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?

Banking, Investing
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September 2017

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.

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