Coping with Retirement “PRSD”

Investing is one of the best ways to put your savings to work and watch your wealth grow over time. However, with increased potential for asset appreciation comes the risk of watching your hard-earned savings potentially decrease in value at certain intervals. Whether you're investing in stocks,  Georgia real estate, or any other asset class, no investor wants to experience losses. These are emotionally challenging and stressful.

Periods of volatility come with the territory when investing in the market. For retirees, such periods can be especially frustrating.  It’s not easy to watch your net worth temporarily shrink. Further, you may certainly experience the feeling that “I don’t have the time to recover from these dips before I’ll have to sell investments to cover my expenses.”. Much is written about, and most people have heard about: PTSD – post-traumatic stress disorder. What we are discussing here is certainly not as serious, but nonetheless, is something we refer to as PRSD – post-retirement stock declines. These can create serious moments of concern and stress for retired investors.

Fortunately, there are helpful ways to financially cope with market downturns and losses during retirement (or reduce your risk levels altogether). Here’s how.

Explore the answers to these questions

  • How do realized and unrealized losses differ?
  • Is there ever a time when realizing a loss is good?
  • What is tax loss harvesting?
  • Do stocks always move in unison?
  • Are our best investments made when we panic?
  • Why is forgetfulness sometimes an investor’s strength?

 

1. Understand the Difference in the 2 Types of Investment Losses

To begin, not all losses should be looked at the same. One of the biggest distinctions you should make with investments that have lost value is understanding whether they’re unrealized or realized losses.

Unrealized Losses

A loss is considered unrealized if you still hold the investment and haven’t sold it. If you have an investment that is “underwater” temporarily, you still have options. You can continue holding the investment and wait for its potential to recover, continue collecting dividends (if the stock pays them), or sell when you’re ready.

While it’s natural to believe that a stock can make a comeback (as many do), keep this in mind: if a stock loses 50% of its value, it needs to gain 100% just to break even. Deep losses require a strong comeback just for you to get your money back.  So decisions to hold on for a recovery should be based not simply on hope, but on some reasonable analysis.

Though it might seem counter-intuitive, selling an investment, even at a loss, can have a strategic benefit.

Realized Losses

Realized losses occur once you actually sell an investment that’s declined in value. However, these losses can be used to your advantage. If you are investing within a taxable account (a non-retirement account), you can use your realized losses to offset your investment gains for that year, thereby lowering your tax burden.

Suppose you sold a stock and realized a gain of $8,000: If you sold a different stock for a $3,000 loss, you can combine the two and reduce your overall capital gains. At tax time, you are only liable for capital gains taxes of $5,000, not the full $8,000. 

This is referred to as tax-loss harvesting and can be used to your advantage if you have realized losses in non-retirement accounts. We have deep experience in minimizing your tax burden with strategic investing and tax-loss harvesting.  In our 50+ years of helping families navigate markets, we’ve learned that using this discipline is the fulfillment of the old adage, “making lemonade from the lemons.” 

 

2. Have a Plan for Market Downturns

There’s a saying in the investment world, “A rising tide lifts all ships.” The opposite, however, is also true. A market downturn can cause all investors to lose money. You’ll need to be prepared for a market downturn when (not if) that happens. 

One of the best ways to be ready is by holding a diversified mix of assets.

Plan Your Investments

When making investments, it’s helpful to know your entry points and exit points—and to stay committed to them. Whether you’re a DIY investor, or if you work with a financial advisor in the Atlanta area, try to have some disciplined gameplan for the prices for your investments at which you’d sell to take profits, or minimize your losses. 

This can protect you from emotional panic selling.

Know Your Loss Threshold

Taking it one step further, it’s also important that you ascertain what your risk tolerance is before you start investing. You need a working knowledge of your overall loss threshold, as well. When markets tumble, the financial media, social media, and average investor all collectively overreact, which can induce more panic and premature selling. 

Meanwhile, if you have at least a rough idea of your loss threshold, you’ll have a much better chance of making investment decisions with less emotion. This is a critical skill during an investment downturn. Working with a financial advisor to create a diversified portfolio can make maintaining a more logic-based perspective much easier.  An experienced fiduciary investment advisor can educate you on what magnitude of fluctuations in market value are likely for different kinds of investment portfolios.  History can be a useful guide to educating yourself.  

 

3. Diversify Your Retirement Savings

Diversification will be one of the most important and disciplined strategies you can implement with your portfolio, especially for your retirement portfolio. If you can spread your retirement portfolio among different asset types, categories, and risk levels, you’ll be much better prepared for a market decline, because different investments complement one another.

Find the Right Investment Mix

Investments seldom move in tandem. Sometimes they move together, but they can suddenly deviate from each other, which makes diversification almost a must-have.

To see this in action, take a look at the chart below which summarizes a decade of history:

 

Find the Right Investment Mix

Source Past performance does not guarantee future results.

Some investments can underperform for many years in a row, then generate their highest returns soon after. Your portfolio needs to have an appropriate mix of stocks and bonds. Better yet, you may want to diversify within other categories, as well.  The chart above shows how an equal-weighted mix of all the various categories smooths out your performance and protects you from the biggest negative yearly results.  The equal-weighted is presented for education, not as a recommendation. 

 

Diversity Within Asset Classes

For example, large-cap stocks tend to pay moderate dividends and may make moderate gains. On the other hand, small-cap stocks have some greater risk, but may offer strong growth potential. However, they usually pay no dividends, can lose value, or even go bankrupt. So, work closely with a fiduciary wealth manager in finalizing a strategy. 

Put together a solidly diversified portfolio that fits your risk tolerance and can help you generate the returns you need for retirement. At Linscomb & Williams, we pride ourselves on providing investment management  Atlanta can rely on, through an experienced team of credentialled professionals. That is why we can help you build a strong retirement portfolio to prepare for any market environment.

 

4. Stay Calm During Periods of Market Volatility

Sometimes, the best action to take during periods of market volatility is to do nothing. Action can be better than inaction, but panic-selling or panic-buying can only make investing more challenging, especially during periods of high market uncertainty.  The Chairman of our firm’s Investment Committee is fond of saying, “Panic is not a strategy!”.

Forgetful Investors Often Outperform

In a study conducted in 2014, it was found that investors with the highest rates of return showed no investment activity after setting up their portfolios. Why? They had either forgotten they had a portfolio—or had passed away.

These findings, while humorous, illustrate that staying the course with your established investment portfolio can be a great strategy. Rather than trying to time the market or scrambling wildly during periods of uncertainty, consider putting together a long-term portfolio. Next, let the market run its course.

 

5. It’s Never Too Late to Adjust (or Start) Your Retirement Plan

It’s Never Too Late to Adjust (or Start) Your Retirement Plan

No matter what your investment experience has been in the past, it’s never too late to consult a financial advisor and create your retirement plan. Playing catch-up can still make a big difference in your financial life, even during market downturns. In fact, the best time to put together a strong portfolio is now.

Whether you’re starting from scratch or giving your retirement portfolio a tune-up, it’s always a good idea to take steps to optimize your investments. Are you looking to generate more income from your savings? Do you want to make your portfolios more tax-efficient? 

Our collective experience as Atlanta wealth managers spans decades of market environments, personal situations, and more. Working with over 2,000 families, we’ve seen a lot in our 50+ years.  We can help you find a strategy that works best for your financial goals. Contact us today.

 

Now Is the Time To Start Planning a Retirement Worth Looking Forward To.

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William

William "Bill" Kring, CFP®

As a member of our Atlanta Wealth & Pension team, William "Bill" Kring is a Managing Director and Senior Wealth Advisor for Linscomb & Williams.

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