All we want is to have enough money during retirement. The older we get, the greater our fear of outliving our retirement savings becomes. So, naturally, when big political, economic or environmental events occur, our impulse is to react, to adjust our portfolio in an effort to protect our money. That is what happened to Pat Regnier, assistant managing editor at MONEY, during the debt ceiling debate.
"I'm not using a figure of speech when I talk about white knuckles," he wrote in his article, My Brilliant Sell-Everything Trade[1]. "When I put my mind back to [that] summer, I can feel the bolt of anxiety that ran through my body as I thought about the crash I feared would come if Congress didn't raise the nation's debt ceiling." Victim to his worst suspicions, Pat, at age 40, sold all of the stock funds in his 401(k).
"My bet on disaster paid off," he wrote. "The very next week, the stock market had the biggest one-day loss since the 2008 financial crisis." Yet, he confessed, "I [found] myself up at midnight running financial calculators and scribbling on the backs of envelopes to figure out what hope I had of getting a decent retirement."
In retrospect, Pat acknowledges that his decision wasn't the wisest. While he chalks up his mistake to bad timing, I saw his biggest mistake as losing sight of his goal.
In an unsteady economy, you have to clearly understand the timing of your goals to take the best course of action. If your goal is to buy a boat in 2014, with less than a year until the completion of that goal, reallocating your funds would best protect your money. Retirement is different.
As the goal of retirement is to not outlive your money, technically, the completion of that goal would be on the day that you die. Thus, with 30 or-so years until the completion of that goal, allowing a 401(k) to compound value is the best way to protect your money.
When you limit yourself to a present point-of-view, you only see how your investments are performing right now. Basing large decisions on such a point-of-view stands to endanger your goals, as you might move all of your 401(k) assets 20 years before retirement... and 40 years before death. Then you would end up like Pat, who wrote, "In the end, I finally edged back into the market at prices just a little bit higher than when I sold."
Ironically, Pat should've known that time frame of his goal would've outlasted the debt ceiling crisis. Those that waited out the 2008 recession-Pat included- saw the value of their investments return to pre-crisis levels. History has shown that if we wait it out-whether it be a president, a debt crisis, a natural disaster-the market generally recovers.
Time is an essential factor when determining investment risk and changing asset allocation. Yes, Pat missed a dip in stock value, but he was left with no retirement plan at 40. Let me repeat, no retirement plan. In the midst of economic, social or political uncertainty, the question is not, "What are my retirement funds yielding right now?" but "What will my retirement funds yield over my lifetime?" The fact of the matter is that you don't need retirement money to buy gas this week, but to buy gas twenty years from now.
Comprehending a goal's time frame will not only help us wait it out, but will also prevent us from making bad decisions in the fear of the moment. We are also more likely to remember that there is greater value to letting investments compound interest than making radical shifts to our asset allocation. Even Pat can agree with this. "Setting a plan to take some risk and sticking to it," he wrote, "isn't always comfortable, but I can tell you it works a lot better than the alternative."
- Regnier, P. (2012, January 23). My brilliant sell-everything trade. Money Magazine, Retrieved from http://money.cnn.com/2012/01/12/pf/investing/sell_stock_best_money_moves.moneymag/index.htm
