before making any decisions.
2. Emergency fund
Consider the worst-case scenario. What if you lose all your sources of income and need to rely on your investments to cover living expenses? Do you have an emergency fund in place?
If not, then you may want to consider selling some of your investments to create one. This will give you a cushion to fall back on in case of tough times. On the other hand, if you already have an emergency fund in place, then you may not need to sell your investments.
This is because you'll have a safety net to cover you in case of job loss or other unforeseen circumstances. It's important to have an emergency fund regardless of whether you sell your investments or not.
This is because you never know when tough times might hit. And it's always better to be prepared for the worst. Although inflation will begin to reduce the purchasing power of your emergency fund over time, it's still better than nothing.
Just make sure to not keep all of your money in cash, as it will lose value to inflation over time as well. As a side note, if you are investing for cash flow, and have diverse income-producing assets, you may not even need an emergency fund.
This is because your investments will provide you with the cash flow you need to cover living expenses in case of tough times. Make sure to keep reading because this is a consideration that needs further explanation.
It's also important to consider your current obligations. Do you have any debts that need to be paid off?
If so, then it may make sense to sell some of your investments to pay down these debts. This is because debt can be a huge burden and can weigh you down financially. If you are stressed with personal debt and would like to pay it off, then it may make sense to sell some of your investments and use the proceeds to pay down this debt.
For example, let's imagine that you have a $50,000 mortgage and you invested $50,000 into a stock that doubled after a few years. To free up some of your monthly cash flow, you may want to sell $50,000 of your investment and use the proceeds to pay off your mortgage.
This would leave you with a smaller mortgage. Although you'd have 50% of the shares you originally owned, you'd be debt-free. The rest of the shares are considered "house money". This means that you can afford to lose them without it having a significant impact on your life.
At this point, you would have nothing to lose as you are investing with profits, while your initial investment has been reclaimed. Of course, there are other things to consider before selling investments to pay off debts.
For example, you need to consider the interest rate on your debts. If the interest rate is low, then it may make more sense to keep the investments and continue to invest for the long term. This is because you can earn a higher return on your investment than the interest rate you are paying on your debts.
An example of this would be if your mortgage's interest rate was only three percent, and you were earning a seven percent return on your investments. In this case, the difference would be four percent, and you would be better off putting your money into investments.
However, if your mortgage interest rate was five percent and you were only earning a four percent return on your investments, then you would be better off putting your money in your mortgage. This touches on the importance of macroeconomics when considering selling stocks, which we will get more into later on.
4. Obligations as a provider
Obligations can also come in the form of being the sole provider of your loved ones. This puts a lot of pressure on you to make sure that you're always making the best decisions - especially when it comes to your finances.
If you're constantly worrying about whether or not you should be moving your money around to stay afloat, it might be time to consider getting out of the stock market. The last thing you want is to be so stressed about your finances that you can't enjoy your life.
This is especially true if it is weighing down on your abilities to be productive at your main source of income. For example, if you are constantly checking your investment account balances while you're at work, you're not going to be as focused on your job and may make mistakes.
This can lead to even more financial problems down the road. Remember that as the sole provider, your productivity matters. If the stress of the stock market is becoming unproductive, it may be time to get out.
Long-term mentalities matter and if you are adamant about staying invested (which might be more profitable), you can still reap the rewards of the market. Although you might want to consider some strategies such as taking out dividends only or investing in lower-risk or defensive stocks.
The most important thing is that you do what works best for you and your family. The stock market isn't worth sacrificing your family's well-being over. If you're not the sole provider, but your family relies on your income, it's still important to make sure that you're not putting too much stress on yourself.
Worrying about your finances can take a toll on your health, both mentally and physically. So if you're starting to feel the effects of the stock market on your stress levels, it may be time to take a break.
Many investors might not have any family obligations. If they can care for themselves easily and still monitor their investments without too much stress, then stock market fluctuations may not bother them as much.
As you can see, considering if others depend on you is an important factor in whether or not you should move your money out of the stock market.
5. Investment Intention: cash flow vs capital gains
Cash flow investors typically don't care as much about market downturns. As long as the money is flowing into their accounts effortlessly, they're content. If the bills are being paid, it might not be worth selling your stocks.
This is especially true if the decision to do so will leave you with a negative personal cash flow. Consider if you are living retired thanks to the income generated by your portfolio. On the other hand, capital gains investors often feel compelled to take their money out of the stock market during a downturn.
This is because they are focused on growing the value of their investments, rather than generating income. If you fall into this category, it's important to have a plan in place for how you will sell your stocks.
