Sunday, February 22, 2009

Should i sell my stocks and hold cash?

Should I invest and stay in the stock market or sell everything and keep the cash when the market is falling? Sadly for most investors the answer is yes. As a result many of them are selling their investment to hoard cash. Is cash really a safe haven and better that other investment? I would say no, so lets have a look at the arguments against holding Cash.

Advantages of holding cash

If a stock is falling like a knife, selling the stock and holing cash will help to stop your losses.
Also some people have a low tolerance to falling stock market so having cash is a good thing.
While your portfolio can fall and rise, cash in bank and safe retain their nominal value. In some countries cash in account is guarantied so that their is little danger of it losing its value.
Its face value at least.

Disadvantages of holding cash

While holding cash might feel good in the short term it is an unwise move over the long term. Stock market go up and down but it usually in the long run. So even if it is going down now it will go up again and recover the loss value. It is only a temporary loss ,a paper loss. If you sell now you will make the loss permanent. When stocks are falling the only chance to regain their value is to hold on to them until their value rise again. On the contrary when the stock market is down, you should buy more stocks at bargain prices.

The second problem with holding cash is inflation. Cash loses value with time and gradually the value will decrease. You will have no such problem with stocks. The return on stocks is usually greater than that on cash and also greater than inflation. The stock market has always outperform cash. While adjusted for inflation a stock portfolio will increase with time, a cash portfolio will fall with time.

If you sell your stocks now, you will have to get in again. You will thus have to time your entry. This is very difficult to do as you will be trying to time the bottom. Chances are that you will miss it, and as I have written in a previous post, missing the bottom is like running after a train it is very difficult to catch. So your best chance of regaining the value of your portfolio is to remain invested and be patient.

So guys stay invested and wait for the bull market. The rise will be quick and brutal. When it start i will be on the train. Will you be on it or running after it trying to catch it?

The choice is yours.

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