You can't control the market's movements, but you can control your response.
Since you can’t control your investment returns, and since no one can predict the future ofCredit: Image: jscreationzs / FreeDigitalPhotos.net the markets, focus your energies on things you can control, such as your withdrawal rate and asset allocation.
Sometimes the best reaction to a decline in the market is to spend less. Depending on your situation, smaller withdrawals (at least in the short term) can give your portfolio time to recoup its losses. After the recent market drop, one retiree called to tell me that even though he believes that eventually the market will recover, he’s feeling nervous since he’s dependent on his assets for income. He wanted to ask my opinion on whether he should replace an expensive cruise with more modest vacation plans. Can you guess what my response was?
Changing market conditions doesn’t necessarily mean that you need to make changes in your portfolio. If your asset allocation remains in balance, then be prepared to wait out the volatility. Also, if your portfolio value has dropped, consider doing tax-loss selling and then diversifying your portfolio with the proceeds.
Don’t put your money into whatever product is boasting the highest yield. Remember that “high returns” is usually synonymous with “high risk.” Retirees may be especially tempted to invest in potentially high-return (read higher-risk) investments, but don’t put more money in something risky than you can afford to lose.
It’s hard to walk the fine line between keeping your assets in cash in order to avoid the need to sell stocks to raise income in less favorable market conditions, and investing cash in order to maximize returns. Your cash balance should reflect your personal allocation model as well as the size of your budget. Many things in the world are beyond our control. Take charge of your asset allocation and withdrawal rate to do what you can to ensure your fiscal success.
Disclaimer: This article is for educational purposes and is not a substitute for investment advice that takes into account each individual’s special position and needs. Past performance is no guarantee of future returns.