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Have you ever stared at your investment portfolio during a market crash and felt that sinking feeling in your stomach? I know I have. The urge to hit that “sell all” button can be overwhelming when you see your hard-earned money seemingly evaporate before your eyes. But is taking all your money out of stocks really the smartest move?
Let’s be real here – nobody enjoys watching their investments shrink. But making hasty decisions based on fear could actually hurt you more in the long run. As a seasoned investor who’s weathered several market storms, I want to share some crucial insights that might help you avoid common mistakes many panic-sellers make.
The Emotional Rollercoaster of Investing
Investing isn’t just about numbers – it’s emotional too. When markets get shaky, our brains often switch to survival mode, and we feel this overwhelming urge to “do something” to protect what we have.
This emotion-guided approach to the stock market typically stems from trying to predict short-term market movements – something financial experts call “timing the market.” While it might seem logical to pull out when things look bad research consistently shows this approach usually backfires.
Two specific emotions tend to drive poor investment decisions
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Fear – When markets decline sharply, many investors give in to FUD (fear, uncertainty, doubt). The assumption is that selling now shields you from further losses. But this logic assumes the market will continue falling, which is impossible to predict with certainty.
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Following the crowd – There’s a reason they call it “herd mentality.” When everyone else seems to be selling, it feels safer to join them. But historically, the herd is often wrong at crucial turning points.
Time in the Market vs. Timing the Market
One question I get asked constantly is “Should I pull all my money out of the stock market?” My answer is usually: ideally, you don’t want to impulsively pull your money out of the market when there’s a crisis or sudden volatility. While a down market can be nerve-wracking (trust me, I know!), and the desire to put your money into safe investments is totally understandable, this can actually expose you to more risk.
Let me explain why:
A groundbreaking study by Brad Barber and Terence Odean titled “Trading Is Hazardous to Your Wealth” found a significant gap between market returns and investor returns. Market returns are simply the average return of the market itself over a specific period. Investor returns, however, are what the average investor actually makes – and they’re significantly lower, particularly among those who trade more frequently.
In other words, when investors try to time the market by selling on the dip and buying on the rise, they actually lose out. The data doesn’t lie!
5 Critical Things to Consider Before Pulling Your Money Out
1. Your Short-term and Long-term Goals
Before hitting that sell button, remind yourself why you invested in stocks in the first place. Stock market investments should be part of a long-term plan, with money you don’t expect to need for at least five years.
For a 25-year-old with decades until retirement, temporary market dips aren’t as concerning as they might be for someone who’s about to retire and needs to start withdrawing from their accounts.
Ask yourself (or a financial advisor) if your overall portfolio still aligns with your goals. If it does, you’re likely better off staying the course rather than jumping in and out of the market. As the saying goes, time in the market is better than timing the market.
2. The Tax Implications
This is something many folks overlook in their panic to get out of stocks. If your investments are in a taxable brokerage account, selling them will probably trigger tax consequences. Stocks sold for gains will require you to pay capital gains taxes, which will eat into your profits.
While selling investments for a loss may generate some tax savings, you’ll also be locking in those losses permanently. You won’t recover unless you get back in at the right time – which is incredibly difficult to predict.
Tax-advantaged accounts like traditional or Roth IRAs don’t have the same immediate tax impact, but there are still opportunity costs to consider before moving to cash.
3. Market Timing Is Nearly Impossible to Get Right
I’ve seen countless investors over the years who were convinced they could predict market moves – and almost all of them got it wrong.
Market timing refers to the idea that you can avoid losses and fully participate in the market’s gains by buying and selling at exactly the right times. In theory, it sounds amazing – who wouldn’t want to buy low and sell high consistently?
In reality, it’s next to impossible. People worry about more recessions than actually occur, and stocks often turn positive before the economy actually improves following a downturn.
Here’s a crazy statistic I found: If you had invested in the S&P 500 from 2000 to 2019 but missed just the 10 best market days, your overall return would be less than half of what you’d have earned by staying fully invested. And ironically, many of those best days occurred shortly after the worst days!
4. Inflation Will Eat Away Your Cash
With high-yield savings accounts offering yields around 4% (as of early 2025) and other short-term fixed-income securities offering higher rates than they have in a long time, it’s natural to be drawn to the decent returns offered by these safer investments.
But here’s the thing – you’re just barely beating inflation based on recent data. Earning 4% when inflation is roughly 3% gives you a real return of just 1%. Not exactly getting ahead, are you?
As Warren Buffett once told students after the 2008 financial crisis: “The one thing I will tell you is the worst investment you can have is cash. Cash is going to become worth less over time.”
5. There Are Alternatives to Going All-Cash
Instead of the all-or-nothing approach, consider these alternatives:
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Defensive stocks: Shifting your portfolio toward relatively safer industries such as consumer staples or utilities could help you avoid some pain without completely exiting the market.
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Asset allocation changes: If your current level of stock holdings makes you uncomfortable, consider increasing exposure to bonds or other assets like real estate through REITs.
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Portfolio rebalancing: Regular portfolio rebalancing can be a way to take advantage of market downturns. When stocks fall, they become a lower percentage of your overall portfolio. By rebalancing to maintain your target allocation, you can actually buy stocks at lower prices.
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Holding some cash: Having a reasonable cash position (say, 10-20% of your portfolio) can provide both psychological comfort and “dry powder” to buy stocks if they fall further. But this is very different from liquidating your entire stock portfolio.
