Our Investment Portfolio Fell From $450K to $250K. Should I Cash in My Investments?

Our investments were $450,000 and are now $250,000. How much do I lose before I cash in investments?

-Liz

I’m sorry that you’ve experienced such a significant financial loss. I know that can be stressful and scary as you wonder whether things will turn around so you can reach your goals.

Since I don’t know the details of your goals and situation, I can’t say exactly what you should do to give yourself the best chance of reaching those goals. I can, however, share how I help my clients navigate these kinds of big ups and downs. (And if you need help managing your investment portfolio, consider working with a financial advisor.)

Cashing Out Is Usually Not the Answer

When I use the term “cashing out,” I’m talking about selling out of your investments and keeping your money in cash instead. And that is not something I almost ever recommend.

Investing is a volatile endeavor. Sometimes, the market is up. Sometimes, it’s down. Significant swings in both directions are an expected part of the process and not generally a reason to change your investment plan.

One of the biggest problems with cashing out is the fact that you’ll likely want to get back into the market. There’s no way to know the right time to return. And the market is up more often than it’s down. So, you’re more likely to miss out on gains by being out of the market than you are to avoid losses. That’s especially true when you’ve just been through a big market decline.

Instead of moving in and out, investors should create a plan that anticipates big market swings and strikes a balance between risk and return that’s aligned with their personal goals. (And if you need help managing your investment portfolio, consider working with a financial advisor.)

Here’s how I would think about that from your perspective.

Designing Your Investment Plan

Before considering any changes, start by working through the following four variables to design your ideal investment plan:

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• Personal goals

• Asset allocation

• Diversification

• Fees

Personal Goals

You need to be specific about what you’re investing to accomplish. You can start by asking yourself a few questions:

1. What do I want to use this money for?

2. How much money will I need?

3. When will I need the money?

4. How much flexibility do I have and how much risk can I afford?

Answering those questions will help you get away from a focus on returns and stay grounded in what really matters, which is the life you’re trying to create with this money. (And if you need help managing your investment portfolio, consider working with a financial advisor.)

Asset Allocation

Your asset allocation is the balance you strike between higher-risk, higher-return investments such as stocks and lower-risk, lower-return investments such as bonds.

It is generally a good idea to have a mix. Stocks are the engine that drives your long-term growth. Bonds provide some stability to help smooth out the ride when the stock market is down.

Your asset allocation is the key to being able to weather the ups and downs. When you get this mix right, you can trust that you’ll capture enough gains from the stock market to reach your goals without risking more than you’re either willing or able to risk.

Diversification

Diversification is the financial version of not putting all of your eggs in one basket.

Instead of trying to pick a handful of stocks or bonds that you think might outperform, you can spread your investments out over many different stocks and bonds. That way, no single investment can sink you.

In fact, since almost no one can consistently pick the right stocks and bonds, diversifying your portfolio allows you to reduce your risk without reducing your expected return.

Index funds are a fantastic diversification tool. With just a few funds, you can spread your portfolio over almost the entire global market to match nearly any asset allocation you choose.

Diversification is a great way to ensure that you’re not taking on any unnecessary investment risk. (And if you need help managing your investment portfolio, consider working with a financial advisor.)

Fees

Cost is an important consideration when selecting investments, especially mutual funds. Diligently minimizing the fees you pay for your investments should increase your returns and reduce your risk. Whether the market is up or down, more of your money will be yours to keep.

Next Steps Walk through the steps above, design your ideal investment plan, then see how your current portfolio compares to it.

If your current portfolio matches your ideal plan, there may not be anything you need to do right now. The losses you’ve experienced may simply be a temporary and expected part of the process.

If your current portfolio doesn’t match your ideal plan, consider some changes. That doesn’t mean cashing in. It means making whatever adjustments you need to make in order to bring it more in alignment with the long-term portfolio you want.

Tips for Finding a Financial Advisor

• Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can interview your advisor matches at no cost 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 settling on 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.

Matt Becker, CFP®, is a SmartAsset financial planning columnist and answers reader questions on personal finance and tax topics. Got a question you’d like answered? Email [email protected] and your question may be answered in a future column.

Please note that Matt is not a participant in the SmartAdvisor Match platform, and he has been compensated for this article.

Photo credit: ©iStock.com/damircudic, ©iStock.com/Eva-Katalin

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