At the beginning of this month the S&P 500 index (SNPINDEX: ^ GSPC) doubled its pandemic bottom in March 2020. While returns for investors have been phenomenal over the past year and a half, the market is unlikely to double again in the next year and a half. In fact, some investors believe the stock market is currently overvalued and could see a correction in the near future.

If you are in this camp, you may be wondering if you should just pull your money out of the market now. While this protects you from market volatility, it creates some additional risks to avoid.

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Inflation risk

As you sell your stocks and turn more assets into cash, inflation will slowly erode the value of your holdings. Your brokerage account is unlikely to pay interest on your cash, and even the best savings accounts will only pay a fraction of a percentage point.

Right now we are experiencing significant inflation. The consumer price index rose by 5.4% in July compared to the previous year. The Federal Reserve says the high rate of inflation is temporary and expects to steer the money supply to an inflation rate of 2% over the long term.

In the short term, however, the Fed is fine when inflation runs high. That means selling your stocks now and switching to cash carries an additional risk of a highly inflationary environment.

While stocks are also affected by inflation, it doesn’t affect every stock in the same way. Value stocks tend to outperform in high-inflation environments, while growth stocks underperform. If you are concerned about current market valuations and inflation, it may be more advisable to shift your allocation to value stocks rather than cash.

What are you going to do with the cash?

When you sell your stocks and hold cash, you pay the opportunity cost of your lost investments. If you have a plan on how to get a positive return on that money, e.g. Cryptocurrency, then maybe selling stocks isn’t the worst.

But investing in a broad index fund has historically been one of the best risk-return ratios you can get over long periods of time. Although there are periods of ups and downs, the long-term trend is that the market continues to rise higher, which brings positive returns for patient investors. And it’s a lot easier than investing in real estate, cryptocurrency, alternative assets, or even individual stocks.

If your plan is to simply hold cash and wait for market valuations to go down, you can hold onto it for a while. The market could continue to rise, defy expectations, and you would miss out on potential profits. And even if the market falls, you need to be sure that you know when to put your money back into stocks.

Timing the market by switching between stocks and cash is inconvenient and often results in missing out on investment returns. There are also transaction costs to be considered, including capital gains taxes.

Think about rebalancing

Rather than pulling money from the stock market into cash, a better strategy is to realign your asset allocation. If your portfolio only contains stocks and you are nervous about prices, it may be a sign that you should hold more bonds and other less volatile assets.

As you get older and closer to the planned retirement age, you should shift more assets into asset classes with lower volatility in order to conserve capital. Balancing your stock holdings with assets with negative price correlation, such as B. government bonds, is far more effective in maintaining capital than to hold stocks and cash. That’s because the other assets usually appreciate in value as stocks go down. Cash tends to depreciate over time due to inflation.

Make sure you have a appropriate asset allocation for your goals and you won’t wonder if it is safer to get your money out of the stock market. It might just be time to rebalance after the massive surge in stocks.

This article represents the opinion of the author who may disagree with the “official” referral position of a premium advisory service from the Motley Fool. We are colorful! Questioning an investment thesis – even one of our own – helps us all think critically about investing and make decisions that will help us get smarter, happier, and richer.