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This isn’t the first, or the last time we’ve faced economic uncertainly, but with 30 or 40 years until retirement, there’s no need to rush out of the market. Question: I’m 28 and have my Roth IRA in a 2045 target-date retirement fund. In the last couple of months, I’ve lost almost an entire year and a half’s worth of profits. I want to keep contributing to my Roth, but I’m concerned about the possibility of recession and all that’s going on in the market. What do you think - should I try something else or just suck it up and keep investing in the same fund? –A.P., Crofton, Maryland Answer: It’s perfectly natural for you to be anxious or even scared at times like this. Read the newspapers and you almost can’t help but come away with the impression that we’re in the midst of a total financial meltdown, an economic Armageddon, so to speak. Combine this sense that the system is ready to come crashing down around us at any moment with the fact that the broad stock market is down about 15% from its peak last October and it’s no wonder you’ve begun second-guessing your decision to invest your Roth money in a target-retirement fund that, given your age, is probably about 90% or so invested in stocks. But as much as I understand your urge to abandon your plan, I think it would be a mistake. That said, I don’t think the solution is to just “suck it up.” That suggests a certain macho attitude that may have a place in certain sports, but isn’t really appropriate to investing. Ration and clear thinking are what’s needed to succeed as an investor. History repeats itself
Probably the single most important thing to keep in mind is that this is hardly the first time the U.S. economy and markets have gone through a wrenching crisis. If anything, these sort of cataclysmic upheavals are a natural part of our system. Investors get giddy about the prospects for certain asset classes, pour way too much money into them, businesses get swept in the euphoria and take too much risk and before long we’ve created a bubble that eventually bursts, leaving losses and economic devastation in its wake.
We’ve seen this happen many times throughout our history: in the Great Depression of the 1930s, in numerous recessions since then, in the S&L crisis of the 1980s and early 1990s, the demise of the dot-com boom in 2000 and now the collapse of the housing bubble and seizing up of the credit markets. The particulars of each episode may vary, but all these incidents have one thing in common: the good times in the boom period always seem as if they’ll never end, and when they inevitably do, everyone acts as if we’ll never recover from the resulting debacle. And, of course, we always do. I don’t want to downplay the pain that people are experiencing today. Nor do I want to suggest that recovery is right around the corner. But I see no reason to suggest that we won’t rebound from this crisis just as we have in the past. Businesses will create jobs, people will earn money and spend it, profits will be made and stock prices will climb again. As an investor, it’s important to remember that and to keep your focus on the future. Time is on your side
The second important thing for you to keep in mind is that you won’t be tapping your Roth IRA money for another 30 to 40 years. So when you’re investing your Roth stash it makes little sense for you to get caught up in the convulsions of the moment. You’ve got plenty of time to ride out this turmoil as well as the additional setbacks that will no doubt erupt between now and the time you’re ready to retire.
When I was roughly your age back in the late 1970s, the U.S. had just come through a period of subpar economic growth and anemic stock returns that understandably undermined the faith of many investors. The mood was so somber that in 1979 Business Week ran an infamous cover story titled “The Death of Equities” that questioned whether stocks were still worthwhile investments. Of course, like many dire pronouncements my colleagues in the press make about the markets and the economy over the years, that one turned out to be stunningly wrong. Indeed, over the near 29 years since that story appeared, the Standard & Poor’s 500 index has returned an annualized 12% - and that’s through four recessions and at least a half dozen downturns of 15% or more in stock prices along the way. Not bad for an asset class that had been written off. I’m not suggesting things can’t get worse from here. It’s also important to note that anyone who’s investing money they’ll need in the next few years shouldn’t have it in stocks anyway. But if you’re investing for a long-term goal, then obsessing over short-term conditions is a mistake. Your strategy has got to focus on the future. So back to your situation. It seems to me you have a choice. You can join the people who are dumping investments they’ve taken losses in and are moving into assets they hope will do better - that is, people who are investing on whim and conjecture instead of adhering to a disciplined strategy. Or you can continue with what you’ve been doing, investing in a target-date retirement fund that gives you a diversified mix of stocks and bonds that’s appropriate for your age and is designed to become more conservative as you get older. In short, you can continue investing in a fund that offers a strategy. I think this decision is a no-brainer. The fact that you’ve chosen a target-date fund in the first place suggests to me that you don’t feel comfortable putting together a portfolio on your own - or you simply realize the fund will do a better job of it. If that’s the case, why would you be in any better position to start shifting your money around now than you were before? So unless you really believe you know the best investments to get into now - which raises the question of why you didn’t get into them sooner - I’d recommend you keep contributing to your Roth and stick with your target fund. There are no guarantees, of course. But I suspect that 30 years from now when you’re approaching retirement and reviewing the balance in your account, you’re going to wonder what all the fuss was about back in 2008. Posted by kpantelides 6:04 pm 21 Comments
