Portfolio Management | August 9, 2017

How Fast Can You Get Your Money Out of the Stock Market?

Key Points

  • Timing rules for selling stocks and other securities and getting the cash are pretty straightforward. But how fast you can cash out is far less important than deciding what money to invest and why.

  • Set a financial foundation for yourself by having adequate cash reserves set aside in an emergency fund before you invest to avoid having to sell at the wrong time.

  • Think of investing as a long-term commitment. Money you'll need in the next three-to-five years (or sooner) is best kept out of the stock market.

Dear Carrie,

If I invest my savings in the stock market, how fast can I get cash if I need it quickly? 

—A Reader

Dear Reader,

Thanks for asking this because what seems like a fairly straightforward question opens the door to a whole lot more discussion. The timing rules for selling stocks and other securities and getting the cash are pretty clear and I'll go over those for you. But what I'd like to emphasize is the importance of deciding upfront how much money to keep easily accessible and how much to invest.

Much of that decision depends on your timeframe because the way you should save and prepare for short-term needs is very different from how you should prepare for long-term goals. And it's the money you earmark for long-term goals that should be the focus of your investing in the stock market.

But before we get further into that, let me first answer your specific question.

How quickly you can get your cash when you sell an investment

When you buy or sell securities, the official transfer of the securities to the buyer's account or the cash to the seller's account is called "settlement." Currently, for most stock market trades, settlement happens three business days after the trade is executed (there is some discussion that this might change to two business days). An easy and common way to remember this is T+3, which stands for trade date plus an additional three days. For example, if your sell order executes on Monday, funds would generally be available by Thursday (or by Wednesday, if we move to T+2). Some brokerage firms may immediately "sweep" your money into an account that earns interest. To be on the safe side, it is always a good idea to ask your broker about how you can assure that all funds and securities can be delivered to you promptly.  

The three-day settlement date applies to most security transactions, including stocks, bonds, municipal securities, exchange-traded funds, mutual funds traded through a brokerage firm, and limited partnerships that trade on an exchange. U.S. government securities, no-load mutual funds, and stock options settle on the next business day following the trade. As you can see, the time it takes to get your cash depends in part on what type of investments you hold. 

What to do before you get into the market

Settlement details aside, how fast you can cash out is far less important than making sure you're ready to invest in the market in the first place. Here's what I suggest:

 First, set your financial foundation—The first thing is to make sure you have an adequate rainy day fund. Even if you're young and healthy, you never know what might happen. Aim to put away enough money to cover six months’ of necessary expenses (rent, utilities, food, medical, insurance) in an FDIC-insured savings account. That's right—a no-risk savings account. That way, if something bad happens such as a layoff or a health problem, you're covered.

Next, think about how much of your additional savings you might want to earmark for short-term goals—for instance, the money you might be saving for a vacation, or even the down payment on a house you hope to buy in the next couple of years. You could put that money in a money market account (not FDIC-insured, but still quite safe and liquid) or a short-term CD (safe, but not entirely liquid until maturity).

• Then decide what money to invest—Investing in the stock market always involves volatility and a certain amount of risk. Therefore, you have to think long term so that you have a better chance of riding out the inevitable dips. Otherwise, you could get caught needing to sell at the wrong time and sustain a substantial loss. This is why your emergency funds should not be in the stock market.

Therefore, before you invest, first think about how soon you'll need to spend that money. If you'll need it in the next three-to-five years, think about using alternatives as discussed above. However, if you're preparing for retirement on another long-term goal, investing in the stock market can provide you with greater long-term growth potential.

Another caution about timing

It may seem counter-intuitive, but there can also be situations where you keep your money in the market too long. And that goes back to the idea of timeframe. For instance, a parent saving for a child's education should probably start gradually shifting the money out of the stock market over time. That way, the money will be less subject to market losses before the tuition bills are due. Again, it's not a question of how quickly one can get the cash out, but rather reducing exposure to the stock market so as not to take too much risk with money that's needed sooner rather than later.

Don't wait to get started

Your seemingly simple question about the time it takes to get your money out of the market has triggered a lot of other considerations. And one of the most important timing considerations of all is just to get started.

Once you have a firm financial foundation, I believe that investing in a diversified portfolio of securities is one of the best ways to help grow your long-term savings. Which brings me to one of the classic sayings about investing: "Time in the market is more important than timing the market." And if you're young and just getting started, time may be your greatest asset.

Have a personal finance question? Email us at askcarrie@schwab.com. Carrie cannot respond to questions directly, but your topic may be considered for a future article. For Schwab account questions and general inquiries, contact Schwab.

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