Retirement. It's a word that's on everyone's minds at some point in the cycle. "Will I have enough for retirement?" is the common internal monologue for many individuals.
And with the S&P/ASX 200 Index (ASX: XJO) experiencing its usual ups and downs, you might be tempted to make investment decisions under duress that might have ramifications down the line.
But one of the most significant mistakes investors make is selling their shares during market downturns and shifting to cash. Let's see why the experts say this is a common pitfall and how it can impact your retirement.
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Panic selling: A costly mistake for retirement
When market volatility hits, the instinct to sell off investments to avoid further losses can be overpowering.
However, panic selling during a downturn locks in your losses and prevents you from benefiting when the market rebounds, according to a Morgan Stanley report.
Historical data shows that staying invested through turbulent times often leads to better long-term returns.
For instance, Morgan Stanley notes that an investor who remained invested in the ASX 200 Index from 1980 to 2024 would have seen an annual return of 12% per year.
On the other hand, an investor who sold during "downturns" and only reinvested when the market was up for two straight years would have averaged just 10% annually.
While the difference might seem minor, it significantly impacts your retirement savings.
Say this continues for another 44 years, and you make consistent $5,000 contributions each year – like most of our superannuation funds – the patient, long-term investor would amass $5.3 million, compared to $3.1 million for the market timer.
Are you prepared to leave $2.2 million on the table under these circumstances?
The pitfalls of moving to cash
After panic selling, another common mistake for retirement is moving to cash during market downturns and staying there, Morgan Stanley says.
This approach not only misses out on potential market rebounds but also fails to keep up with inflation. Regarding the example from earlier, the broker says:
An investor who sold after a 30% market drop and stayed in cash would end up with just $497,000 after 44 years, even after investing $5,000 a year.
What to do instead? Consider dollar-cost averaging back into the market, Morgan Stanley says.
This strategy involves investing a fixed amount at regular intervals, which can help mitigate the risk of timing the market poorly.
Dollar-cost averaging reduces the sensitivity of your portfolio to the luck of timing, which can make it easier for fearful investors to move out of cash, since they can avoid the worry of putting a big chunk of money into the market, only to have the sell-off resume.
And if the market rebounds, they will be glad that they already put some of their money back to work, rather than having all of it on the sidelines.
Foolish takeout
Market volatility is an inherent part of investing. It can be unnerving, but it also presents opportunities to buy quality shares at discounted prices.
For example, during the COVID-19 crash in 2020, many investors who waited for the pandemic to end missed out on a 40% market rebound by October 2023, according to The Motley Fool's Scott Phillips.
For retirement, the key is to maintain a long-term perspective. This cannot be emphasised enough. Phillips has sage advice:
Me?
I'm doing two things:
First, I'm making sure I know what I own, and why I own it. And I'm making sure that the companies' long term futures are fairly reflected in share prices.
Second, I'm reminding myself that over the 30 years to June 30, 2023 (the latest dataset available from Vanguard), the ASX turned a hypothetical $10,000 into over $130,000.
The ASX has historically delivered strong returns over extended periods despite short-term fluctuations. Markets have survived numerous recessions, wars, and crises and still charge higher as corporate earnings grow.
So, in times of market turbulence, it's crucial to avoid panic selling and immediately shifting to cash. These actions can severely impact your retirement savings, so a more thoughtful view is needed.
Instead, stay focused on your long-term investment strategy.
By maintaining a disciplined approach, you can ensure that your retirement plans stay on track, even in the face of market uncertainty.
