A Note About “Losing” Money in the Market

I’m sure you’ve been hearing a lot of people complain about how much they’ve lost in the market over the last few years.  Maybe you’ve been among them, I certainly have (here, here and here).  But the reality is, you haven’t really “lost” money unless you cashed in on those losses by selling stocks when they were down at those depressing values. 

Last week, I wrote about my experience watching the market drop 46% during my first year of retirement.  I retired with several years’ worth of expenses in cash, a healthy allocation to bond funds, some real estate, and the remainder in stock funds.  Which means, that while the market tanked, the "losses" in my own nest egg were far less dramatic.  That's the advantage of retiring with a diversified portfolio, in years of market turmoil, you don't lose money in lock-step with the market.

While the stock and real estate portions of my portfolio have yet to fully recover, my retirement nest egg is now only down 15% from the day I retired.  Having the cash and bond assets to draw upon meant that I wasn’t forced to sell stocks and real estate when the getting was bad.  Stocks have increased over 50% since those bleak days of March, 2009.  By not selling when the market was down 46%, I participated fully in those recovered gains. 

It wasn’t a cool head that prevailed, but the realization that I could not possibly pay my bills for the next 50 years if I sold all my assets and hid the cash in bonds, CDs, and my mattress. 

I certainly could have invested 100% of my money in those safer assets when I initially retired, but since, over long stretches of time, bonds outpace inflation by a lot less than stocks do, I would have needed far more in my nest egg to quit my job.  Delay retirement or accept some market risk.  I chose the latter. 

My thoughts on the subject over at U.S. News today, “Why Retirees Shouldn't Shun the Stock Market"

Related Posts:

            The Stock Market:  What a Difference a Year Makes

            Retiring in a Down Market:  It’s Not as Bad as I Thought!

Retirement Planning Risk:  Playing it Too Safe  CBS-The Retirement Beat

            Why Annuities Won’t Fix the Retirement Problem  CBS-Retirement Roadmap

           

This is an article of Retirement:  A Full-Time Job

Comments

[Leon C]

I also allocated 2 - 4 years of estimated annual expenses into a stable value fund so I did not have to sell in the recent down market. Having a diversified
portfolio and mental discipline sticking to a plan has minimized my portfolio loss. With that in mind, I am tempted to up my equity exposure 5 % in this recent market pull back. What do you think ?

I am recently retired and can spend more time monitoring the market. Don ' t worry... I am not going to become a CNBC junkie ! I like your blog site keep up the good work.

[deegee]

One big thing I realized about retiring early (at 45, similar to what you did, Syd), is that you need to make sure you can generate enough income from your non-retirement assets as well as look after your longer-term investments (taxable or IRA). These cross-purposes can make it tough sometimes to figure out how to live like an older retiree while saving for actual old age at the same time.

At least us younger retirees can look forward to what I have often described as "reinforcements." That is, once I turn about 60 in 13 years from now, I will be able to start tapping into those income sources I can't tap into now (or face heavy penalties). These include IRAs, pensions, and Social Security.

Because many of the shares in my taxable stock mutual fund I bought in the late 1990s, I would face heavy losses if I sold them now. The NAVs now versus those from 11-13 years ago are about 40% lower. But when I include all the reinvested dividends and cap gains, I am actually somewhat ahead, still.

The bond fund I use to generate my current income has been generating a return of just over 8% when using my actual (low) cost basis as a comparison point. This is mainly because I bought into it when its NAV was very low in late 2008.

So I am somewhat overweighted in bonds in my taxable accounts but somewhat overweighted in stocks in my IRA. These two asset allocations somewhat cancel each other out, giving me a desired overall AA.

[sue]

Syd, do you have a mortgage or do you own your home outright?

[Retired Syd]

@degee: That's also how it looks for me. I overweight in bonds and cash in my non-retirement accounts as I will need to draw off of those sooner (and therefore need less volatility). I still have 13 years to go before I can begin tapping into retirement accounts (which will need to last me another 40 years after that), so those are more skewed toward stocks. Then, I will have further cushion when I am 67 (or if I wait, 70) when we start receiving Social Security benefits. Looks like we have similar pictures.

@Sue: We own a vacation home outright, but I retired with a small (14% of my home value) mortgage on our main house. The rate was so low at the time, 4.75%, we put that money into a 5.25% CD and figured we would pay it off the following year when the CD matured and the interest rate adjusted for the first time. We thought it would be going up. But the rate adjusted down to 3.125%, so we decided to wait another year to pay it off. It will adjust again soon, and with this low-interest environment, it looks to be to around 3%. As long as the rate is so low, I will continue to make a year-by-year decision based on the picture at that time. (For most people, though I think it probably makes sense to pay it off before retirement . . .)

[fred doe]

i have a government pension. when i retired i also had a ira mutual fund. about a year before the crash i didn't like what it was doing so i cashed out and put it in a ira cd in order to think about it, three and a half %. a year later the market crash the cd came do and i bought stocks. this was not financial savvy on my part just luck the way pets know when a earthquake is coming. the point is i had the cash to act. i bought three good stocks at a deep discount and i made 40% on the money not bad in this economy (one even made a split a few weeks back) so i bought more shares. high yields low betas reinvested dividends. mutual funds bah! i do better with my mad money passbook account. i don't make much but i don't lose any either. i use the heddy green method sound,save and big cash on hand.

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