For those of you much more financially savvy than me.
The IRS says that I can invest up to $5000 per year into a Roth IRA on top of the 401k contributions I make at work. For the past several years I did just that, plunking it down on an S&P 500 tracking Mutual Fund. Fidelity, I think. Anyway, I know that the market is down dramatically, and I won’t be retiring for another 20 years or so. I haven’t made my Roth contribution for 2009 yet, and am wondering if this is a good time to do it, should I wait and see if the market falls further, or should I seek out another vehicle for my retirement dollars?
I’m not much of an expert on investing, but I do know that you can’t go wrong by consistently putting money into the market and letting things ride. Adjustments should be made to rebalance the portfolio as relative values change or as your investment parameters change.
For what it’s worth, I’ve seen studies that having at least some investments in bonds (10-15%) will not only make the portfolio more stable, but will slightly increase your long-term return rates from a pure stock approach.
Studies also show that market timing is not important in the long run. Hitting every good day only gets you about 1% more than hitting every bad day. The only people who lose (long-term) are the ones who didn’t invest.
If you’re talking about calendar 2009, I would suggest investing 1250 each quarter. I don’t expect the market to make a huge rally over the next 9 - 12 months, and this gives you room to continue to take advantage of a price drop over the coming months.
Can I get a cite on that sentence?
I’d be fascinated to know how adding a small portion of a weaker-performing investment class in with your portfolio of strong-performing investments would make you more money.
I would spread it out. Back in December I thought about moving a large chunk of my oversized rainy day find into an S&P index fund thinking we surely must be near the bottom. Instead I decided to jack up my 401K contribution so the funds would be moved over the next 18 months. I am glad I changed my mind.
I already made my $5000 2008 contribution. I invested it in a lump sum into the S&P 500 index fund. This year I think I will take some of the advice mentioned above and spread it out a bit, probably on a monthly basis. I do need to put some of my nest egg into bonds, as also mentioned above. I don’t think any of my retirement money is in bonds, save for one target fund that I own. I believe that a small percentage of that is in bonds. I realize that as I get older, I need to be less heavily invested in stocks and more so into bonds.
I know that $5K isn’t a monumental sum, but I appreciate the feedback just the same. I’d like to earn every penny that I can on my retirement investments, as I’m sure anybody would.
Because the weaker-performing class acts as a reserve against fluctuations in your primary investments, assuming they aren’t strongly correlated. You need to do regular rebalancing for this to be helpful.
When an investment class goes down, the other classes provide funds to buy that class when it’s low. For example, my goal bond-investment percentage is 10%. With stocks going low, my rebalancing to bring bonds back down to 10% is dumping more money in stocks. I’ll thus be better positioned to gain when stocks rebound.
I looked to see if I could find the original source for that and it isn’t available on the web (or I just can’t find it). It came from an American Funds presentation made to accountants and tax preparers last year (to encourage us to recommend them to our clients). If I recall, the result was about a 15% reduction in volatility and about 0.5% increase in averaged returns.
The idea was that you keep the balance by selling and buying. You may already know that stocks and bonds tend to move in opposite directions - when stocks are down, bonds generally go up and vice versa. And in any event, bonds are less volatile than stocks.
Let’s say you start with a 90/10 mix of stocks/bonds. At a time like this, your stocks are down 50% and your bonds have not lost much; your mix may be 80/20 because of that. You sell enough bonds and buy stock to get back to 90/10. In three years, the stock market has recovered and the bonds are growing slowly, so maybe your mix is now 95/5. You sell some stock and buy bonds to come back to 90/10. When the next bear market comes along, you’ve got that extra value preserved in your bonds and use it to buy more stock on the cheap. The emphasis is not on timing the market, but on rebalancing the portfolio as needed.
(As part of a longer-term strategy, of course, you eventually change the mix so that at retirement, you might be closer to 60/40, but that decision is one of sacrificing potential returns for greater stability.)
As long as you do invest it this year and do hold for 20 years, the issue of when you invest it won’t amount to a fly’s fart in a tornado come payout time. Therefore, if I were you, I’d invest it all today so I didn’t forget about it.
If you are planning a single lump sum investment, the timing of the investment matters significantly. If you invested a lump sum in the S&P500 in 1988 and sold at year-end 2008, you would have about 17% more money had you invested on the lowest 1988 daily close versus the highest close. The effects can be minimzed through strategies such as asset allocation, rebalancing, and dollar-cost averaging, but the effects are there.
I’m not sure there’s a particularly reasonable way to tell if the S&P 500 is cheap right now. There is a great deal of economic uncertainty and the potential for a high degree of U.S. government involvment and intervention.
Thanks for all the input, everyone. I’ve just set up my Vanguard 500 Index Fund (Roth IRA) to make an automatic contribution from my Vanguard Money Market Fund of $125 per week for the next 40 weeks.
Well, dang. That makes a lot of sense, although I wonder if the ridiculous management fees that bond funds charge vs the nice low fees on the SPYDER I’m keeping my retirement funds in might not cancel that out.
Nonetheless, not everyone has the same 401K + pension arrangement I have, and many of you probably have better fund choices available than I do.