There is one very important time that you must understand when it comes to your portfolio: time to cash in. You have to know when to take the money out of your investment portfolio to use it, typically for retirement. While some of this revolves around your needs – if you hit retirement age, for example, you have extra pressure to cash out regardless of how things are going – some of it also involves performance and the general trend of the economy.
When this gets tricky is when your portfolio is earning very well. On one hand, you want to get the money out of it before a reversal comes and you lose money. Many people in the United States who cashed their portfolios to retire in 2009, after the recession hit and the market dipped, wished they had cashed out back in 2006. They actually saw their values fall, causing them to lose money that they had previously thought of as their own. Their need to retire still meant they had to cash out on schedule, but they may have even lost so much that all of the money they made in the last three years just became a wash; they would have been able to retire just as well three years before, without working at all, even though they had to live off of their retirement funds for longer.
On the other hand, though, you want to leave a strong portfolio in place for as long as you can. It compounds on itself; the more money you have in it, the more you can potentially earn over the next quarter or the next year. If you start pulling money out, even earning at the same percentage is simply going to bring in less money because there is less to work with. You don’t want to take it out too soon and miss out on those earnings.
The best thing that you can do is to allow your portfolio to get to the point where it is earning enough every year that you can live off of the interest. You can then start taking just the interest out, and you’ll make it all back the next year. This is a sustainable portfolio that can carry you for as long as you need. You may never need to take all of your money out since you have enough to live off of, drastically reducing the financial stress you feel during retirement.
Of course, this is not going to be possible for everyone. If your portfolio is never going to hit that level, you have to make some tough choices, based on the economy and your needs, to cash out at the right time. Just make sure, before you make any adjustments, that you really understand the most important time for your portfolio: time to cash in.