For example, stop-loss orders can help you limit your losses. If you are in profit and the company has run its course, it might be time to make money off the table. If your goal as a capital gains investor is to arbitrage stocks in shorter time frames, you might want to take your profits and move on.
There's no need to get too attached to any one stock. The key is to know your investment intention and be honest with yourself about why you're investing. Once you know that, you can decide whether or not to sell your stocks during a market downturn.
6. Tax consequences
Before you move money out of the markets, it's important to consider the tax consequences. This is a commonly overlooked factor, but it can have a significant impact on your overall returns.
Each tax bracket and jurisdiction will have its own rules, so be sure to consult with a tax professional before making any decisions. Even if you've been investing in a tax-efficient account like a 401(k) or IRA, you may still have to pay taxes on your withdrawals.
This is because the date set for tax-free withdrawals is usually over a certain age. If you don't meet this age requirement, you may be subject to an early withdrawal penalty. Before you make any decisions, be sure to consider consulting with a CPA before selling our securities.
It may not be the most fun to think about, but it's still important to consider. These professionals can also help you take advantage of any additional tax strategies that are available to you in a legal manner.
7. Investment time horizon
We briefly mentioned this before, but it’s worth repeating: One important factor to consider is how long you plan to keep your money invested. If you were planning to invest for only a few years to help you purchase a home, for example, you might want to take your profits.
This is so you can enjoy home shopping with an exact budget, rather than worrying about whether the stock market will cooperate. On the other hand, if you don’t plan to touch your money for decades, you can afford to ride out the market’s ups and downs.
This is especially true if you’re investing for retirement or a child's education. Through compound interest, your money has time to grow—and recover from any market setbacks.
In general, the longer your investment time horizon, the more risk you can afford to take on. This is because you’ll have more time to recover from temporary market declines. Of course, this also depends on if you are invested in the S&P 500 or a penny stock.
8. Type of Investment
When trying to determine if you should move your money out of stocks, it’s important to consider the type of investment you have. For example, if you own an index fund that tracks the S&P 500, you might not want to sell.
This is because the market will likely rebound and your investment will recover. On the flip side, if you were trying to trade penny stocks for a few quick profits and it looks like the market will turn bearish for a while, you might want to cut your losses or realize some gains.
Some companies are likely to continue growing forever and it might be better to not sell them. While others might be more of a swing trade strategy due to a change of legislation or short-term trend.
The decision to sell depends on the type of investment along with the other considerations mentioned in this article.
9. The macro picture
This is likely the most common driver of investors' uncertainty when it comes to selling stocks. After all, the stock market is very closely linked to how well the economy as a whole is doing. If there are concerns about a recession or bear market on the horizon, it's only natural that some investors would want to pull their money out of stocks.
However, it's important to remember that the stock market is not the same thing as the economy. The stock market is made up of publicly traded companies, which are just a small slice of the overall economy.
Even if we're in for a rocky period economically, that doesn't mean that every company will be affected equally or at all. In fact, some companies do quite well during periods of economic turmoil, so it's important to do your research before making any decisions.
For example, even in an inflationary environment, certain sectors like healthcare and consumer staples tend to do well. In a recession, companies that provide essential goods and services - think utility companies and food retailers can see their stock prices rise as consumers cut back on discretionary spending.
If you are in luxury goods or non-essential services, however, you may want to reconsider your position. Of course, some macroeconomic factors will likely cause the entire market to move in unison - think of a pandemic like Covid-19.
In these cases, it may make sense to move to cash or safer investments. But in most cases, it's still best to not sell as in this example, shares recovered shortly after. Macro is difficult to predict.
We can look at history but as investors, we should know that past performance is not indicative of future results. So while it's important to keep an eye on the economy as a whole, don't make the mistake of thinking that it will have a uniform impact on all stocks.
Doing your own research is still the best way to find out which stocks are likely to weather any economic storm.
10. Investment potential
When deciding if you should get out of a position, reconsider your investment thesis. If you still believe in the long-term potential of the investment, then holding may be the best decision. If your thesis has changed or if you no longer believe in the investment, then getting out may be the best move.
It can also be helpful to update your investment thesis and see if it still aligns with your goals. If your goals have changed, then it may make sense to move your money around to better reflect those changes.
Evaluate objectively if the company still has a competitive advantage, if the management is still sound, and if the industry outlook is still favorable. You should also view their recent financial statements to get an idea of how the company is currently doing.
A re-evaluation might just help you realize that the company has become even more bullish and selling would ultimately become a costly mistake. You don't want to look back a few decades later and think to yourself, "I should have held on to that stock." If you still believe in the investment, then holding may be the best decision.
