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Question: I’m 20 years old and have just started a new job. For the first time I now have the opportunity to participate in a 401(k). But with all that’s been going on lately, I wonder whether I should hold off signing up until things get better. What do you think? - Sarah, Las Vegas, Nevada

Answer: I don’t blame you for feeling apprehensive - or flat out scared, for that matter - about investing in the financial markets these days. To call the last few months, and last week in particular, nerve-wracking would be like saying root canal without anesthesia is a little uncomfortable.

But despite all the upheaval and the uncertainty that still prevails, I think it would be a mistake for someone your age to postpone contributing to her 401(k).

In fact, I think it would be a mistake for virtually anyone, regardless of age, to forego saving for retirement in a 401(k) or similar account in reaction to the recent failures, takeovers, freefalls in stock prices, etc.

That’s not because I think the bailout plan that the administration and Congress are working on - which goes by the acronym TARP, for Troubled Asset Relief Program - will make all the problems in the economy and the credit markets disappear and quickly send the stock market to new highs.

Far from it. While the three-page bailout proposal the White House sent to legislators does contain some specifics - like asking for authority to spend up to $700 billion to buy shaky mortgage-related assets from financial institutions - there are still lots of details to work out. And the plan has to be OK’d by Congress, which means its final shape is even more of a question mark.

Even if lawmakers respond with uncharacteristic speed, it’s still unclear how well the plan, whatever it turns out to be, will work. The market’s big rebound at the end of last week was encouraging, but I think that was essentially a huge sigh of relief that we’d pulled back from the abyss.

What with job losses, no turnaround in sight for house prices and battered financial institutions hardly in a position to shovel out credit as they did in the recent past, it’s not as if our economy is positioned for cruising speed.

So I wouldn’t be surprised after the “whew” effect has set in if the stock market retreated again or began bouncing around without much forward progress. For all I know we could even see more episodes of panic if more bad news pops up. (Which is all the more reason for you to get a better understanding of the safety net underlying your various types of accounts, if you haven’t already done so.)

Taking the long view

That said, I believe it would be foolish in the extreme to write off the long-term prospects for stocks. Ultimately, stock values hinge on the productivity of U.S. workers and the earnings power of American companies. And it’s not as if those engines of long-term growth are about to disappear.

Granted, we may need some time to work through the detritus of the housing bubble and lending excesses. And stock returns could very well be anemic as that happens. But history shows that some of the best long-term gains go to investors willing to buy stocks when they’re reviled, as in the years following major setbacks like the 1929 crash and the 1973-1974 bear market.

Of course, the long view may not seem particularly relevant to you at the moment. But remember: the money that you contribute to a 401(k) is going to be invested for many years. That’s obvious in the case of someone in her 20s, who has a good 40 or more years until retirement.

But it’s also true for someone even in the late stages of his or her career. After all, if you’re 60 or 65, you’ll likely still be drawing on your retirement savings well into your ‘80s or ’90s. In effect, that means you’ve got an investing time horizon of 25 to 30 years for the dollars you contribute today.

Not whether or not, but how

So as I see it, the real question isn’t whether you should be contributing to a 401(k). It’s how you should be investing the money you contribute, as well as the money that’s already there.

If you’re in your 20’s or 30s, you still want most of your 401(k) money in stocks, say between 80% and 90%. I know that may be a tough sell emotionally in these uncertain times. The last thing you’re probably looking forward to is watching your 401(k) balance take more hits n the near future, which I think you should expect when you commit that much to stocks. But the important thing isn’t what your 401(k) is worth over the next few years; it’s what its value will be in 2040 and beyond.

Even if you’re older, you should still think of the money you’re contributing now as a long-term investment. But you also need to give some consideration to preserving the assets you’ve already accumulated.

That means dialing back your stock exposure somewhat, although you don’t want to hunker down completely in bonds and cash. Lightening up on stocks will give you more short-term stability. But if you get too conservative, you run the risk of stunting the eventual size of your nest egg - and your lifestyle in retirement.

There’s no stocks-bonds mix that’s appropriate for everyone at any given age. It depends on how much risk you’re comfortable with and what other resources you can draw on. But generally if you’re in your 40s, you might still have upwards of 80% or so in stocks, although that percentage might drop to 70% or so in your 50’s and to 55% to 60% in your 60s.

Don't time the markets

One final thing: As regular readers of this column know, I’m not an advocate of trying to outguess the markets and moving in and out of stocks or other sectors based on your opinion (or feeling, guess, trenchant insight, whatever) of where the market may go.

I believe that the best way to deal with the inherent uncertainty of investment markets is to settle on an asset allocation that makes sense for you and, aside from rebalancing back to it once a year, pretty much leave it alone (or at least refrain from making big changes).

But even if you disagree with me on this, it would still be a mistake to forego contributing to your 401(k for the simple reason that you would be giving up the chance to put away money for retirement and missing some nice tax benefits in the bargain.

So even if you can’t reconcile yourself to investing along the lines I’ve suggested. Indeed, even if you can’t bring yourself to invest in stocks or bonds at all. Then contribute to your 401(k) and put your money in a stable value fund or a capital preservation fund.

I still think you would be making a terrible investing mistake to limit yourself to such accounts. But at least you’ll be putting away money for retirement. And if you do decide to reform your investing strategy later on, you won’t be starting from scratch.