What does it mean when you move your investments to cash?
When people say they are moving their investments to cash, or keeping cash on hand, what does this mean exactly? Are they moving cash to a money market account? Letting it sit in their trading account? Bank account? Is this a good idea?
This is a great question.
Typically when people say they are "moving to cash", this is a strategy when they feel the markets are headed to a decline. They would go ahead and sell investments and keep this money in cash until such time they feel it is ideal to re-enter the markets.
"Moving to cash" can mean different things to different people. Some investors will simply have the funds sit in cash in their trading or investment accounts. This could either be in the form of a money market holding, true cash in their account or an FDIC insured deposit account. Depending on the brokerage firm that you hold your assets with will dictate what options would exist for you within your account.
In addition to the above, some investors will remove the funds from their brokerage account all together and move the funds to a bank account instead.
Whether this is a a good idea or not would depend on your personal situation. Typically, most investors are not savy enough (and neither are most advisors) to determine when to exit and enter the markets. Should you have a long term time horizon, 10 years plus, moving to cash may not make sense for you. You may get out of the markets and avoid some of a decline (you will never avoid it all) but when do you re-eneter the markets. Many times investors will miss some of the rebound and reinvest their cash too late.
These are great questions and I would recommend you hire a fiduciary advisor to help you navigate this as best you can based upon your own facts and circumstances. Best of luck!
Any time you sell an investment in a brokerage account you automatically get cash on settlement. Most brokerage firms have a default vehicle for the cash -- usually a money market fund of some kind. They type of money market fund is not important because they all yield zero, more or less.
Is it a good idea? Look at it this way: if you move to cash you have a 50% chance of missing a downdraft in the market and a 50% chance of missing a rally in the market. You also have a 100% chance of getting a zero return before inflation, and thus a negative real return. You are more likely to be worse off if you do this than if you do not do this.
An investor would "move to cash" if he felt fearful. To be a successful investor you have to learn how to manage your fears. You have to realize that there has never been a time when there wasn't something to be afraid of. You must also realize that every buying opportunity came at a time when investors in general were fearful. If the market is going through a time when investors are panicky and selling without regard to value, that is exactly the time to manage your fears, overcome them, and get in.
If selling today turns out to have been a good move, will you have the courage to buy at such a time? And if it turns out to be a bad move, how many years will you sit on the sidelines before giving up, admitting your error, and buying back in at higher prices? NO -- stay fully invested. You are a long term investor and it just doesn't pay to try to avoid short term moves in the market.
A successful investor researches the companies he buys and chooses companies that are well-managed, growing, well-positioned competitively, and financially sound. An investment is not a casino chip. It is a part-ownership interest in a business that does not really fluctuate in value even if its stock price does. This is the most important lesson an investor can learn.
There are many definitions of "cash". Certainly bank savings accounts and bank CDs are one way to hold cash, and CD rates have moved to 1.5% in many parts of the country if you shop around. In 401(k) and 403(b) accounts, cash can mean a stable-value account with a fixed principal and a varying interest rate which can be above 4% with TIAA-CREF and some other providers. A money market account is another option, either taxable or otherwise.
These are all excellent ideas because we have likely begun the third severe bear market for U.S. assets since 2000.
Cash can be dollar bills held in a vault or safe, checking and/or savings accounts, and money markets (both floating and stable)...essentially cash is considered a safe haven that is meant to eliminate the impact of stock or bond market volatility. Investment houses will also use the term "Cash Equivalents" to define securities that mature in less than a year. Technically not cash, but those securities experience little volatility, and can be turned into cash quickly.
Moving money to cash is done, I believe, for two significant reasons: 1. to set a certain amount aside to pay for something in the very near future, 2. to receive proceeds from the sale of an investment. #1 is a simple concept, and with #2, the cash may be temporary, meaning one is simply between investments, or, it is strategic, meant to take money "off the table", reduce the risk one is taking with investments for a period of time. At today's interest rates, cash investments don't earn much (if any) interest, and will typically earn less than the rate of inlfation, which means that the cash held will typically lose purchasing power over time. At this time, cash is more of a store of value than an investment.
Whether holding cash is a good idea or not is very subjective, as it depends on what you are trying to accomplish. Savers tend to favor cash over investments, and investors tend to favor investments over cash.
It is a great question and a mistake that many investors make. Liquidate and "Move Your investments to Cash" typically means to sell ALL of your investments when you are scared, feel the market will decline and "cash out" to money market accounts. This should be contrasted with selling investments to rebalance, re-invest or to pay off debt, etc (that are NORMAL reasons to sell stocks).
I hear this talked about a LOT on my radio show (The STA Money Hour on 950AM KPRC in Houston). Right now people are calling in and saying "I hate Trump...he's gong to destroy America" or "The market seems high now and I don't want to lose money again"...when that happens, typically the next sentence is usually "should I sell it all (or iliquidate) and move to cash?".
That is typically a bad idea based on market fear...fear and greed are the biggest motivators to buy and sell in the market. Instead, you should have a disciplined plan as to when you want to buy or sell...AND have that plan in place when you are in a good place (not motivated by fear and greed.
Aligned with this, let me point you to a few articles I wrote or were quoted in that may be interesting to you based on why or why not to "liquidate and go to cash":