If your thesis has changed or if you no longer believe in the investment, then getting out may be the best move. Each investment and each period will yield different considerations. That's why it's important to stay up-to-date on your investments and monitor their progress before you sell.
11. Alternative opportunities
You might want to sell some stocks, but do you have a better asset to invest in? The market may be down, but other opportunities are up. If you have cash on hand, it might be a good idea to invest in something else.
By reallocating your assets, you can minimize your risk while still keeping your portfolio diversified. But if you sell and there are no other opportunities, you can be left sitting on cash as the value of other assets continues to increase.
This can be annoying to watch as you realize that the purchasing power of your fiat is also declining. The key here is to have a clear investment plan. If you don't, then it's easy to make hasty decisions that you might regret later.
When should you cash out investments?
There's a lot to consider before you cash out of investments. Some say, "Double and quit." This means when you make enough gains to double your original investment, you should then cash out.
This is a good rule of thumb for those who want to make a profit and cash out but don't have a clear investment plan. For others, the answer is never. By doing your due diligence and only investing in the best assets in the world that have the highest probability of surviving centuries of change, you give yourself the best chance of success.
This can be difficult in an ever-changing world but compound interest through decades can make this a successful strategy. The truth is, the answer depends on countless factors that converge depending on unforeseen circumstances. It can be stressful wondering if you should cash out or not but by being aware of this consideration, you can make the best decision for your individual situation.
Should I sell my stocks before a crash?
Theoretically, yes. The probable thought process behind this question is that if you sell before the crash, you can avoid losses. And if you wait to buy until after the crash, you can buy low and then sell high.
However, market timing is difficult to do in practice. It's hard enough to predict when a crash will happen, but it's even harder to know when to get back in.
For example, Ray Dalio famously inaccurately predicted that the market would crash right before it had about a decade-long bull market. This bet was a defining moment in his investing career and is a reminder that no one can accurately predict the market. And even if you could, there are still risks.
Ray Dalio has since learned this principle mistake, and you can learn from his experiences as well. If you are wanting to time the market, it might be better to dollar cost average instead.
For example, rather than trying to time the bottom with your life savings, you could instead invest a fixed sum of cash into the market every month. This technique can help you mitigate some of the risks associated with market timing.
If you are looking to buy back in after a crash, be sure the trend is supporting your investment thesis and average out over some time to mitigate the risks. The main risk is opportunity loss. Sitting on the sidelines waiting for a crash might have you holding fiat currencies that are depreciating in value.
If you're waiting for the perfect time to buy, you might miss out on gains as the market continues to go up. We can look towards history, pinpoint the factors that lead to market crashes and gain a somewhat vague idea of when the next one might happen.
But if you're not careful, you can lose a lot of money trying to market time. Black swan events (unexpected events that have a large impact) are by definition, impossible to predict. So while it may be a good idea, in theory, to sell before a crash, it's hard to do in practice and there are still risks involved. For these reasons, time in the market beats timing the market.
Where should I put my money before the market crashes?
If you can successfully time the market and want to cash out before a crash, where should you put your money? The three most common places are cash, bonds, and/or gold.
This is the most conservative option and will help you avoid losses if the market crashes. It also gives you liquidity to buy undervalued companies throughout the bear market.
This option gives you some sort of income while you wait for the market to bottom out. The main risk is that if inflation increases, your bonds will lose value.
This is seen as a safe haven asset. It's considered a store of value by gold bugs. It can preserve your wealth during a market crash but it doesn't pay dividends or interest like bonds. Ultimately, the decision of where to put your money before depends on if you need liquidity as well as other macroeconomic factors.
How do I protect my 401k from the stock market crash?
The best way to have protected a 401K during the last market crash would have been to have it in cash. However, this is not always an option for people. Selling would have caused a taxable event for most people.
If the market timing was successful though, there would have been plenty of undervalued opportunities as the stock market soared briefly after. Ultimately, the decision of what to do with a 401K during a market crash depends on each person's individual circumstances.
However, if someone is close to retirement, it might be best to leave the money invested and ride out the storm. This is especially true if the general investing knowledge is low. Market timing is difficult for professionals let alone the average retiree.
It's important to know what you're getting into before cashing out investments. If you have a 401k, for example, there are usually penalties for taking your money out before retirement age.
You should also consider whether or not you'll be able to recoup any losses in the market after cashing out. It's also important to remember that timing the market is incredibly difficult, and even professional investors can't do it consistently.
So if you're thinking about cashing out because you think the market is about to crash, it's important to weigh the risks carefully before making a decision. This article featured an extensive list of things to consider before moving money out of the stock market.
If you ever hear any of your friends or family talking about cashing out, be sure to share this article with them and bookmark it for later in case you ever need it!
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