Personal Finance

After An Incredible Year For the S&P 500 (VOO), Here's What I'd Do Next

Maurie Backman

Published: January 4, 2025 9:12 am

Key Points from 24/7 Wall St.

• The S&P 500 is up around 25% over the past year.
• If you’re near retirement or are worried about the economy, you may want to lock in some gains and boost your cash reserves.
• With savings accounts still paying 4% or more, it’s a good time to have money in the bank.

Investing in the stock market isn’t for the faint of heart. But a common approach is to invest in the broad market by purchasing shares of an S&P 500 ETF (like the Vanguard S&P 500 ETF) so you get an instantly diverse portfolio. Plus, if you’re someone who’s admittedly not going to spend the time researching companies individually, then going all-in on the S&P 500 makes a lot of sense.

Investors who took that approach in 2024 may be pretty happy right now. The S&P 500 is up roughly 25% over the past year.

But you know what they say about the stock market — there are no guarantees. And given the potential for economic upheaval this year, it’s hard to predict what the S&P 500’s returns will look like in the next 12 months. So if you’re in a position where you could use more cash reserves, you may want to take some gains in your portfolio while you can.

Why it’s a good time to have money in savings

The S&P 500 is coming off of a couple of good years. But that doesn’t mean it’ll be smooth sailing in 2025.

We don’t know how inflation will trend and what’s in store for the broad economy. But any sort of shake-up could lead to weaker stock market returns, or even a correction (which, let’s face it, the market may be overdue for anyway).

That’s why now’s a good time to think about taking some of your investment gains and running with them. Of course, you’ll need to be careful with short-term gains, which could deal you quite a blow from a tax perspective. But if you’ve held shares of an S&P 500 ETF for at least a year and a day, and you’re looking at more favorably taxed long-term capital gains, then you may want to convert some of them into cash, whether it’s a high-yield savings account or a CD ladder.

A good number of high-yield savings accounts are still paying upward of 4%, despite recent interest rate cuts on the part of the Federal Reserve. And while savings account rates aren’t set in stone, CDs offer more predictability in that regard.

Should you cash out your gains?

I wouldn’t necessarily recommend that everyone take their S&P 500 gains and move that money into cash right now. If you’re all set with emergency savings, secure in your job, and years away from retirement, then I’m generally a fan of staying invested. But cashing out gains could make a lot of sense for people in certain categories.

If you’re retired and your portfolio is up, it’s not a bad idea to cash out some of your gains and set yourself up with more money in savings. I’d say the same to anyone who’s on the cusp of retirement, especially because we don’t know what’s in store for the market in the coming year.

I’d also recommend cashing out some gains if you’re worried about your job or industry in 2025 and feel you need more emergency savings. And similarly, if you don’t have much cash set aside for unplanned expenses, it’s a good idea to make sure you’re reasonably protected.

The general consensus is that you should have a three-month emergency fund at a minimum. I don’t love that rule of thumb, though, because it can take a surprisingly long time to find a job following a layoff, especially if you’re further along in your career.

So I like to recommend a six-month emergency fund at a minimum. If you’re not there but have a portfolio of gains you can tap, that solves that problem.

Of course, it’s also a good idea to sit down with a financial advisor and discuss your personal situation. They can help you determine how much cash you should have on hand given your goals, concerns, and stage of life.

But know this. Today’s savings account yields aren’t going to stick around forever. So it’s an especially good time to have money in the bank.