While holding or switching to cash can be good mentally and help avoid stock market volatility in the short term, it's unlikely to be prudent in the long term. Once you withdraw a stock whose price has fallen, you go from a loss of paper to an actual loss. It might seem like a good idea, then, to get your money out of the market now before a possible decline. But that can sometimes be a risky move.
You may be more concerned about market risk at this point in life and market uncertainty may make you ready to run away, but don't let your emotions get the best of you. Just as it's never a good idea to try to time the market as you enter, don't try to time the exit either. Gradually reducing your portfolio risk is the most prudent thing to do. This is one of the reasons why target date fund managers gradually move from stocks to bonds and cash as the investor approaches retirement.
Conversely, keeping money in the market for an extended period of time can help reduce the risk of short-term falls or falls in stock prices. Even as you opt for more liquid investments, remember that stocks play an important role in a diversified portfolio. And the Dow fell in what experts call a bear market, meaning that stocks are down 20% from their recent high. For older investors looking to convert stocks to cash, it's important to have a plan and not be too influenced by today's market.
Sometimes, astute investors also choose to rebalance their portfolio in a recession by buying new stocks. The easiest way to keep your money safe during a recession or market crash is to maintain a long-term perspective and avoid making hasty decisions as a result of short-term market movements. Many industry studies have shown that time in the market is often a smarter approach than trying to time the stock market or giving in to panic when selling. Even if those shares are sold at a loss, the investor could direct the money earned from the sale of these shares to safe haven assets that could recover their recent losses.
Our goal is to analyze complicated concepts, inform you about the latest trends, and keep you up to date on things you can use to help you make your money right. A secondary benefit of cash is having some “dry powder” or money available that could be used to buy additional stocks if the market continues to fall. While a bear market can be disconcerting and the desire to invest your money in secure investments is understandable, this can expose you to more risks. If you're retired, don't withdraw funds from your stocks in a bear market unless you have no other option.
This is a summary of the factors that investors could weigh when deciding if they want to keep their money in the stock market. If you invest in at least 25 or 30 stocks from various sectors, your portfolio will remain strong, even if one or two companies don't survive a recession. If investors can get a relatively good rate (after inflation) for a bond, they will tend to take money from stocks to interest-bearing investments, such as government bonds. You can now apply that same principle in reverse, shifting your investments over time from stocks to bonds and cash.