Don't Overreact to Short-Term Retirement Losses

Investing is a Long-Term Strategy

by J. M. Pressley
First published: August 22, 2007

Short-term dips in your retirement portfolio are to be expected. Take the long-term view of your investments to avoid making the situation worse.

Short-term losses are common in retirement portfolios. That's one of the most important things to accept in retirement investing. Part of becoming an informed investor is keeping track of the strategy and performance of your retirement account, and that type of monitoring is generally encouraged. Following your account through all of its daily and weekly fluctuations, however, is a sure path to overreaction. Though you may want to halt a short-term dip in value, you could be setting yourself up for long-term losses.

It's a natural reaction. The more you see a fund's losses, the more likely you are to start shifting monies from that fund to another. The problem with this approach is that your moves are based on past performance. The markets—and your funds—have already adjusted to whatever caused the change in price by the time you attempt to move your money. As any professional advisor will attest, trying to time the markets is anything but a long-term investment strategy.

Picture long-term strategy as the straightest line toward your retirement goals. If you react emotionally to every downturn in your portfolio, you'll veer away from that straight line, costing you in real dollars at the time of your retirement.

Three Tips on Avoiding Trouble

Think of your account balance in terms of years, not hours or days. Your goal should be efficiency in maximizing your account's value so it can support you in retirement.

  1. Short-term dips are just that—they won't matter twenty years from now. It's better to ensure that you're investing in a way that fosters long-term growth, which means a diversified investment portfolio consisting of both stocks and bonds. Of course, your diversification should vary according to your own risk tolerance and how much time you have to invest before retirement.
  2. Once you've decided on a proper strategy for your account, you generally should leave it alone. You may want to perform a yearly account reallocation to bring your portfolio back to its original proportions or occasionally adjust your contributions according to your income. Those are legitimate ways to manage your account so that it's performing to expectations. Unless there's an overwhelming reason to make a change, though, you should resist the urge to tinker.
  3. Finally, remember to relax. Over the last eighty years, there has never been a twenty-year period in the stock market that produced an average annual loss. With a typical retirement account, doing a monthly or even quarterly check of your account balance is more than enough. The point is, don't fret about the daily fluctuations. Obsessively checking your account every day will more likely generate worry than peace of mind.

Remember, you're investing for twenty years from now, not for tomorrow.

Sources

Stocks for the Long Run, Jeremy Siegel; The Motley Fool (http://www.fool.com)