My investments are ‘declining slowly’. Should we flee to cash in?

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Ask an Advisor: My investments are “declining slowly.” Should we flee to cash in?

My wife and I currently have about $250,000, half of which is in our Roth Individual Retirement Account (IRA) and some small annuities, and the other half in various checking accounts and a money market account. We are both retired, have no bills and save quite a bit each month. With things very uncertain right now, should we keep those few investments or cash them out? It seems like they are just slowly decreasing.

-John

Economic uncertainty can increase family anxieties. When stock markets are volatile and in what seems like endless decline, the fear of losing hard-earned money and experiencing a diminished quality of life motivates people to sell at low points.

While the flight to cash can seemingly ease the pain and quell the uncertain feeling of not knowing the bottom, it can bring more painful long-term effects. Here is the answer to your question.

If you have specific questions about investment strategies, a financial advisor can help.

Behavioral finance and the flight to cash

Ask an advisor - my investments stand

Ask an Advisor: My investments are “declining slowly.” Should we flee to cash in?

The flight from investment to liquidity introduces two questions.

The first is this: after you leave the transfer market, when do you come back? The second is this: when will the market recover?

No one knows when the market will transition from a sustained recession to an outright recovery. Furthermore, investors tend to overestimate their ability to time this market surge.

Market studies show that after significant periods of decline, such as bear markets, some of the best performing days tend to occur during the early stage of the rebound period. Missing strong performance days reduces your portfolio’s return during the recovery period and the strong market that follows.

While taking control by selling during falling markets can ease short-term pain, the temporary good feeling can contribute to future long-term pain.

Understanding “Buckets”

Investors often build retirement income using money from different “buckets.” Buckets represent short-, medium-, and long-term income needs. Your buckets work together and have different functions to fund your lifestyle and provide confidence and flexibility during uncertain times.

Social Security, annuity income, and liquid cash reserves reside in your short-term bucket. Additionally, Social Security and annuities provide a guaranteed income that helps fund basic wants and needs based on your lifestyle preferences.

Your middle segment consists of investments that are more risky than those in your short-term segment and less risky than those in your long-term segment. It helps fill the bucket in the short term.

Your long-term bucket holds the most market risk and the best chance of generating a return to match or exceed inflation.

Staying ahead of inflation is essential to maintaining your dollar’s purchasing power and standard of living in retirement. Americans are living longer. While it’s a wonderful trend, it does come with longevity risk, which includes the risk of outliving your money. Inflation and longevity risk make it imperative that investors maintain some long-term investment exposure.

Your short-term bucket

Ask an advisor - my investments stand

Ask an Advisor: My investments are “declining slowly.” Should we flee to cash in?

Your short-term bucket helps you manage behaviors, offers flexibility, and maintains confidence during market volatility. Cash balances in retirement hold one to two years of living expenses.

Coupled with guaranteed income streams like Social Security, this bucket allows you to preserve your standard of living during market volatility without forcing you to sell short during significant downturns.

Drawing on your cash reserves maintains your market portfolio and allows you time to participate in a (hopefully) long-term market recovery and subsequent early days of better performance during the initial bounce.

Should you flee to cash in?

When deciding whether to cash out, consider your capacity and risk tolerance, which is your ability and willingness to take the risk. Just because you’re willing to take certain risks, however, doesn’t mean you should.

Conversely, if you are unwilling to take on market risk, but should because avoiding it could adversely affect your goals, you should consider risk responsible. For example, staying in cash for 20 or 30 years wouldn’t face longevity or inflation risks.

A cash reserve investment “bucket” can help your long-term bucket stay invested during market volatility, so it can capture your automated savings contributions and low-price opportunities. Your long-term bucket can then remain positioned for future growth that addresses longevity and inflation risks.

What to do next

Historically, market timing has proven challenging. We do have historical insights, however, about the investment market and individual investment behavior. Investors often build retirement income using money from different “buckets.” Buckets represent short-, medium-, and long-term income needs. This helps maintain liquidity by maintaining exposure to the markets in your long-term accounts.

Preston Cherry, CFP®, is a SmartAsset financial planning columnist, answering readers’ questions about personal finance and tax topics. Have a question you’d like an answer to? Please email AskAnAdvisor@smartasset.com and your question may be answered in a future column.

Please note that Preston is not a SmartAdvisor Match platform participant and has been rewarded for this article.

Find a financial advisor

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The post Ask an Advisor: My investments are “declining slowly.” Should we flee to cash in? first appeared on the SmartAsset Blog.

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