What does it mean to "liquidate and move to cash"?
I have read several articles and reports about investors suggesting that people should "liquidate stocks and move to cash", but I have yet to find a solid description or explanation of what it means. What exactly does it mean to "liquidate and move to cash"?
It is a great question and a mistake that many investors make. "Liquidate and Move 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":
- Money: 5 Ways to Protect Your Retirement if the Market Tanks
- CNBC: Are you prepared if the market tanks in Q4?
- CNBC: Afraid of retiring into a bear market? Tips to hedge bets
Liquidating and moving to cash is just a fancy way of saying sell some (or all) of your stocks and then not reinvesting the cash into anything else. In practice, most brokers pay very low interest rates on their cash balances so usually it would make more sense after doing heavy selling to put the money into a bank CD or something which pays around 1.5% as it does these days with zero risk.
In general, selling stocks and real estate and corporate bonds makes good sense with these near all-time record highs, but doing everything in a lump sum or all at once is rarely a good idea. The best approach to most things in life is to act gradually with a well-designed plan rather than hastily making lump-sum trades.
To "liquidate and move to cash" basically means to sell all of your holdings and move that proceeds to cash. You really only would do this if you were trying to time the stock market (stupid) or if you were a day trader or some sort. If you happen to be a day trader and say are taking a vacation - you might "liquidate and move to cash" to avoid having to work on your vacation.
For the rest of us who are using diversified portfolios to reach our various financial goals, this would be crazy to do.
You may like this post on stock market volatility:
Live for Today, Plan for Tomorrow.
DAVID RAE, CFP®, AIF® is a Los Angeles-based retirement planning specialist with DRM Wealth Management. He has been helping people reach their financial goals for over a decade. Follow him on Twitter @davidraecfp, Facebook or via his website, DavidRaeFP.com. or the Fiduciary Financial Planner LA blog.
"Liquidate stocks and move to cash" means sell all of your stock holdings and keep the proceeds in cash. I suspect that whichever articles you read indicated concern about the current richness of stock valuations. There's certainly merit to that concern since the S&P 500 Index is now trading above 18 times projected earnings for the next 12 months. That's toward the upper end of the typical valuation range, which should signal that caution is warranted. Even so, interest rates are still very low (which supports rich stock valuations) and corporate earnings are advancing at a good pace. So from an business perspective, there appears to be little on the horizon to disrupt the upward movement of stock prices.
With that said, however, we're moving into the seasonally weakest time of the year for stocks and the Fed is in the process of raising rates. What's more, in two out of three years there is an interim pullback of 10% or so. Those who think it worthwhile to sell and move to cash will then be faced with the decision of when to get back in. Although it sounds like a promising suggestion, the reality is that few investors have had the good fortune to get out and back in at the right times. Indeed, most investors usually get it wrong.
Either way, I wish you good luck!
Good question and one you should understand.
The term "liquidate and move to cash" essentially means selling the holdings, "liquidate stocks" that you have (stock, bonds, mutual funds, ETF's, etc..) and not reinvesting them. Once sold you maintain the monies, "the cash", not invested in anything. The "cash" can be in a money market, checking, or savings account.
This strategy is typically utilized when you feel a market event will be taking place and you do not want to take on the inherent risk that the investments you hold may carry. The cash is considered a safe haven away from risk.
I would highly recommend that this type of strategy be thouroughly thought out and it may be best for you to consult with an advisor who is a fiduciary prior to enacting it.
Best of luck!