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It's tough to watch your funds losing value in a tough market, but cashing out an IRA before you've reached retirement age is going to hurt you even more.

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Question: I’m 57 and retired and the value of my IRA rollover keeps going down. Should I just take my money out now and pay any charges, or should I just let it sit and lose more money as stocks decline? --Lloyd, Niles, Michigan

Answer: How about doing neither?

You present this situation as if you have only two choices. That’s not the case, though, which is good for you since I don’t think either of the courses of action you’re considering are very good.

Let’s deal with the first option, just cashing out your IRA rollover. That would be about the absolute worst thing you could do. Why? Well, first you would owe taxes on whatever portion of your account’s value consists of pre-tax contributions and investment gains (which, if you’re like most people, means all or nearly all of your account balance). What’s more, since you’re under age 59 1/2, you would also owe a 10% penalty for early withdrawal of your IRA funds.

Besides, even if you pull the money from your IRA, you still have to address the question of how to re-invest that money. In short, you would be in the same position you’re in now, except that you would have given up a big chunk of your account to the IRS and you would no longer enjoy tax-deferred compounding on any gains your IRA might generate in the future.

Now let’s examine your second option, just letting your money sit where it is. That’s definitely a better choice than cashing out, since you’re retaining the tax advantages of an IRA. And, on the surface at least, this option could be a sensible move. After all, investment advisers often tell their clients that “staying the course” is the best approach in uncertain and volatile times like these.

But advice like “stay the course” makes sense only if you’ve gone into the downturn with a bona fide investment strategy that you set in advance. If you have created a diversified mix of stocks and bonds that’s appropriate given your age, goals, risk tolerance and time horizon - and you believe your strategy still makes sense - then by all means hang in there. You don’t want to abandon a sensible long-term strategy just because of short-term turmoil.

But the fact is that many investors haven’t gone into this market downturn with a coherent strategy. Many people don’t have a well-thought-out portfolio. They have a haphazard collection of investments that they chose because a particular stock was mentioned by some pundit on TV or because a fund popped up on list of a top performers. In short, they haven’t employed the concept of asset allocation to create a portfolio with different investments that work together and hedge risk. A hodgepodge of holdings can generate decent returns when a rising market is lifting all boats. But it can get swamped by losses and leave you floundering when the investing seas get turbulent.

So what do I recommend you do?

Well, if your IRA funds are actually part of a well-balanced portfolio that you put together before this downturn began and you think that your mix still makes sense, then I don’t see any reason to begin making radical moves. You may continue to take some losses, but it’s more important that you’re solidly positioned for the long-term. I think you’re better off sticking with your plan than trying to figure out where to move your money every time market conditions change. That’s a futile guessing game.

But if you don’t have an actual investing strategy - and judging by your question I suspect you don’t - then the first thing you need to do is create one. Begin by thinking about your goals. Since this is an IRA we’re talking about and you’re 57, I assume you’ll be relying on this money for income throughout retirement.

That means you want enough of your IRA in bonds to provide some ballast in times like these, but you also want to own stocks that can provide long-term growth to maintain your purchasing power in the face of inflation. After all, you may be spending 30 or more years in retirement.

Generally, I’d say that someone your age should have roughly 60% or so of his portfolio in a broadly diversified group of stocks or stock funds (large and small stocks, growth and value) and 40% in bonds (most likely short- to intermediate-term so you don’t get clobbered if interest rates rise). But you can adjust your mix based, among other things, on what other resources you have to draw on for retirement income and how much additional risk you’re willing to take for extra return or how much return you’re willing to give up for greater security.

If you’re not comfortable with the idea of building your own portfolio, then you might consider investing your IRA in a target-retirement fund. You simply choose a fund with a date that roughly corresponds to the year you plan to retire, and you get a stocks-bonds mix appropriate for your age.

By the way, one other advantage of keeping your money in an account like an IRA is that you can rejigger your portfolio if necessary without fear of generating a tax bill, as you don’t pay tax until you withdraw your money.

So banish any thoughts about cashing out your IRA or shifting your money around every time the market soars or dives. Instead, take the portfolio-building approach I recommend. It won’t completely immunize you from short-term losses, but it can offer enough protection to get you through difficult times like these while also positioning you to capitalize on the eventual rebound.

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