When it comes to your investments, you may be tempted to cash out early for a quick profit explains Greg Van Wyk.
However, there are many good reasons why you should resist the urge and hold on to your investments instead. Here are 10 of them:
1. Potential loss of growth opportunities.
When you cash out your investments prematurely, you lose out on all the potential growth that could come from holding onto those assets for longer. If you had invested in stocks or mutual funds, for example, you would miss out on any future earnings gains or dividends that these assets might experience over time.
2. Reduced returns over time.
In addition to missing out on any potential growth opportunities available with your initial investment, cashing out too soon can also lead to reduced returns over time. This is because you may need to sell your assets at a lower price than you originally paid in order to cash out early, resulting in a loss.
3. Taxes and fees.
Depending on the type of investment, there may be taxes and fees associated with cashing out prematurely. For example, if you have a 401(k) retirement account, you may be subject to an early withdrawal penalty if you take money out before reaching age 59½.
4. Market timing risk.
Attempting to time the market is generally considered to be a losing proposition, as it’s impossible to know when the perfect time to buy or sell will be explains Greg Van Wyk. However, this becomes especially true when cashing out your investments, as you may be forced to sell at an inopportune time and end up taking a loss.
5. Loss of compounded growth over time.
When you hold onto your investments for the long term, they are able to grow through the power of compound interest. This means that any growth that occurs is reinvest into the asset and earns more money on top of it, leading to even higher returns over time. However, if you cash out early, this advantage is lost, potentially leading to lagging returns down the road.
6. Limited liquidity.
In some cases, cashing out your investments early could mean losing access to those funds for years or even decades. If you had invested in real estate, for example, you may find it difficult or impossible to sell your property quickly enough to get your money back when you need it.
7. Impacts on other financial goals.
When you cash out your investments early, it can often come at the expense of other important financial goals. For example, if you were planning to use that money to pay for a child’s college education or save up for retirement, those plans might be derail if you choose to cash out instead.
8. Loss of long-term perspective.
Investing is all about thinking long-term and focusing on the big picture rather than short-term fluctuations in the market. However, cashing out too soon robs you of this valuable perspective and can lead you to make rash decisions based on fear or greed.
9. Diminished risk tolerance and/or confidence.
Another downside of cashing out your investments prematurely is that it could impact your attitude towards investing in the future, making it more difficult for you to ride out market downturns or remain committed to long-term growth strategies. This lack of confidence and risk tolerance could ultimately lead to worse investment results over time says Greg Van Wyk.
10. Lost opportunity cost.
When you cash out your investments early, you are essentially giving up the chance to put that money into something else that may have outperformed what you sold off in the first place. For example, if you had invested in stocks but chose instead to unload them and invest in bonds, you may have missed out on any gains that equities might have experienced. As a result, it’s important to weigh the costs and benefits of cashing out your investments early before making any decisions.
Although there are some potential downsides to cashing out your investments early, there are also many reasons why it can sometimes make sense to do so. For example, if you need the money for an emergency expense or to finance another investment opportunity, unloading some or all of your current holdings could help you achieve those goals more quickly.