Within the next few weeks, you will be receiving year-end statements from your 401(k), IRA, and pension fund accounts showing your closing balance. When you do, be prepared to be shocked that your account balance isn’t as high as it was previously. So, try to remain calm and continue reading to get an explanation.
This has happened because we’re in the midst of a global economic slowdown. We, in the United States, are affected the most because we have the largest stock market in the world. So, when the stock markets take a downward turn, which it has in the past two months, millions of people’s accounts are affected.
In looking over the balances, you will ask, “what happened to my retirement portfolio?” I know because that is what I asked when I first reviewed my account. If your account totals have dropped significantly, like many other’s accounts have, you will be very concerned and should be. I can imagine the fear that will consume so many people when they see these lower values.
The average person, who does not understand how volatile the stock market can be, might think that someone stole some of their assets after seeing the lower market value of their portfolio. And so they might want to immediately blame someone for this loss, but that won’t change their predicament.
In reality, the change in the market value of your portfolio is not caused by a person stealing from you, but instead, represents the volatility that occurs when the stock prices of the companies within your portfolio fluctuate. Hence, this is why it’s so important to select the right investments. Also, this portfolio volatility happens daily, but you won’t see it if you only review the quarterly reports. Hopefully, after reading this article, you will start watching your portfolio closer than you had in the past.
If you are in retirement or approaching retirement very soon, (over 10 thousand are retiring daily) you will be very nervous to learn that your portfolio has depreciated so much. Some people panic in these situations and immediately go out and liquidate their holdings because they don’t want their portfolio to drop any lower. They would rather cash out now than risk losing more of their portfolio value to market deterioration. However, the top performing investment advisors would discourage you from following this strategy because it’s not good for wealth building. If your plans are for the long term, you can’t panic and sell out when the stock market has fallen this much.
For those who use this strategy, you have to be careful in making such an important decision. You need to know that you are taking a substantial loss when you elect to liquidate your portfolio after a big drop in the stock market. I would strongly suggest that you avoid using this approach to manage your retirement portfolio.
If you go back in history, the stock market dropped between 15-20% in 1987, 1999, and in 2008. However, after no more than a year later, the stock market rebounded and regained almost all of the market value back. The customers that elected to hold on, and not sell their positions, were handsomely rewarded when the stock market rose higher than previous levels.
If this kind of volatility scares you, take a look at the composition of your portfolio. For example, if you are over fifty years old, your portfolio allocation should consist of a higher percentage of “fixed assets” like bonds, which are a safer investment and a lower percent of “equities” or stocks, which are a riskier investment. Most investment experts recommend that you have a 60/40 ratio, in your portfolio, 60% consisting of bonds and 40%vconsisting of stocks. In having this allocation, you have some safety as well as some risk for market appreciation. In using this mixture, there is a strong possibility that you will not be affected severely when the stock market goes on its market swings.
In closing, you must look at your portfolio more often as a protection measure, so if any price swings do occur, you can contact your investment advisor and request a change in your portfolio allocation. Also, you must make smart choices when selecting the stocks for your portfolio. If you follow these steps, you won’t have to ask the question noted in the title of this article.
If you have any questions, feel free to send them to me.