If you’ve invested long enough, you know that market turbulence is an unfortunate fact of life.
But knowing that doesn’t always make it easier to take. So here’s a quick reminder that may put your mind at ease.
Most investors withdraw only a small percentage of their portfolio each year. For people in the early stages of retirement, their withdrawals often do not exceed 4% per year (that’s a common withdrawal guideline for retirees wanting to ensure their portfolio lasts for thirty years or more).
If you withdraw 4% of your portfolio value each year, you need to withdraw only a tiny 0.33% of the portfolio value each month.
So even if the market is down, you only need to tap 0.33% of your portfolio to meet your monthly spending needs. The rest of the portfolio can and should stay invested.
In addition, don’t forget that most people maintain a diversified portfolio. That means a portion of their portfolio is invested in stocks (for growth), and a portion is in bonds and other investments (for income and stability).
While the stock portion of your portfolio may be down in value, you may find that other holdings, like bonds, are flat or have actually increased in value. (One virtue of diversification is that different investments do not move in sync with each other).
So if you are invested in a diversified portfolio, not only do you need only a small 0.33% withdrawal each month, but that amount can be drawn from bonds or other investments largely unaffected by stock market turmoil. The stock market may be down, but diversification means there may be no need for you to sell at reduced prices. (And why would you sell if you don’t need to?)
When the market gets turbulent, stay focused on what you can control and ignore what you can’t. You can’t control what the market does today or tomorrow, and frankly, you shouldn’t care. Your portfolio is designed to meet your spending needs over the next ten, twenty or even thirty years. What happens today is not material.
Finally, remind yourself that you can control what you spend and what you save, and those two variables have an enormous impact on your financial future. By taking care of what you can control, and by investing wisely and maintaining a diversified portfolio, you’ll find there’s no need to worry about what the market is doing today.