To be or not to be in cash

Investors often face the dilemma whether to cash out or stay invested in the stock market. Being in cash has its own advantages and disadvantages. Liquid cash is comforting, makes one feel more secure, and one can spend it as and when needed. Moreover, being in cash during turbulent times protects the investor from market volatility.

However, being in cash does not protect the investor from the eroding effect of inflation. Inflation erodes the value of money over time, so to prevent such erosion one needs to remain invested in equity or debt or any other asset class which will help the investor grow his money at a rate faster than the inflation rate.

That apart, being in cash comes with an opportunity cost, which is the benefit foregone by the investor by holding cash. In other words, opportunity cost is the indirect loss suffered by the investor by holding cash instead of investing in a growth-oriented asset such as equity.

Of course, cashing out of the stock market might entail booking profit or loss. When the investor is making a profit in a stock, he may be overcome by greed and may avoid booking profit and

cashing out in the hope of making more profit. On the other hand, if the investor is looking at a loss in a stock, he may be overcome by fear of more losses and cash out, instead of waiting for the stock to rebound. Or he may hold the stock in the hope of recouping his loss, which may not happen and instead deepen his loss further. So, hope or greed or fear may determine whether an investor cashes out or remains invested in the market.