Should I Take Money Out of the Stock Market?

This article is provided for informational purposes only and should not be construed as legal or investment advice. Always consult with a professional financial or investment adviser before making investment decisions.

When the stock market’s going up, it seems like a no-brainer to invest as much as you can afford. After all, your investments are gaining in value.

But when the market dips or becomes volatile, it’s easy to get nervous and start second-guessing your investment plans. You might start asking yourself questions — should I take my money out of the stock market? Should I cut back on investments until the market recovers?

In most cases, it’s best to invest long-term and simply stick to your original plan. This guide will discuss what you need to know about market volatility and your investment strategy. 

When it makes sense to cut back on investing

There are certain circumstances where it might make sense to cut back on investing. 

High-interest debt

If you have high-interest debt, tackling this debt before investing typically makes financial sense. For example, if you have credit card debt, you’re likely paying 15 to 20% or more in interest. Meanwhile, the stock market typically returns 7 to 10% per year, on average. Looking at the math, it makes sense to pay off your high-interest debt before putting more money in the market. 

Tally† can help qualifying Americans pay off credit card balances faster while saving money on interest. Learn how Tally works here. 

Emergency fund

If you don’t yet have an emergency fund, it’s wise to build one before investing. An emergency fund is simply some cash set aside for unexpected expenses or loss of income. Most experts recommend setting aside enough money to cover three to six months of expenses, but any amount is better than nothing. 

Short-term savings

If you are saving for a short- or medium-term expense, investing may not be optimal. For example, if you’re saving for your wedding next year, it’s best to keep that in liquid savings, like a bank account. If you invest short-term savings, you run the risk of having to sell at a loss if the market drops. 

Should I take my money out of the stock market? 

If the market starts to go down, should you sell and put your money into something safer?

In most cases, the answer is no. Making knee-jerk reactions concerning your investments is never wise and could lead to worse performance over time. 

There are many reasons to stay invested:

Timing is difficult 

It’s nearly impossible to correctly time the fluctuations of the market. You could sell right before the market recovers. Or, you might sell at a good time — but fail to buy back in until the market has already recovered. 

The best market days are key growth drivers 

The stock market has good and bad days — but it’s the good days that are key to long-term gains. If you invested $10,000 on January 1, 2001, and stayed invested through the end of 2021, you’d have over $61,000. If you had the same initial investment but missed the 10 best market days of that period, you’d have only around $28,000. This illustrates the importance of staying invested — missing even a day or two of recovery could substantially impact your portfolio long-term.

You haven’t lost money until you sell

Here’s a new way to look at stock market declines: You haven’t actually lost any money until you sell assets. If you own 100 shares of Apple stock, you own 100 shares of Apple — whether it’s trading at $100 or $200. If you sell, you lock in that loss. If you hold on, the market can recover and you can sell for a profit. 

In most cases, sticking to your original investment plan will produce the best results. If you don’t yet have a plan written out, read through our guide to investment planning. You may also wish to consider working with a qualified financial adviser. 

Why keeping your investments in the market makes sense

For long-term investing, keeping assets in the market makes sense. Here’s why:

Effects of inflation 

Inflation eats away at the buying power of your dollars. If you’ve got money sitting around in cash, you’re losing buying power. If inflation is 5%, you’ll need $105 a year from now to buy what you could purchase for $100 today. Invested funds should keep pace with inflation (and often exceed it) in the long run.

Taxes 

If you sell assets in a taxable investing account, you’ll trigger a taxable event. If the assets have gained in value since you bought them, you’ll owe taxes on your profits. 

Selling cements losses

Again, selling your assets locks in the loss. Holding onto your assets allows them time to recover. If you can simply ignore your portfolio until the market recovers, your long-term investing plan will be unchanged and you’ll be better off financially. 

If you’re still debating whether to sell, consider this: Why are you are selling? If you need money right now for a necessary expense, then it may be appropriate to sell. But if you are simply feeling anxious or worried about losing money in the stock market, that’s not a true “need.” 

Consider portfolio rebalancing

If you’re feeling anxious and want to take some sort of action, consider rebalancing your portfolio. 

Rebalancing refers to buying and selling assets to return them to your target asset allocation.

For example, imagine your portfolio is set up to have 80% stocks and 20% bonds. If the stock market crashes, your current ratio might look more like 75% stocks and 25% bonds (because the value of your stocks has declined).

In this case, you could choose to sell 5% of your bonds, and move those funds back into stocks. This would rebalance your portfolio and allow you to purchase some stocks at a discount. 

Portfolio rebalancing is one of the key benefits of having a diversified investment portfolio. It can help improve long-term returns and scratch the itch of anxiety by allowing investors to take some direct action during market turmoil — without making any rash decisions. 

Final thoughts

So, back to the question, “Should I take money out of the stock market?” Ultimately, staying the course is vital for long-term success in investing. When the market becomes volatile, do your best to ignore it and focus on things that are in your control. And if you can, keep buying investments — after all, you’re now able to buy stocks at a discount. 

If market turmoil is causing you significant anxiety, you may wish to consider a lower-risk asset allocation in the future. It’s wise to speak to a financial adviser to come up with an investing plan that suits your risk tolerance and financial goals. 

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