 | Add a comment If you had invested in the SP500 about eight years ago, and had not touched any of your principle, your net gain would be about 0% today. Eight years to me is considered “long term”. Now, if I invest today, in say, a SP500 index fund, I’m worried that 10 years from now, I may still have 0% gain. Comments? Posted By CuriousGeorge, San Jose, CA : April 23, 2008 7:55 pm
This was some excellent advice, Walter. I’m 34, also with a target-date retirement fund. I know with paitence and discipline, it is likely that I will be a millionare when I retire. As for those of you who are screaming that now is the time to jump ship, I will be drinking to your health in the future as you enjoy your canned franks and beans…..7 times a week. Posted By Dan, Columbus OH : April 23, 2008 2:02 am
I’m in a similar boat (35 with big losses in both my taxable and tax deferred accounts this year). The thing is, you know the market will rebound eventually so just look at the downturn as an opportunity to pump as much money as you can into your accounts at a lower than usual cost. You’ll wind up with more money after the market goes back up in a few years. If you max out your 401k and Roth every year you’re pretty much a guaranteed millionaire by the time you retire. Posted By Paul, Seattle WA : April 11, 2008 4:26 pm
I really enjoyed reading these posts. As usual, they are all over the place on advice. I’ve been a financial planner for 25 years and I have heard the doom and gloom crowd at every market downturn. It is financial static and should be ignored. If you have a properly diversified portfolio, stay the course. If you have any cash, now is a great time to invest it. It may not be the best time, but it’s better than it was 6 months ago and looking out five years or more I think you’ll be glad you did it. Forget about trying to make short term adjustments. Nobody can do it consistantly. Posted By Anonymous : April 5, 2008 2:13 pm
I’ve seen the end of the financial world as we know it many times… the arab oil embargo, the crash of 87, the 9-11 dot com bomb, and now the sub-prime mother of all checkout lines. If you’re a long term investor, this a great time to buy and hold. Start saving in your 20’s. If you’re not a long term investor, you shouldn’t be in the stock market. Posted By David, St Louis, MO : March 28, 2008 10:55 pm
stay the course, the market always goes up, it will return, the data for the past 25 years is .. Well this is great but I do not have 25 years to wait, I am retired and lets be honest we all do die. What are we “short termers” supposed to do, keep the money managers in business ? How about some advice for the less that 10 year investor who has been hit by this market. There is none. Get out or stay, you loose either way, it may be a matter of loosing less. Posted By rob. kville texas : March 28, 2008 5:37 pm
While I appreciate the advice you gave the 28 year old Roth investor, I’m 58 and am very uncomfortable with the investments allowed us in my union retirement account. Our choices consist entirely of paper. Our investment adviser (a major investment bank) manages most of the funds available to us for choices and they have continued to advise our investment committee against adding a gold/silver fund, telling them it would be too volatile. Our committee continues to take their advice even though the investment bank has made horrible choices for their own company and has had to take billions of dollars in write-offs for their own accounts. I am much more concerned about return OF my principle than return ON my principal, given the choices available to me. My total account is sitting in their money market fund – which one would hope is safe. However, the investment bank has had to prop-up the fund with millions of dollars to keep it from “breaking the buck.” If the fund needs help in the future, will they be generous and add more funds? Or, if they have to take more write-downs for their own accounts in the future, will they even be in a position to do so? Meanwhile, the purchasing power of my account continues to decrease. I have written to our investment committee at about six month intervals for three years now, trying to get them to add a gold/silver fund (or even a bullion only fund) with no results. After my last letter to them in early March ’08, they again turned me down, but they indicated that they would be open to have me personally appear before their committee at their next meeting. I plan to accept their invitation. What should I tell them when I appear? Posted By Dennis, Moorhead, MN : March 27, 2008 10:10 am
I’m not sure I understand why anyone more than 5 years from retirement is going to change anything they do. Unless they actually buy their own stocks - which is stupid. Never buy stocks. You invest in funds, where professional fund managers buy stocks and other investments for you. You take their advice on risk, which varies depending on the years you have before retirement, and let them do their jobs. Recessions are brilliant news for those of us that have 5, 10 or 15 years till they retire. Because along with the ridiculous stocks - those that should never have seen the light of day, all the powerhouse businesses such as IBM, Intel, Coca Cola, Walmart see their stock price plummet too. This represents a huge opportunity to buy cheap. In fact recessions are where most funds make their money - you just don’t see it for a few years. I was incredibly lucky. I started investing right at the beginning of the tech bubble crash. So for a couple years my funds looked like crap, some actually appeared to lose money. Then as the economy picked up, my funds increased in value exponentially. Investing in the stock market by yourself is fine as long as it’s not with your retirement funds. You wouldn’t take your retirement fund to Vegas, and bet it all on the hope you win a million or two. No, if you have spare cash you invest that yourself. Everything else is handed over to respectable investment brokers. There are plenty of them. You don’t need to know what they buy or sell on your behalf, you just need to arrange annual meetings to verify that all is going as planned. You certainly don’t panic just because one year your funds take a bit of a nose dive. During those years, your fund managers are buying up proven stocks by the bucket load – at low prices. So 2 or 3 years later your funds jump in value, and that average 8% return they promised is realized. Hopefully a bit more, but never rely on it. Remember, even if your mutual funds have invested in subprime mortgages, they haven’t done so directly. Those were hidden inside packages of loans, and represented a small percentage of the overall investment. So even if that portion goes south, the majority of those investments were made up of safe, good credit mortgages. Of course fund managers are starting to offload these credit investments, and that means losses. But they’ll be replaced with quality investments that will recover and return your money. This is expected, it happens all the time – and if it leads to recession the opportunities to recover those losses will be enormous. Posted By Andy, Anchorage AK : March 25, 2008 8:08 pm
