Logically, you know your asset mix should only change if your goals change. But in the face of extreme market swings, you may have a hard time convincing yourself of that—especially if you’re retired or close to retirement. We’re here to help.

If you’re tempted to move your stock or bond holdings to cash when the market drops, weigh your decision against these 3 points before taking any action.

  1. You’ll “lock in” your losses if you move your portfolio to cash when the market is down.

    Once you’ve sold, your trade can’t be changed or canceled even if conditions improve immediately. If you liquidate your portfolio today and the market rebounds tomorrow, you can’t “undo” your trade.

    If you’re retired and rely on your portfolio for income, you may have to take a withdrawal when the market is down. While that may mean locking in some losses, keep this in mind: You’re probably only withdrawing a small percentage—maybe 4% or 5%—of your portfolio each year. Your retirement spending plan should be built to withstand market fluctuations, which are a normal part of investing. If you maintain your asset mix, your portfolio will still have opportunities to rebound from market declines.

  2. You’ll have to decide when to get back into the market.

    Since the market’s best closing prices and worst closing prices generally occur close together, you may have to act fast or miss your window of opportunity. Ideally, you’d always sell when the market peaks and buy when it bottoms out. But that’s not realistic. No one can effectively time the market over time—not even the most experienced investment managers.

  3. You could jeopardize your goals by missing the market’s best days.

    Whether you’re invested on the market’s best days can make or break your portfolio.

    For example, say you’d invested $100,000 in a stock portfolio over a period of 20 years, 2000–2019. During that time, the average annual return on that portfolio was just over 6%.

    If you’d gotten out of the market during those 20 years and missed the best 25 days of market performance, your portfolio would have been worth $91,000 at the end of 2019.* That’s $9,000 less than you’d originally invested.

    If you’d maintained your asset mix throughout the 20-year period, through all the market ups and downs, your portfolio would have been worth $320,000 in 2019.* That’s $220,000 more than you’d originally invested.

    This example applies to retirees too. Life in retirement can last 20 to 30 years or more. As a retiree, you’ll draw down from your portfolio for several years, or maybe even decades. Withdrawing a small percentage of your portfolio through planned distributions isn’t the same as “getting out of the market.” Unless you liquidate all your investments and abandon your retirement spending strategy altogether, the remainder of your portfolio will still benefit from the market’s best days.

Buy, hold, rebalance (repeat)

Market swings can be unsettling, but let this example and its dramatic results buoy your resolve to stick to your plan. As long as your investing goals or retirement spending plan hasn’t changed, your asset mix shouldn’t change either. (But if your asset mix drifts by 5% or more from your target, it’s important to rebalance to stay on track.)

*Data based on average annual returns in the S&P 500 Index from 2000 to 2019.

This hypothetical example does not represent the return on any particular investment and the rate is not guaranteed.

Past performance is no guarantee of future returns. The performance of an index is not an exact representation of any particular investment, as you cannot invest directly in an index.

 

 

Notes:

All investing is subject to risk, including the possible loss of the money you invest.

There is no guarantee that any particular asset allocation or mix of funds will meet your investment objectives or provide you with a given level of income.

Diversification does not ensure a profit or protect against a loss.