The market is crashing! Am I losing my retirement money?
The simple answer is no, unless you sell.
I can't just leave it at that. There are so many questions left unanswered. "My account is dropping by the day, I need it to stop. What do I do?". This undoubtedly is the most common question that will come up.
My first response to that question would be, "Why the bloody hell are you looking at your retirement account (RRSP, 401(k), Super) every day?!". Investing for retirement is a long game. Day to day swings and volatility in the market shouldn't even grab your attention. You need to look at the long-term trends of at least 10+ years when making decisions about your retirement portfolio.
"Yeah but I'm seeing my account balance go down". Yes, you will. But you haven't lost any real money yet. I'll explain why a bit later, but for now I think it's important to outline why that in times where the market is trending down, you will notice a decrease in your portfolio's worth.
How much you see your balance drop will depend on two things:
The asset allocation of your portfolio (what types of investments you hold)
The magnitude of the market decrease
When you set up any investment account you will be asked a series of questions to determine your "risk tolerance". This simply means how much risk you are willing to take on for a potentially higher reward. More risk usually equals more reward, but it can also equal more loss. So be careful.
Understanding your risk tolerance will allow you to choose the appropriate asset allocation that's right for you. Generally, the younger you are the more heavily weighted your portfolio would be to equities (stocks, shares, etc.) with a smaller portion dedicated to fixed income (bonds, notes, etc.) assets. If you're nearing retirement age your portfolio may be weighted more heavily to "safer", less volatile fixed income type assets.
Market decreases and increases usually have a bigger impact on equities rather than fixed income. So if you have a higher percentage of equities you may see higher volatility in your account balance.
Those last 3 paragraphs should give you a bit of background as to why you may see a decrease in your retirement account balance. Now we'll dive into why you haven't lost any real money, even if you see your balance dropping.
When you contribute to your retirement account, your money is used to purchase units of shares, bonds, or whatever assets you have in your portfolio. The units have a value at a certain point in time which is determined by multiple market conditions.
This is important to know because while the value of your units may fluctuate, your actual number of units does not. So while ever you hold those units you will not lose real cash. The only time you will realize a loss is if you sell some of your units. It may be tempting to sell when you see your balance bleeding from a market dip or crash but that is the absolute worst time to sell off any of your investments!
Remember we said retirement investing was long term? It's a marathon, not a sprint. Meaning greater than a 10 year time horizon. So next time you open up your PC, laptop, tablet or phone to check your retirement nest egg, look at how it's performed for the past 5 - 10 years, rather than the past week or month. You will most likely see the value climbing rather than tanking!
As always, if you are concerned or have any questions about any of your investments, contact your broker, advisor, or whoever manages your portfolio to have those questions answered. You don't want to be guessing when it comes to your retirement. Your future self will thank you for it.
I realize my explanation of this topic is a super-simplified one using a pretty generic retirement portfolio as the example, so your specific circumstances may be different. I'm interested to hear your questions, thoughts and experiences down below. Log in, leave a comment and let's have a chat.
Blake - Fire with a Family