You lost money in the market (any market)!

What does that really mean to you? Primarily, it is probably an emotional response to having seen the value of something go down. The prehistoric brain's reaction to having lost anything is panic and fear; fear that we can't do what we wanted to do anymore. Beyond emotion, a more rational evaluation will determine the actual impact of such a loss.

Maybe you lost $25,000 or $40,000 or maybe even $130,000 in a declining market. With sums like these, usually your retirement is what is in jeopardy. What does this really mean to your retirement possibilities? Moreover, what should you do about it? Should you completely abandon your investments across the board and follow everybody else into something else that's going up? What drastic change should you make? Let's look at each of these reactions.

Emotional response: we, as humans, are predisposed to what behavioral scientists call loss aversion. We feel more pain and sadness for having lost a little of something more than for having gained a great deal. This emotional response causes us to respond more to the emotion than to the facts. Often the emotional response is greater in degree than it would normally be. Hence, the tendency is to abandon completely everything for something else, or to seek retribution on someone else to get the loss back.

How do you rationally evaluate the impact of such a loss on your ability to retire? With the "Wealth Rule" as discussed in "Wealth Odyssey." The Wealth Rule is derived from reversing the results of current portfolio withdrawal research. Current withdrawal research suggest that a range of withdrawal percentages can be taken from a portfolio; and depending on the research's assumptions, the portfolio would last many years before it is depleted. The research is seeking the answer to how much a portfolio can sustain in withdrawals each year and for how long it can sustain there withdrawals. This clearly pertains to the issue of withdrawing money for retirement.

For retirement, and reversing the research, you can determine the amount of resources you need to sustain your Standard of Individual Living (SOIL) in retirement. I suggest you use a maximum withdrawal rate of 5% each year. Therefore, the "wealth rule" is for each $100,000 of assets in your portfolio, it would generate $5,000 each year in retirement income. Or, if you use a more conservative 4%, $4,000 per year, etc. (How do you establish your "wealth rule?")

Let's get back to our discussion of your lost portfolio value, and to change your emotional reaction to something more rational, so that you can better deal with this situation. For example, you lost $50,000 overall in your portfolio. The "wealth rule" states that this is a lost of $2,500 a year (using 5% withdrawals). Therefore, in this example, what is the real impact of not having just over $200 less a month in retirement? Could you adjust your expenses to compensate for this? Don't you do the same today if there was a cutback at work? Isn't the real issue that you are probably not saving enough to retire realistically in the first place? Moreover, this loss aggravates that reality?

What to do about a loss?

• Be sure you are saving enough to meet your goal to start with. Yes, there will be setbacks along the way, but you will feel these losses as less severe when you are on track to begin with. The example above shows this. "Wealth Odyssey" discusses in detail how to do this in simple terms.
• Rather than abandon your strategy in its entirety, or rather than follow others who are in despair into "what's hot and going up right now," diversify. Money is like a school of fish. It seeks growth and avoids perceived dangers. Rather than chase the school of fish, know where the fishing holes are, and drop a net in all of that at the same time. This is diversification. Not everything is going up at the same time, nor is everything going down at the same time. Your overall portfolio becomes more stable with less volatility and more even growth. No, this will not eliminate an overall portfolio decline when it comes, but it does reduce how far that decline would be.
• If a loss (as in the example of just over $200 a month) shows that you are not able to make the needed adjustment to your retirement budget, this would suggest that you are likely too aggressive in your current portfolio makeup. You are trying to force an aggressive portfolio to make up for lost time by trying to grow it as fast as you can. However, your emotional reality is that you can't stand the down side of such a posture. Revise your portfolio to fit your emotional reality, and save more as well. You are not as aggressive as you think you are. Face the facts - your budget can not take the loss so do not take the chances on such a loss.