With the Dow so high, is now a good time to start a Roth IRA?
April 2, 2013 4:50 PM   Subscribe

Hello! I'm in my early 30s and am finally financially stable enough to start socking away some cash in a Roth IRA (my employer does not offer any retirement plans). However, I'm a little worried that, with the market being at such a high, that something will happen due to all the current BS going on with Congress and the market will crash again, and I will lose a good chunk of money. Is this fear totally unfounded? Should I just start my Roth and hope for the best?
posted by emily37 to Work & Money (20 answers total) 5 users marked this as a favorite
Starting a Roth IRA doesn't have anything to do with the stock market, as most plans will allow you to invest in non-stock market funds. You should be able to buy shares of Fidelity's Government Bond Fund, for example. Or you can buy ultra-short ETFs, or gold ETFs.
posted by UrineSoakedRube at 4:55 PM on April 2, 2013 [1 favorite]

With compounding interest, and savings accounts as well as MMAs and CDs with very low interest rates, it does seem like a better option.

Do you have other investment ideas that you are kicking around otherwise?
posted by wocka wocka wocka at 4:55 PM on April 2, 2013 [1 favorite]

Response by poster: Since I am young(ish), I do want to invest in something that can offer a decent return, and I don't mind taking a little bit of risk. I am just trying to figure out if I'm setting myself up for a huge disappointment with everything being so "bubbly" right now. Since I don't have a 401k as an option, and since I am right now in a place to qualify for a Roth (that might not be the case in a couple of years) I'd like to take advantage of it.
posted by emily37 at 4:58 PM on April 2, 2013

You cannot predict what the market will do. Because of that, you should start investing as soon as you possibly can. You probably will end up losing money at some point, but the idea being that in the next 25-30 years you will end up on the gaining side overall.

My personal experience was that I had started a personal investment account in 2007 and ended up losing half my money in 2008. However I kept putting money into it, and the cash that I invested when the market was at rock bottom ended up making me a fortune (hyperbole alert!) in the following years. Just continue to feed the fund in good times and bad and you will end up being ok.

The best advice I can give you is to regularly put money into it, and DON'T check the balance. Look maybe once or twice a year, but if you are obsessively checking on a daily basis you are going to freak yourself out.
posted by Literaryhero at 5:06 PM on April 2, 2013 [10 favorites]

It is always the right time to start any kind of retirement investing. Spread out over time, the current market conditions won't have much affect on your overall performance. Never stop contributing money. Ignore your returns and the account balance. Worry only about annually or bi-annually rebalancing the stock/bond/cash percentages according to your desired risk and your targeted retirement age.
posted by incessant at 5:11 PM on April 2, 2013 [6 favorites]

tl:dr; LiteraryHero is right.

Longer explanations:Since I don't have a 401k as an option, and since I am right now in a place to qualify for a Roth (that might not be the case in a couple of years) I'd like to take advantage of it.

A 401k vs Roth does not affect the risk of an investment or where you put the money - it only changes the tax status of the money and the rules on when/how much you can contribute to it and take it out.

So if you have money to save and you want to take advantage of the tax breaks available, then yes you should start a Roth IRA. You can start one by going to Fidelity/Vanguard/Sharebuilder, saying 'I want a Roth' and putting cash in. It can literally stay as cash if that's what you want.

Separately, you are trying to ask 'should I put my Roth IRA money in stocks'? In general, if you are 20-30 years away from wanting to use the money, then probably yes. Bigger investment companies like Vanguard and Fidelity should have a 'retire in 20x0' fund where you can put all your money, and they will put it in a mix of stocks and bonds, changing the ratio as you get older until it is all in safe not-stockmarket investments for the last few years before the year 20x0 that you picked as your approximate retirement date.
posted by jacalata at 5:15 PM on April 2, 2013 [5 favorites]

Best answer: It's not timing the market. It's time in the market.
posted by caek at 5:28 PM on April 2, 2013 [10 favorites]

The higher potential return you can get from an investment, the riskier it will be (on average across all market instruments). If you have a lump sum and are risk averse, you may want to consider investments like treasury bills and A-and-higher bonds. If you expect to invest regular amounts over several years, a stock-based investment can make sense, though you may want to take the story of dollar cost averaging not too seriously.

