Retirement Guys: Three sell strategies to avoid lossesWritten by Nolan Baker Mark Clair | | email@example.com
All investors want to be protected against losses. The younger the investor the more time he or she has to recover from those losses. Plus, by putting in a consistent amount of money all of the time, the strategy of dollar cost averaging can be very beneficial for younger savers. Yet, at retirement age, major market downturns can not only hurt, but they can destroy a retirement nest egg. Several strategies are available to try and avoid losses, but let me share three with you.
Understand that almost all risky investments will go up and down in value at some point; it is a normal part of investing. Stocks, bonds, mutual funds, gold, oil, and real estate go through cycles when prices rise and fall. The larger the loss, the longer it can take to recover and the higher the percentage return an investor will need to make to “break even.” For example, if an investor has a 10 percent decline it will take 11.11 percent return to get back to even. If an investor has a 30 percent loss it will take 42.86 percent to get back to even. Compound that loss if a retiree spends 5 percent of the money, now -35 percent and it would take 53.85 percent to get back to even. Do a stress test on the portfolio to determine the current level of risk.
No perfect system exists when developing a plan to sell investments at the exact highest point. The primary objective is to limit future losses. Know what you personally feel comfortable with. Protecting profits is another reason to have a sell strategy. I am not a big casino gambler, but the only times I have made money is when I took my “winnings” when I was ahead. Third, if a sell strategy is done correctly, it can put an investor in a position to buy when prices are lower and have more opportunities. If an investor decides to sell, they have to understand that prices could have gone higher.
Strategy 1: Rebalance and stay diversified
The good sound principles of don’t put all of your eggs into one basket still hold true today. In investing, this is called diversification, which is mixing a basket of investments together that don’t all perform the same. Although it doesn’t guarantee against losses, it is a strategy used to reduce risk of loss. Studies and mathematical models can help an investor determine the mix of investments based upon individual risk levels, conservative to aggressive. In our office, we also use the strategy to determine the mix based upon the time frame on when the money is intended to be used. Generally, the sooner the money will be needed, the less risk an investor should take. Create buckets of money for different times frames based upon individual risk levels.
Strategy 2: Use circuit breakers
Although Mark Twain died over 100 years ago, his saying “history doesn’t repeat itself, but it does rhyme” still hold true today. Circuit breakers involve setting up specific sell rules to help remove the human emotions of investing. The formulas can be very simple or very complicated. One of my favorites is to use the 190-day moving average. When the market is above the moving average it is a good time to be invested. When the investment goes below the 190-day moving average it is a sell signal.
Strategy 3: Have a set number
The more defined an investor’s approach is, I believe the higher probably he or she will have at reaching their goal. If an investor is looking to generate income, a sell strategy could be used if the current investment drops below the goal. For example, if investor wants a 4 percent dividend yield and the yield drops below that number other investments get reviewed. Another number an investor may want is having a certain number of income needs in no risk investments. That number could be six months’ worth of savings for a person still working, or three years to five years for a retiree living off their savings. Last, an investor may want to consider protecting gains over a certain time frame. If the investments went up by $25,000 those gains are moved to a protected account.
The good news is the markets are at or close to an all-time high. We along with probably most investors hope they keep going higher. Developing a disciplined sell strategy at a high point can be a good idea for investors looking to limit losses in the future. Remember, buy low and sell high. For more ideas on how to implement a sell strategy talk with an investment professional that specializes in these types of strategies.
For more information about The Retirement Guys, tune in every Saturday at 1 p.m. on 1370 WSPD or visit www.retirementguysnetwork.com. Securities and Investment Advisory Services are offered through NEXT Financial Group Inc., Member FINRA / SIPC. NEXT Financial Group, Inc. does not provide tax or legal advice. The Retirement Guys are not an affiliate of NEXT Financial Group. The office is at 1700 Woodlands Drive, Suite 100, Maumee, OH 43537. 419-842-0550.