Investing for the long haul

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.