Like most of us, the investor below is worried about the status of her retirement accounts given the depressed state of the markets and the economy. She made a move she thinks will keep her safe during these turbulent times. But in reality she could be missing the opportunity of a lifetime.
Question: I am a lucky one, in that my job should be secure during these troubled times. I invest 3 percent of my wages in a deferred compensation plan (no employer match). I just stopped contributing to the mix of mutual funds they are in now and had all of my future contributions re-allocated to the stable income fund. I left the existing balances in the current mix of stocks funds they are in now (foreign, large cap, mid cap and small cap, with a small amount in a bond fund and a small amount in the stable income fund.) Was this wise for the time-being? It doesn't seem like the market will rebound any time soon.
Also, I have a separate Roth IRA account that has been in the toilet for years. I moved it from Schwab to Smith Barney about a year ago. It's in a mix of American funds and other funds through Smith Barney.
I have no idea what I should, or should not, be doing in this market. I am 49 years old, and will probably work until I am 66. I also have a pension where I work. My husband is self-employed; we have rental property he manages. His retirement accounts are minor. We have two boys, ages 6 and 10. Thanks. --B.R., Geneva, N.Y.
You're right, B.R. It sounds as if you are among the lucky ones as we cope with the current financial turmoil. I hope your good fortune continues.
But based on the information you have provided, I'd consider taking a different approach to the deferred compensation plan you participate in through work. Rather than dump all future contributions into the stable-income fund, I'd go back to contributing to a mix of the available stock, bond and stable income funds.
The reason is you're missing out on an opportunity to invest at low prices.
Depending upon the fund in question, share prices are down about 30 percent from this time last year. That means a mutual fund that a year ago sold for $50 a share is now selling for $35 a share.
Therefore, every $50 you contributed to that fund last year bought one share. Today, it would buy you 1.43 shares. When the rebound happens, those extra shares means you benefit in a big way.
You might be right, the market may not recover anytime soon. However, according to the plans you laid out, you have 17 years left in the work force. And if you wait until the market rebounds to invest in stock and bond funds, then you've missed out on the early gains.
If you wait for that hypothetical mutual fund above to return to $50 a share before investing again, then you missed out on the first 43 percent worth of gains. I know right now it seems like investing in a stock mutual fund seems like throwing money down a hole, but now is the ideal time to invest.
Yes, stock and bond prices can continue to decline this year. But with 17 years left in the work place, you have plenty of time to ride out the current storm.