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OK, I’m In—How Do I Know When to Get Out? – The Financial Preserve from Lonier Financial Advisory LLC
Conscientious Financial Planning and Retirement Income Management | 201-741-9528
from Lonier Financial Advisory LLC, Osprey, FL

OK, I’m In—How Do I Know When to Get Out?

OK, I’m In—How Do I Know When to Get Out?

Last time we discussed when to invest and said that first you should make a sound lifetime financial plan for saving and investing based on your goals and the strength of your household balance sheet.  When you have that plan, you should follow the plan, invest regularly, and not try to time the market.

If you have a chunk of cash to invest, use either the lump sum (all at once) or dollar-cost average method to get on plan, as soon as you can.

OK, so you’re in. So maybe you’re wondering, when do you get out?

The short answer is, never. This is the real meaning of Warren Buffet’s famous dictum that his favorite holding period is “forever.”

The only time you take money out of the market is when your plan calls for it—to fund your goals, or to realign your investments with changes in your goals or in your plan:

  1. Primarily, this means annual withdrawals to fund retirement expenses. Some also have funds earmarked for college tuition for kids or perhaps to start a business or buy a home, but retirement funding is primary.
  2. Aside from the periodic rebalancing of your portfolio, changes to your financial plan, reflecting changes in your household balance sheet, may require that you re-allocate your savings and investments. For example, as you age and the future value of your earned income has a smaller impact on your balance sheet, you might need to de-risk by shifting some of your capital from equities to bonds and cash.
  3. Instead of directly funding annual retirement expenses, you might use some portion of your investments to purchase secure retirement income flooring as part of a long-term retirement income plan, such as a ladder of simple income annuities, deferred income annuities (longevity insurance), or a high-quality bond ladder.

That’s it. Otherwise, you stay on plan, regularly adding new money to your savings and investments, using it to rebalance between equities and bonds to maintain your planned allocation. That’s why we call it a lifetime plan.

When markets are down, these regular additions, most often from payroll deductions into a company plan or IRA account, add more shares than when markets are up, and lower your average cost per share. Like diversification, this kind of long-term dollar-cost averaging is the only free-lunch Wall Street offers. The rest can be dubious and expensive.

If you’re retired or nearing retirement, your retirement income plan should allocate only that capital not needed for your income floor to an upside market portfolio, so a market dip will not threaten your lifestyle. Rebalance your upside portfolio as the market sinks, and when it recovers, you’ll enjoy gains from the portfolio that can provide protection from inflation and possible funding for discretionary or legacy goals.

In down markets, though you may be fearful and want to run for cover in cash, if you have a good plan you will find it easier to do the right thing—rebalance into the market weakness and add new funds to take advantage of the buying opportunity.

The question is not “when do I get out?” but “do I have a sound plan for being in the market?” in the first place.

–Mike Lonier, RMA℠


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