Tragic Mistakes to Avoid With Your Retirement Account When Markets Drop

It is quite common for the average investor that is converted from a long-term investor to become a short-term market timer as a result of market volatility. The emotional impact of watching sudden, swift and large adverse market movements to impact the future nest egg today when the funds will be required in the far future may cause actions today that contradict tomorrow’s needs.

It is also quite common for the average investor to seek safe haven and readjust the portfolios so the holdings are preserved and ready to be put back to work tomorrow. Unfortunately, this does not work. Market tops are not signified by the sound of a bell, and a whistle is not blown when the market bottom has been reached.

Another tragic mistake is to withdraw funds from retirement accounts. The taxation and the early withdrawal penalties alone will create a huge hurdle to any recovery.

Historically speaking, portfolio returns are based on asset allocation as opposed to individual investment choices. In other words, diversification works. The only person that does not need diversification is the person that is correct 100% of the time.

To manage the emotional impact of what is happening, some self-reassurance as to why the portfolio has been started, continues to receive contributions and when this plan is to payoff is a good start. A well-diversified portfolio will benefit from either a rebalancing, an increased contribution, or a combination of both. Investment choices that have been around for many years will most likely survive this sudden volatility. Those that have not, may not.

Recently I had a conversation with an individual that heard the siren’s song of crypto currency and placed all her funds with Celsius. For some time, all was well, until it was not. The lack of access to these funds and the lack of diversification concentrated all the risk to a point where there is now hope instead of a well-disciplined strategy to have that future nest egg. 

Another conversation was based on how the values within a variable annuity have dropped so much that the idea of surrendering the annuity and place them in a CD was something that would have provided the emotional relief from the current pain. What was quickly forgotten were the reasons why the annuity was purchased and the costs associated with early surrender.

For any self-directed or advisor engaged investor, consider this as an opportunity to meet the future goals that were originally planned by working with the changing tide as opposed to swimming away and avoiding. This is best done by keeping the emotional compass intact. These turbulent times will not last and a return to growth is in store. Stay the course, it works.

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AUTHOR: Jeffrey Stouffer – Finance Expert for JustAnswer 

Jeffrey L Stouffer (Jeff), holds the CFP(R) and CAIA designations. He is a broad based financial advisor that helps clients manage assets, debts, and risks. He is the principal of Mercantile Advisors, LLC, an Alexandria VA based Registered Investment Advisor. He holds Series 3 and 65 FINRA licenses and Virginia Life/Health, Property & Casualty Agent and Consultant licenses. He has over 30 years of financial services experience and has been a contributing Finance expert with JustAnswer since June of 2020.