If everyone should stay in stocks why are fund managers moving so much money into Treasuries? If the magical 8% historical returns on stocks is based on income from dividends, and dividends have been declining, and will continue to do so, why do money experts and fund representatives keep saying there’s an 8% historical return to be made? Why does everyone discount that the large population bulge, the baby boomers, will liquidate their assets and downsize their homes at the same time? Why do economic experts dismiss the declining dollar does not lower the standard of living, especially when GDP, the only rationalization that the standard of living wouldn’t declined, is expectd to fall in downturn? Is it because they expect the US to wreck everyone else’s economy? Posted By Mike, Concord, NH : March 25, 2008 7:39 pm
Why is it the little guy is told to “stay the course”, yet all the big players do just the opposite? Aren’t they the reason we see these huge market swings every day? No wonder those of us “staying the course” with our 401Ks and Roths feel some panic. If all the investment experts are stampeding…aren’t we the fools for “staying the course”? Posted By Katie/Lake Oswego/Or : March 25, 2008 5:03 pm
I do think that this is ridiculous advice. Things are different this time, for example our huge foreign debt, including debt issued to finance this stupid war, the debt and lack of savings of U.S. homeowners, the existence of downward pressure on wages by work that can be emailed here from anywhere in the world and by moving of blue-collar jobs to low wage countries. This country is TOAST and if we stop buying, the world economy and our economy is going to stop in its tracks. This is a time to have cash and high quality bonds as a reserve for younger and older people, because we may be looking at the start of the first depression since the 1930s. The other thing I didn’t like about the position taken in this article is that there may come a time when it will be advantageous for older people to have a substantial portion of net worth in stocks but just not now. The whole idea of some kind of static asset allocation scheme based on age is not more than a panacea for what ails us. Posted By David Spring Seattle WA : March 25, 2008 1:43 pm
Bad advice. Stay out of the market until the dust clears - we are far from that at this point. It makes a huge difference 30 years down the road if you start your investment at SP500 at 1350 or at SP500 at 1100. The potential to lose 15-20% of principal right off the bat kills your future returns. You can lose the beauty of compounding returns for 5 years. Worse that can happen, if by some kind of miracle the great-debt-experience-gone-wrong of the last 20 years does not impact equities, you will only lose 1 year of returns - which are likely to be very low anyway. capital preservation is also investing. never lose money. these are key rules. Posted By Thomas Poelling, Rio de Janeiro, Brazil : March 25, 2008 1:41 pm
The typical financial “expert” response of “stocks have always gone up a lot, therefore they will keep going up a lot”. This just won’t be the case. Most financial analysts tell you that from the stock market, long term you can expect something like a 7% return. While this may have been the case in the last 20 years or so, if the stock market continued on this pace, in 40 years the dow would be at nearly 190,000! Does anyone really believe the DOW is going to be anywhere NEAR 190000?!?! It’s just not going to happen. Posted By Scott, San Diego, CA : March 25, 2008 1:03 pm
Excellent article and great advice. Posted By Byron, Austin TX : March 25, 2008 12:50 pm
What advice to you have for those of us already retired and concerned about how recent setbacks in the stock market will affect our retirement income? Posted By James McKenna, Fredonia, NY : March 25, 2008 11:55 am
Interesting…. this 28 year old intends to retire at 65. I see no one has pointed out that normal retirement age has been raised to 67…..check the new rules for Social Security. Posted By Harry Jack Casa Grande Az : March 25, 2008 10:55 am
A very well written and intelligent article! Posted By Bryce Hammer, Longmont CO : March 25, 2008 9:41 am
Thank You for such a great article. For young people right now the best thing to do really is to stick with your plan and keep buying regularly. Would you rather buy stocks after they are down 15% or before? Don’t freak out and sell. Always ask yourself WWWBD? What Would Warren Buffet Do? Posted By David, Charlotte NC : March 25, 2008 8:03 am
Well said. Posted By Rick Williams, Fredericton, NB : March 25, 2008 6:29 am
Whatever happened to those “EE” savings bonds that you could buy at half price and would mature in 5 years. That’s a 20% annual increase on investment and something I would like to participate in again if they are still around. Posted By Barney, Tulsa, OK : March 25, 2008 6:11 am
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Curious George - diversify your portfolio across lots of asset allocations and international markets. Plus, if you’re 100% invested in equities and they have a stinky time, then you’re only hope is they rebound sometime. Invest in some bonds, make use of the money they make.
The US is only (roughly) 40% of the entire stock market. If the S&P 500 has a bad time, then that’s only indicitive of a minority share of the market - get into micro-cap, small-cap, mid-cap, international, specific emerging markets and commodities. Throw in some bonds, and you should be fine.