Ask an Advisor: I’m 81, have a $118,000 mortgage and an IRA worth $110,000. Do I have to withdraw my investment to pay off my mortgage?
My retirement savings have been wiped out in recent years due to market changes. I plan to continue working for about five more years. What investment suggestions do you have this late in the game?
– Daniel
I’m sorry to hear you took a hit when you moved into the house until your retirement. I know this can be disappointing and potentially stressful. These types of scenarios are why I suggest broad diversification and maintaining an asset allocation that fits your timeline, aligns with your goals, and allows you to stay the course during tough markets. (If you have any questions about investing or retirement, you can use this tool to connect with potential advisors.)
Possible reasons for being ‘wiped out’
While I don’t know how much you lost, the description of being “wiped out” says it was a lot. Let’s build some context around that. If you’ve been wiped out in recent years, I imagine one of two things happened, or possibly both.
You had a concentrated portfolio.
You tried to time the market.
These are two common pitfalls in investing that expose you to a significant amount of unnecessary risk. (If you need help tailoring your investments to your risk tolerance, consider working with a financial advisor.)
Holding a concentrated versus diversified portfolio
Ask an Advisor: How Can I Recoup My Recent Late-Game Investment Losses?
I’m suggesting that perhaps you had a concentrated portfolio, because a broadly diversified portfolio wouldn’t have wiped you out.
Let’s use the classic 60/40 portfolio as an example. This portfolio typically contains 60% of assets in stocks and 40% in bonds. A According to Bloomberg, the diversified 60/40 portfolio had an average annual return of 6.5% over the ten-year period ending in 2022. This return can vary depending on what exactly you have in a 60/40 portfolio. It will also be different with other divisions such as 50/50 or 70/30. But the premise remains true: Broadly diversified portfolios have not been wiped out in recent years. (A financial advisor can help you make important investment decisions, such as how to spread your money across stocks, bonds and cash.)
A diversified portfolio is a good risk limiter. Concentrated investments tend to be more volatile and expose you to specific risks that diversification can protect you against. When I come across highly concentrated positions in new clients’ portfolios, I always point out that one shoddy CEO, one failed product launch, or one glimmer of bad publicity will “wipe you out.”
Does holding a diversified portfolio mean you will always earn positive returns? No. Some years are good, some are not. For example, the 60/40 portfolio lost about 16% in 2022. However, as long as you incorporate these fluctuations into your plan, you have created an important risk mitigation factor.
Timing the market versus maintaining the right asset allocation
Ask an Advisor: How Can I Recoup My Recent Late-Game Investment Losses?
It’s nice to think that investors can sell their investments right before they go down, sit on the sidelines with their money, and then buy them back in as soon as they expect them to go up again. In reality, it usually doesn’t work that way.
Investors often time the market wrong. Many people who try this end up selling after their portfolio value drops and waits too late to buy back in, missing out on the upturn. That’s not because they aren’t smart. The market is simply unpredictable and people are emotional, especially when it comes to their money.
Make sure your asset allocation is right for you personally. That means it’s tailored to your timeline, goals, and risk tolerance. How much you allocate to stocks, bonds, and cash also depends on how much money you need to withdraw and when. Having an appropriate asset allocation can help you get through those bad years without selling and cashing out. (If you need help with your asset allocation, this tool can help match you with financial advisors.)
Next steps
I think the best move is to identify and hold the right asset allocation for you. This is not a magical solution that will give you huge returns. But it can give you more consistent returns that leave less to chance, reduce risk and allow you to put an actual plan in place rather than hoping for exceptional investment returns.
Tips for finding a financial advisor
Finding a financial advisor does not have to be difficult. SmartAsset’s free tool matches you with up to three vetted financial advisors serving your area, and you can interview your advisors for free to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
Consider a few advisors before choosing one. It’s important to make sure you find someone you trust to manage your money. As you consider your options, these are the questions you should ask an advisor to ensure you make the right choice.
Have an emergency fund on hand in case you encounter unexpected expenses. An emergency fund should be liquid – in an account that is not at risk of significant fluctuations like the stock market. The trade-off is that the value of liquid cash can be eroded by inflation. But with a high-interest account, you can earn compound interest. Compare savings accounts from these banks.
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Brandon Renfro, CFP®, is a financial planning columnist at SmartAsset, answering reader questions about personal finance and tax topics. Do you have a question that you would like answered? Email AskAnAdvisor@smartasset.com and your question may be answered in a future column.
Please note that Brandon is not a participant in the SmartAsset AMP platform, nor an employee of SmartAsset, and has received compensation for this article.
The post Ask an Advisor: My Retirement Savings Have Been Wiped Out. How can I recoup my recent investment losses this late in the game? appeared first on SmartAsset Blog.
