Should you cash out of this S&P/ASX 200 Index (ASX: XJO) rally?
The ASX 200 has had a pretty top few weeks. Since the lows we saw in late March, the ASX 200 has rallied almost 20%. That's more than double the index's long-term average annual return – albeit following a 37% crash earlier in the year.
Still, the confidence of many ASX investors would be well up from the widespread panic we saw in March. Some shares like the ASX banks have stabilised. Others like CSL Limited (ASX: CSL) are edging ever closer to their pre-crash highs.
But this begs the question – is now a good time to 'cash out' and lock in some gains? Particularly since the markets don't seem to be factoring in that we're about to go through the worst recession Australia has seen in decades.
Time to cash out?
It might be tempting to cash out of some or all of your holdings if you're nervous about the markets right now. After all, cash is king in a market crash.
But here's the problem.
Do you actually know what the markets will look like tomorrow, in two months, six months or a year's time? Of course not, otherwise you wouldn't be reading this article! Even the best investors in the world, like Warren Buffett, don't try to pretend they know exactly what the markets will do next.
Plus, odds are (like most ASX investors), your portfolio still has some losses left over from the March crash. To paraphrase a great song, you can cash out any time you'd like, but you can never leave… your losses once you do so.
Yes, the ASX might crash the day after you cash out and you'll look and feel like a genius.
But maybe it won't. Maybe it will go on to hit new highs – stranger things have happened. As the legendary economist John Maynard Keynes once said, "Markets can remain irrational longer than you can remain solvent". And if that happens, you probably won't feel so smart.
And even if you do pull off a well-timed cash out, when are you going to jump back in? That's two incredible punts you're going to have to pull off.
Throw in the costs of jumping in and out of the markets (taxes, brokerage, fees etc.) and it's a very narrow tightrope you're trying to walk.
Foolish takeaway
Like most of us Fools, I think having a long-term mindset is the best way to invest in shares. Thus, I think trying to time the market by cashing out 'before the crash' is folly. Investing in shares means you're in it for the good times and the bad – it's all part of the game. Trying to dodge the inevitable will usually result in poor returns over the long run!
