Feb 14, 2024

Thinking Of Cashing In? 8 Considerations Before Selling Your Investments

We understand.

Sometimes high market volatility can be nerve-wracking. Seeing your investment balances swing up and down – especially down - may be unsettling. Or perhaps with slightly better interest rates hanging around you’re tempted to move to cash holdings. Maybe it’s a case of needing a bit of extra money to get you through a tight month.

Whatever’s driving you to consider taking your money out of stocks, we’d urge you to pause a moment and think about the following before selling up.

What to weigh-up before taking cash out of stocks  

1. Your financial goals

Remind yourself about why you started investing in the first place. Stocks and ETFs should form part of your long-term investment plan, meaning this money should not be needed for a minimum of five years, but ideally much longer. Deciding to liquidate your stocks and EFTs prematurely may be detrimental to long-term returns and, as a result, achieving your financial goals.

Naturally, there are times when circumstances or situations change, and your financial goals may need to be adjusted. As opposed to cashing in investments, you might want to consider reevaluating your risk tolerance and portfolio structure instead.

2. Timing the market is near impossible

Downturns in the market are to be expected. It’s unrealistic to expect that you can avoid losses entirely by buying and selling at the exact right time for maximum gains – that is buying low, selling high. While a noble aspiration, it’s simply not likely to happen consistently over the long term.

“Time in the market is better than timing the market.”

This is a valuable phrase to keep in mind which reminds us that being successful in investing isn’t about trying to pick the perfect moment to buy or sell (timing the market), but rather about how long you can keep your money invested (time in the market).

3. Earning opportunities lost

The longer your money is in the stock market, the more opportunity you have to earn. Being ‘out’ of the market for even a handful of key performance days can have a significant effect on your overall returns.

Also, consider potential dividend payments. When you invest in a company that pays dividends to its shareholders, you can earn income periodically – even if the share price has dropped. And if you reinvest your dividends payments, you increase your shares, and therefore your earning and profit potential. This opportunity for compound growth is maximised when investments are held over an extended period, leading to potentially exponential growth in portfolio value.

4. Inflation erosion

Inflation is a cash killer. The rising costs of goods and services eats away the buying power of your money over time. What you could afford to buy with the same amount of money a few years ago, will be far less today. The inflation rate is linked to monetary policies as governments try to maintain or encourage economic growth and closely tied to interest rates. Often, bank accounts don’t offer enough interest to counter inflation, and so you’re allowing the value of your cash to decrease over time.

Warren Buffett, the renowned, highly successful investor once said:

“The worst investment you can have is cash. Cash is going to become worth less over time.”

5. It’s not a loss, until you withdraw

Even if your balance is negative, it’s considered what is called a paper loss. Meaning it’s not a realised loss, it’s a temporary negative return on investment. It’s only once you sell the stock that you ‘lock in’ the loss and it becomes a realised, actual loss. And once sold, you immediately lose the possibility of recouping losses.

In general, markets have a relatively long track record of recovering. If you’re patient and hold onto your investments, there’s a good chance that they will recover their value over time.

6. Eliminate emotion

If you’re thinking about cashing in your investments, it’s likely you’ve already let some level of emotion creep into the equation. It’s not always easy to avoid being wrapped up in the highs and lows of the stock market volatility, but it’s important to resist making any impulse decisions based on fear or greed.

To remove emotion from your investments, and specifically about market downturns, you could explore investing on a consistent, regular basis, irrespective of the price. This strategy is called dollar-price averaging and essentially works because you’ve committed to buying stock on a schedule (emotionally neutral), not based on the price (emotionally charged). And with stocks and ETFs available as fractional shares on Nemo Money, you’re able to afford to invest even small amounts at a time.

7. Tax implications

While the UAE doesn’t impose tax on investments (capital gains tax), investors in other countries may be subject to taxation on the sale of investments. If you’re legally obligated for tax, it would be wise to investigate the specific calculations and costs involved before making any decision. The last thing you’d want is to be lumped with a higher than necessary tax bill because of cashing in your investment.

8. Consider alternative options

If you’re concerned about an economic recession, a market downturn or the exposure of your portfolio, we’d encourage you to explore alternative options before calling it a day on your investments. After all, you chose to invest with a long-term plan of growing your wealth, and that won’t be achieved with your funds sitting in cash.

Instead, you could:

Rebalance your portfolio to reflect the respective weightings or percentages you’d like to see for each stock or sector, while maintaining your overall desired mix of assets. Price fluctuations can cause imbalances as some prices drop while others remain static or increase.  

Diversify your portfolio to protect against losses. A portfolio that’s concentrated in a specific asset, sector or stock type is at more of a risk for loss than one that is more spread out in terms of investments. Stocks that are performing well can often offset or minimise the effects of underperforming ones and smooth out performance over of the long term.

Stay invested

Cashing in your investments is a significant decision that’ll ultimately impact the long-term returns of your portfolio and could hinder or derail meeting your financial goals. Before taking action, we encourage you to take all the above into consideration so you can make an informed decision that aligns with your overall financial plan.

Vee Tardrew

Vee Tardrew is an experienced copywriter with an extensive career in marketing within the fintech sector. She's passionate about investments, emerging technologies, and opportunities that can bring about positive change in the world. Prior to bringing her love for words to the Exinity team, Vee led content creation for a pioneering cryptocurrency investment firm for close on a decade. As a creative soul with a technical mind, Vee is adept at storytelling to simplify complex topics and won't pass up an opportunity for a tasty food analogy.