Building long-term wealth requires years of consistent saving and investing. But another key to growing your nest egg is ensuring you don’t have to sell during market downturns once you're in retirement.
Doing so can mean locking in losses and reducing your balance for years to come. Here’s what you should know.
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How forced selling happens
Retirement savings are meant to be used to cover your expenses during your golden years, but when and how you withdraw from your accounts can make a big difference. If you sell when the market is down, you’re not only selling at a loss but missing out on the benefits of a market recovery.
But if you’re in need of cash to cover your gas, groceries and more, you may have to sell stocks, bonds and other assets in your investment accounts. That can result in losses that can take multiple years to recover from.
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How to protect yourself
There’s a simple strategy to avoid selling at a loss when you’re retired: maintaining a cash reserve that you can tap for your everyday expenses and emergencies, such as a surprise health care bill. Financial advisors tend to recommend people keep emergency funds of at least three to six months’ worth of living expenses on hand, but they bump this up to one to two years’ worth of living expenses for retirees. That way, you have more time to ride out volatility and wait for your positions to recover.
That's not necessarily easy. You can consider trimming your stock portfolio — potentially selling assets that are performing well so you can lock in the gains — to build up the cash reserve. Some people also work a part-time job instead of fully retiring right away, so they can build their cash reserves faster.
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The benefit of diversification
Diversification entails including a mix of assets — like stocks, bonds, cash and alternative investments — in your portfolio. You should also include a variety of investments within those categories when appropriate. For instance, your stock portfolio can include stocks of large and small companies, as well as domestic and international ones, and stocks from various sectors.
The idea is that when one aspect of your portfolio is performing poorly, another will hold steady or outperform. For example, gold doesn’t behave like stocks and can increase in value when stocks lose value. Gold can rally amid economic uncertainty and high inflation — two catalysts that could hurt the stock market. Experts tend to suggest allocating no more than 5-10% of your wealth to gold. You can purchase physical gold or shares of gold exchange-traded funds (ETFs), which tends to be the easier route.
Diversification makes it easier to withstand volatility without panicking and being forced to sell at a loss.
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