Not so fast, advisors warn.
"People make bad decisions when they go to cash," said Scott Bishop, head of financial planning at Houston-based STA Wealth Management. "Their guts are usually wrong."
Investment flows show that investors typically get it wrong when they try to predict which direction the market will head, said Cory Clark, director at Dalbar, a Boston-based market research firm.
In 2016, investors guessed wrong about the market's direction — such as by selling shares, in aggregate, right before a winning month — in seven months out of the year, according to Dalbar. Over the past 20 years through 2016, after accounting for poor timing of fund flows, the average equity investor has earned 4.79 percent annualized, or almost 3 percentage points fewer than the Standard & Poor's 500 index each year, on average, according to Dalbar.
"A year ago there was a lot of uncertainty and fear, and concerns over a potential market top," Clark said. "And we just saw the markets keep on keeping on."
Investors who sell now risk missing a "melt-up," such as if stocks quickly notch additional double-digit gains, said Thomas Yorke, managing director of Oceanic Capital Management in Red Bank, New Jersey.
If the market does top out soon, investors who sell run the risk of not getting back into stocks at the right time.
"Most investors do very poorly when selling in anticipation of a correction," said Bishop. "It never feels 'right' to buy back in."
One of Bishop's clients went to cash in the summer of 2008 — successfully dodging the market collapse that followed Lehman Brothers' bankruptcy — but still hasn't gotten back into the market, he said.
Investors generally experience their worst underperformance, compared with the market, during times of market turmoil for just that reason, Clark said. They pull their money out of stocks and fail to get back in as the market recovers.
Even missing out on a few days of market gains can have devastating effects on an investor's long-term performance.
An investor who stashed $10,000 in a portfolio tracking the Dow Jones Industrial Average at the end of 2001 and held on would have had $28,698 by the end of 2016, for a total return of 7.28 percent annualized, according to Putnam Investments. By missing out only on the Dow's 10 best days during that period, the investor would have ended up with just $14,697, for a total return of 2.60 percent annualized.
"Investors should stay the course," said Ryan Fuchs, a financial planner at Ifrah Financial Services in Frisco, Texas. "If you have a plan in place that is well thought out and appropriate for your situation, you should stick to it through ups and downs."
Instead of liquidating holdings, investors may consider rebalancing both to lock in profits and to bring their asset allocation back in line with their long-term objectives, said Tom Manning, chief executive officer of F.L.Putnam Investment Management, based in Wellesley, Massachusetts.
In addition to rebalancing their overall stock-to-bond allocation, investors can consider selling shares of individual stock positions that have performed well and investing the proceeds in defensive stocks, said Yorke. For example, he is trimming clients' allocations to FAANG stocks and buying exchange-traded funds that invest in defensive dividend stocks, he said.
For investors who are very worried about the market or about current events, it might also be a good time to reassess overall risk tolerance, Manning said.
"If people are losing sleep over the market and the drama that's playing out in Washington, they likely have a greater allocation to stocks than they can stomach," Manning said.
Of course, investors who are losing sleep about the market's big gains are probably in the minority.
"It's rare that a client with a successful investment calls you and says 'Gee, it's time for me to get out,'" Yorke said. "Generally when that happens they just want to ride it forever."