Building long-term wealth requires years of consistent savings and investments. But another key to growing your nest egg is making sure you don’t need to sell during a market downturn when you retire.
Doing so can mean covering losses and reducing your balance for years to come. Here’s what you need to know.
How a forced sale happens
Retirement funds are meant to be used to cover your expenses during your golden years, but when and how you withdraw from your accounts can make a big difference. If you sell when the market is down, you are not only selling at a loss but you are missing out on the benefits of market recovery.
But if you need cash to pay for your gas, groceries and more, you may need to sell stocks, bonds and other assets in your investment accounts. That can lead to losses that can take years to recover from.
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A way to protect yourself
There is a simple strategy to avoid selling at a loss in retirement: save money to cover your daily expenses and emergencies, such as an unexpected health care bill. Financial advisors often recommend that people keep emergency funds for three to six months of living expenses on hand, but limit this to one to two years of living expenses for retirees. That way, you have more time to pull out volatility and wait for your positions to recover.
That’s not easy. You might consider trimming your stock portfolio — assets that are likely to sell well so you can lock in a profit — to build cash reserves. Some people also work part-time instead of retiring full time right away, so that they can build up their savings quickly.
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The benefit of diversity
Diversification involves including a combination of assets – such as stocks, bonds, cash and other investments – in your portfolio. You should also include a variety of investments within those categories if applicable. For example, your stock portfolio can include stocks of large and small companies, as well as domestic and international companies, as well as stocks from different sectors.
The idea is that if one element of your portfolio performs poorly, the other will hold up or succeed. For example, gold does not behave like stocks and can rise in value when stocks lose value. Gold can come together amid economic uncertainty and higher inflation – two things that could hurt the stock market. Experts often suggest that you don’t put more than 5-10% of your wealth in gold. You can buy physical gold or shares of gold exchange-traded funds (ETFs), which is often the easiest route.
Diversification makes it easier to withstand volatility without panicking and being forced to sell at a loss.
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