With numerous stock market indexes reaching all-time highs, some investors believe that a market correction is near. People approaching retirement should be aware of the large impact this could have on their portfolios, including large losses and a concept called reverse dollar cost averaging. In a recent commentary for The Globe and Mail, Sightline Wealth Management Senior Vice President Paul de Sousa discusses these impacts, and what can be done to mitigate them.
According to de Sousa, losses typically affect portfolios differently early in retirement than they do later. Specifically, with early retirement losses, less money is compounding. Additionally, when minimum RRIF and additional withdrawals are removed from the portfolio, the problem is also compounded. This damaging effect can result in long-term portfolio losses and is referred to as reverse dollar cost averaging.
Dollar cost averaging consists of purchasing a fixed dollar amount of stock, or mutual fund, consistently with price as the primary consideration. When prices drop, more shares are purchased, and when they rise, fewer are bought. This strategy overtime enhances portfolio returns.
Meanwhile, the opposite of this is referred to as reverse dollar cost averaging and consists of consistent withdrawals, regardless of price. “It works well when portfolios are rising, however, it is detrimental if withdrawals occur when portfolios are declines,” explains de Sousa. “Overtime, this leads to an accelerated loss of capital available for retirement income.”
While spending less, increasing returns by taking on more risk and postponing retirement can offset early retirement losses, it is still wise for investors to prepare. De Sousa discusses that investors can implement four strategies before retirement to help mitigate market timing and reverse dollar cost averaging. These specific strategies include: proper portfolio diversification, alternative income, strategic reserve accounts, and working with a trusted investment advisor.
To learn more, read the full article here.
**A correction from the originally published Globe and Mail article changes the word “efficient” to “inefficient” in the enclosed article. The article can be seen in its original version online.