continue contributions to Roth IRA during economic decline?

[Guest wjprime]

Hello--

This is my first posting. I've been asking around and can't get a straight opinion. I'm due to submit my 2003 contribution for Roth IRA and am wondering if I should wait a year.

I'm tired of seeing my TIAA-CREF and personal investment accounts dwindling as I contribute faithly a significant portion of my salary monthly.

What's the rule of thumb here? If I don't submit now, then at least I can watch my $3000 gain it's simple 2% interest in the bank. Investing it andwatching it go down all year long will just continue making me mad.

What should I do? What is everyone else doing?

Thanks so much,

Wanda

[John G]

You ask a good question.

Here is the problem. No one can tell you when the market will go up and when it will go down. No one can tell you when it is about to change direction. Millions have tried, but the "market" has always been filled with uncertainty. We know things happen in cycles (like employment, interest rates, even weather patterns of drought and rain) but that does not mean they are easy to predict.

A personal example.... in making perhaps 2,000 trades over the past 20 years I have never caught the exact high or low on a single stock. Catching the exact turning point is more rare than a hole-in-one in golf. I have one of those, and fully recognize how much luck was involved with a 4 iron.

So... if you can't tell when the market will go up and when it will go down... then you shouldn't invest?

Wrong conclusion. Here is why. Our free market system, capitalism and entreprenurial emphasis is a huge powerful force for growth and improvement. In the last century, our economy has survived two world wars, hundreds of famines, the dust bowl, a couple of regional wars and a great depression. We have thrived in spite of flawed politicians, a "chad" election, McCarthyism, Aides, political assignations, race riots, small pox, worldwide flu and a wide range of dumb public policies. I think we can make a strong case that we will survive some third world terrorists, even if they have biological weapons and a couple of dirt nukes. We offer a great combination of personal/religous freedom and economic opportunity. I haven't seen any rag tag boats filled with Americans trying to escape to the Bahamas.

The long term performance of the stock market is very good. Up years out number down by anywhere from 4x to 6x depending upon the data you use. (I like to use the performance of a couple of mutual funds that have existed for 65+ and 50+ years as a reasonable surogate.) Back to back negative years do occur, and twice in the past century we have had 3 down years in a row (the second one is going on right now). But... the good years not only outnumber the bad ones, they outweigh the bad years (that is they are more up then the down are down). So, over the long haul (15+ years) the stock market has outperformed more conservative investments like CDs and bonds.

Think of it as stocks are "on sale" right now. Somewhere in the future that market will rebound. You will not get a letter in the mail telling you in advance. In fact, your only likely to know many months after the fact that we have entered into another bull phase.

I personally do not see a lot of downside risk right now in the stock market. In fact, I am a buyer looking for good values for the next 5 years. But, that is me. Buy low, sell high. A down market does not make me mad but tells me to look around for good companies that are getting bashed along with the Enrons and Kmarts which deserve to go out of business.

If you have trouble sleeping with money in the stock market right now, you still have another alternative. Fund your Roth or other tax sheltered plan, but put the money into a money market account or other short term interest paying option.

One last point, don't worry about what "other people are doing". The last thing you want to do is following the herd. The herd is invariably wrong as they all want to jump in after the market has gone up a lot and want to bailout after the market is down... which is a lot worse then putting in a contribution each year and ignoring what happens.