‘Locking in your losses’ is a phrase frequently used when investors consider withdrawing from a portfolio during a market downturn or taking their retirement savings in cash after leaving employment, yet few fully understand what this means or why the decision can have such lasting consequences. While the phrase may be familiar, the meaning is not always appreciated because, when an investment statement shows a lower value, the loss already feels real. Selling can therefore appear to stop further damage, although the decision may instead convert a temporary decline into a permanent loss and remove the capital that was meant to participate in the recovery.

We all know that long-term wealth is built not only through investment returns, but also through the ability to remain invested long enough for those returns to compound. This is because compounding needs time, capital and continuity – and a withdrawal interrupts all three, meaning the real cost of cashing in includes the future growth that amount can no longer generate.

A market decline is not automatically a permanent loss

Let’s use the example of an investor who places R100 000 into a diversified portfolio, following which markets fall by 20%, reducing the value to R80 000. The decline is unquestionably uncomfortable, but while the investor remains invested, they still own the same underlying units and retain the ability to participate in whatever happens next. If the portfolio later rises by 25%, the value returns to R100 000. If, however, the investor sells at R80 000 and moves to cash, the R20 000 decline is ‘locked in’, meaning the investment no longer has the ability to recover unless the investor re-enters the market.

This does not mean that every investment will recover or that investors should remain in a poor-quality portfolio. The important distinction lies in whether the decision is driven by evidence and changed circumstances, or by fear in response to a decline that the original plan was designed to withstand.

Why moving to cash is not a neutral decision

When markets are unsettled, investors often tell us that they intend to move into cash and reinvest once conditions improve. While this sounds sensible, it requires two decisions to be made correctly, namely (a) when to leave and (b) when to return. The first is normally made after prices have fallen, while the second is delayed until the news feels reassuring, by which time markets may have recovered materially. The result may therefore be that the investor sells low and buys back higher, locking in the loss and purchasing fewer units with the capital that remains.

In this context, it’s important to remember that markets do not wait for recovery. Recoveries often begin while the economic news is still poor, which means that an investor waiting for an obvious signal may remain on the sidelines during an important part of the rebound. The bottom line is that while cash may reduce short-term discomfort, using it as an emotional ‘safe space’ can create a long-term outcome that is more damaging than the decline the investor was trying to escape.

Compounding needs capital to remain in the system

Compounding is often described as earning returns on previous returns, although its power comes from allowing an investment base to remain intact so that each period of growth has a larger amount on which to work. For example, R100 000 growing at an assumed 8% per year could reach approximately R466 000 over twenty years, before fees, tax and inflation. Withdrawing the R100 000 today therefore also removes the potential growth that could have accumulated over those two decades. Investors often assume that they can withdraw now and replace the money later, but replacing the capital is only part of the repair because lost time cannot be redeposited. A larger future contribution may help, although it will need to work harder over a shorter period of time. Once compounding has been interrupted, catching up generally requires more money, more time, a lower future lifestyle, or a combination of all three.

The hidden cost of cashing out retirement savings

The consequences are particularly significant when an investor leaves employment and chooses to take retirement savings in cash rather than preserve the available funds. Depending on the fund and applicable rules, not every portion will necessarily be freely accessible, particularly under the two-pot retirement system. Where a cash withdrawal is available, tax may reduce the proceeds, the remaining capital base is smaller, and the withdrawn amount no longer benefits from the tax-efficient growth environment of the retirement fund.

Let’s consider an employee who has changed jobs several times and withdrawn retirement savings at each transition. Each withdrawal may have solved an immediate financial need, but the investor has repeatedly restarted the compounding process from a lower base. By retirement, the shortfall is not simply the sum withdrawn – it is the value those amounts might have reached had they remained invested. A preservation fund or another permitted transfer option may allow the benefit to remain invested without triggering an immediate tax event, although keep in mind that the structure should be considered in the context of the broader plan.

Withdrawals during retirement require a different lens

For those who have already retired, remember that withdrawals are part of the plan – but it’s important to know that timing still matters. When the same rand income must be generated from a smaller portfolio, more units may be sold, and fewer remain for a recovery. This is the essence of sequencing risk, and it is one reason why a retirement income strategy should include sufficient liquidity for short-term spending while retaining appropriate growth exposure for later years.

Sometimes withdrawing is still the right decision

None of this means that investors should never access their capital because, after all, money exists to support life, and there may be compelling reasons to withdraw, including funding an emergency, settling expensive debt or meeting essential living costs. The purpose of financial planning is not to preserve every rand at all costs, but to make deliberate trade-offs with a clear understanding of what each decision gives up. Before withdrawing, our advice is to ask whether the need is temporary or permanent, whether other liquidity is available, what tax and future growth will be forfeited, and how the decision affects the original objective. If volatility rather than genuine need is driving the decision, it may be better to revisit the portfolio’s time horizon and purpose first.

Turning a feeling into a permanent outcome

Ultimately, locking in a loss is the point at which an investor turns a market experience into a financial outcome. A falling value may recover, and a diversified portfolio can continue doing its work, but capital that has been sold and spent is no longer available when conditions improve. The loss becomes permanent not merely because the investment was sold at a lower price, but because its future compounding was surrendered at the same time.

As such, before withdrawing, investors should look beyond the immediate relief that moving to cash may provide and consider the longer-term consequences for their financial plan. Markets may recover, but the opportunity to participate in that recovery can be lost once capital has been withdrawn, while the time forfeited through interrupted compounding cannot be recovered. In many cases, the most damaging investment decision is therefore not the temporary decline itself, but the permanent action taken in response to it.

Have a fantastic day.

Sue