What About Emergency Funds?
One exception to all of this: safety should always be the priority for money in your emergency fund. This money should be readily available when you need it, so it’s best held in FDIC-insured accounts. High-yield savings accounts are great options and typically offer higher annual percentage yields (APYs) compared to traditional banks.
Your emergency fund isn’t an investment – it’s financial insurance. Keep it separate from your investment strategy.
The Bottom Line: Think Twice Before Selling Everything
Moving your portfolio entirely from stocks to cash might seem like a safe move when markets are volatile, but it’s important to remember that stock market investments are part of your long-term plan. Selling everything could have significant tax implications, and jumping in and out of the market has historically not been a successful strategy.
If your current portfolio keeps you up at night with worry, there are better alternatives than going all-cash. Consider speaking with a financial advisor about adjusting your asset allocation to better match your risk tolerance while still keeping you on track to meet your long-term goals.
Remember, successful investing isn’t about avoiding all market dips – it’s about having the discipline to stick with your plan even when it feels uncomfortable. The most successful investors I know aren’t necessarily the smartest – they’re the ones who can control their emotions when everyone else is panicking.
Have you ever been tempted to pull all your money out of stocks during a market downturn? What did you end up doing, and how did it work out? I’d love to hear your experiences in the comments below!
Market timing is difficult
Often, the reason for wanting to move money out of stocks and into cash is because you think the market is headed for a downturn and you think you can avoid it by holding cash. But this strategy is known as market timing, which has not been a successful investment approach over the long term.
Market timing refers to the idea that you can avoid losses and fully participate in the market’s gains by buying and selling at exactly the right times. It sounds great in theory — who wouldn’t want to buy low and sell high all the time? In reality, it’s next to impossible to actually do. People worry about more recessions than actually occur, and stocks often turn positive before the economy actually improves following a downturn. You’re mistaken if you think you can predict every move in the stock market.
Sticking to a long-term investing approach and making regular contributions to retirement accounts is likely to be a more successful strategy than market timing. Train yourself to understand that market downturns are a normal part of long-term investing, and try to take advantage of them by increasing investments during these times rather than trying to avoid them altogether.
With high-yield savings accounts offering yields around 4 percent and other short-term fixed-income securities also offering higher rates than they have in a long time, it’s natural to be drawn to the decent returns offered by these safer investments. But it’s important to remember that you’re just barely beating inflation based on the most recent data as of March 2025.
Of course, earning 4 percent when inflation is roughly 3 percent is better than earning nothing, but your real return is just 1 percent. People often talk about the need to hold cash as a way to prepare for a possible downturn, but cash has a poor record as a long-term investment.
“The one thing I will tell you is the worst investment you can have is cash,” legendary investor Warren Buffett told students in the aftermath of the 2008 financial crisis. “Cash is going to become worth less over time.”
What to consider before taking money out of stocks
Before you ditch stocks in favor of cash, it’s probably worth reminding yourself why you invested in stocks in the first place. Stock market investments should be held as part of a long-term investment plan, which means you shouldn’t expect to need the money for at least five years, if not longer.
However, sometimes goals change, so it’s important to reevaluate them periodically. Stocks are often held as part of retirement planning, which for many people will still be decades away. In this case, selling stocks in favor of cash could be detrimental to your long-term returns and runs the risk that you won’t meet your investment goals.
Safety should always be top of mind for money held in an emergency fund, however. The goal for an emergency fund is that the money is there when you need it, so it’s best to hold these funds in FDIC-insured accounts. High-yield savings accounts are great options and typically offer higher annual percentage yields (APYs) when compared to brick-and-mortar banks. Check out Bankrate’s list of the best high-yield savings accounts to find the best online savings account for you.
Lastly, ask yourself or a financial advisor if your overall portfolio is still aligned with your goals. If it is, you’re likely better off sticking with your plan rather than jumping in and out of the market. Time in the market is better than timing the market.
If you hold stocks in a taxable brokerage account, selling them will likely have tax implications. Stocks sold for gains will require you to pay capital gains taxes, which will eat into the profit you earned. Selling investments for a loss may generate tax savings, but you’ll also be locking in those losses and won’t be able to recover unless you get back in at the right time.
You won’t have to worry about the tax impact if your investments are held in tax-advantaged accounts such as traditional or Roth IRAs, but there are still things to consider before you decide to move all or a portion of your portfolio to cash.
Should I Cash Out My Stocks?
FAQ
Should I pull all money out of the stock market?
No, keep your money in the market, especially if you’re still far from retirement. When you try to time the market, you end up losing more money than if you had just stayed in. Think about it: if the market goes down, it’s just a discount on what you were already going to buy.
How much do I need to invest in stocks to make $1000 a month?
You’ll need a portfolio worth about $300,000 generating a 4% dividend yield to earn $1,000 in monthly passive income. Building a diversified collection of 20 to 30 dividend stocks across different sectors helps protect your income.
What is the 3-5-7 rule in stocks?
The 3-5-7 rule is a trading risk management strategy that limits risk to 3% of your account per trade, restricts total exposure to 5% across all open positions, and sets a 7% profit target on winning trades. It helps traders control losses and improve long-term consistency.
How much tax do I pay if I cash out stocks?
The current capital gains tax rates are generally 0%, 15% and 20%, depending on your income. Stock dividends may also be subject to these favorable capital gains tax rates as long as they are “qualified,” which is based in part on how long you’ve owned the stock; if not, ordinary income tax rates apply.