Page 150 - February_2023

FINANCIAL PLANNING
T T H H E E R R I IS SK K O OF F CASHING OUT
by Cade Peterson, Financial Planning Advisor
As an investor, you are occasionally
tested to hold your investments for
the long-term. You might hear people
like myself telling you to stay in the boat because eventually things will get better.
But how long do you have to wait? With the possibility of the United States tipping into a recession, it can feel extremely frustrating to be an investor. These are typically the times when you start to wonder if now is a good time is to sell. If you are constantly watching your retirement accounts, then you may start to wonder if you could just sell to avoid any further losses. The issue with this ideology
is that nine times out of ten, you will miss the recovery. I want to talk about the risk of cashing out and how detrimental it can be to your future retirement.
REALIZING A LOSS
I’m sure you have heard a story before about someone who “lost everything” in
the stock market. You might even be that person. I also wouldn’t be surprised if you have heard someone tell you that they’ve lost money in their 401k. My intention isn’t to
but instead to offer a different point of view. First off, you don’t lose unless you sell. That is what’s called realizing a loss. If your 401k has dropped significantly but you’re still invested, then you haven’t “lost” anything yet. The account value is simply down from where it was. This is part of being an investor. Unfortunately, our investments don’t always go up. That simply doesn’t mean that you’ve lost. Historically, both the stock market and the housing market have always recovered. Those individuals who reacted to declines in their value and sold are the ones who ended up losing. It is also very common to be more concerned with your 401k or investment accounts than you are with real estate. The reason why is because you can look at the current value of your investment accounts every single day. When the market is open, your account values are fluctuating. Real estate values also rise and fall, but you don’t see the numbers every day. If there was a screen that told you the value of your home on a minute-by-minute basis, you’d likely be
a bit more concerned about it. If you saw your home value down 10%, the obvious response
decisions. Why isn’t that the case with equity investments? I think the logical explanation is that watching your investment accounts drop effects your emotions quite a bit more than seeing declining values in real estate. It is still an asset you own that is dropping in value. I would encourage you to think about this next time you are questioning your involvement in the stock or bond market.
MISSING THE 10 BEST DAYS
When you decide to move to the sidelines and put everything in cash, you are taking
a great risk. This is the crux of cashing
out. By selling, you are putting yourself in the position to miss the recovery. Everyone intends to get back in when things go lower, but they almost never do. Their emotions take over as things get worse, so why would they feel comfortable in the market when it’s worse than when they originally sold? I have a chart provided that shows the value of an initial investment of $1,000 using S&P 500 price returns under varying scenarios. Each scenario assumes that $1,000 was invested 25 years ago and remained fully invested or was
tell you that the stories you hear are incorrect is to wait it out and avoid making any rash moved to cash during the best market days.
148 SPEEDHORSE February 2023