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Q: My portfolio lost more than 10% of its value in 2022. How do I know when it’s time to sell and how to prevent this?
A: Let’s start this discussion with some important assumptions. First, you must agree that your investment portfolio should aim for long-term results (at least 5 years or more). You must also agree that your portfolio is a mix of stocks and bonds (50% or more stocks). Finally, let’s assume and agree that you are still saving and accumulating money, or taking out a small percentage of your portfolio each year (typically 4-5% of your total annually in your mid-60s).
First, let’s agree that you haven’t “lost” anything until you sell something for less than what you actually bought it for. Conversely, if you don’t sell for a higher price than you bought it for, you haven’t made any money. Given these assumptions, we believe you are “locked in” at the highest price of your portfolio (probably around the end of 2021). Although this is a common and very human behavior, it is important to understand that you are selectively choosing the dates on which you want to examine investment returns. Additionally, I’m confident that if you looked at the value of the same portfolio from a different date, you’d get a completely different reaction.
As an example, let’s assume your portfolio is 100% contained in the S&P 500 stock index, a popular collection of the 500 largest companies in the United States. Looking back, in the second half of 2021 the index was around 4700, and at the end of 2023 it was about the same, with no real increase in two years. Remember, just holding a portfolio doesn’t mean you’ll make or lose money.
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Now let’s choose a different start date. Why not start 2021 a year early? The index was approximately 3750. That’s a 25% increase in just under three years. Let’s now go back exactly five years to January 2019. The index was 2650. That means the S&P 500 index has increased by about 70 (70%) over the past five years.
So did you lose money or make money? It depends on when you start counting. Fortunately, the longer you invest, the more likely you are to make a profit. The S&P 500 index has been profitable in more than 90% of all five-year periods over the past 80 years. It is not unreasonable to expect an annual return in the high single digits (though not every year) from such an investment.
Therefore, it is very important to remember the first premise (long-term investment and balanced portfolio) and not to use the highest price of the portfolio as a comparison. Constantly comparing your returns to your portfolio’s historical highs can lead to discouraging and possibly unwise investment actions. Instead, have patience and discipline with your investments (or get help to do so), and pay attention to more important things.
Steven Podnos is a fee-based financial planner in Central Florida. He can be reached at Steven@wealthcarellc.com and www.WealthCareLLC.com.
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