In the long run, mutual funds net of management fees slightly underperform the market(s) from which they select their constituent stocks and bonds. That said, mutual funds are an easy way to invest without having to learn much about financial markets or do much to review your portfolio.

Some types of funds you might consider:
bond fund: collects interest on loans to the government and companies
index fund: comes close to matching the underlying stock index
value fund: buys stock from companies believed to have strong potential to increase in value
growth fund: buys stock from companies showing potential for continuing growth/expansion
industry-specific fund: concentrates on a particular industry, e.g. banking, consumer goods, automobiles, technology, health care
country-specific fund: usually like an index fund, but on a foreign country's stock exchange
ethical fund: buys stock only in companies meeting a set of ethical practices
posted by thatdawnperson at 5:35 PM on April 2, 2013

I started saving for retirement in 2006. I got more involved and even bought a couple individual stocks (as a learning exercise) in 2008 before things got bad. You can see where this is going: At the beginning of 2009, I looked like an absolute fool. Before I knew what was happening, I was lecturing a friend on the value of retirement savings, and when I pulled up my 401k it showed negative returns for the first time. Embarrassing!

But I kept contributing the whole time. And the result is predictable: not only did my pre-2009 investments regain their value, but all the money I put into my retirement accounts for the past couple years bought lots of stocks at a discount, and those investments have done well for me. All because I contribute a set amount every month, rain or shine. Putting money in over and over again really smooths out the short-term dips, because eventually that money will generate a return whether it's tomorrow or 8 years from now. Frankly, if anything happens to the US or the world that prevents your retirement accounts from generating a profit over 10-12 years, we'll all have bigger problems than our retirement accounts.

So let's say your doomsday scenario occurs and there's another big dip in the market. You'll essentially be repeating my experience from 2006-2011. If history is an acceptable predictor, the economy will continue to grow at some rate, and eventually you'll get a return. If you keep your money in the market over a 30 or 40 year period, you're probably looking at tripling or quadrupling it (based on past growth, not a guarantee, etc). And by putting your money in a IRA or Roth IRA, your gains will be tax advantaged so you'll keep more of it, and IRAs have handy penalties that incentivize you to keep your money where it is - earning a return. Over the very long term it's as safe a bet as you can reasonably ask for in life - not guaranteed, but probably a good idea.
posted by Tehhund at 6:06 PM on April 2, 2013 [2 favorites]

...and I will lose a good chunk of money

You're thinking about this the wrong way. If you invest now and the market crashes, you haven't lost any money. If the market continues going up, you have made any money either. All that happens is your investment has gained or lost value. You haven't made or lost money until you sell your investment.

The terminology is important because it can affect how you think about risk. When you invest the money in your retirement accounts into, it will be at least 30 years before you really care what the value is and it will go up and down constantly throughout that time but the general trend will be up.

In a perfect world, the market would always be down when you made your contribution but you can't control that. Just contribute every year. Some years will be up, some years will be down it all averages out.
posted by VTX at 6:43 PM on April 2, 2013 [2 favorites]

I have been sitting on a LOT of cash reserves in my Roth for a good while, for the same reason. You should definitely put the money in there. And you should probably be investing it, too, as should I... But at least max out your contribution every year, because as you say, in a few years you may not be able to. Nothing says you have to put it in the market right away.
posted by ista at 6:57 PM on April 2, 2013

A lot of posters have the right idea, but I just want to add that you can mitigate against this by buying shares of different things. For example, I hold shares of index tracking funds (e.g., S&P 500 goes up, the fund goes up, S&P 500 goes down, fund goes down), some real estate corporations (REITs), some emerging market funds, and some bonds. That way, if any one of those things tanked, the other may not. E.g., often if the stock market tanks, bonds increase in value, as its assumed that governments won't let their bonds default.

If you google for index fund diversification or index fund portfolio, you'll find much much more. Here is a guide I used. It seems complicated, but it's pretty intuitive once you read through it and think about it a bit.
posted by !Jim at 7:18 PM on April 2, 2013

(Others beat me to it but...)

Now is ALWAYS the right time to start investing. :) It's like the saying goes: "The best time to plant a tree was twenty years ago. The second best time is today."
posted by ninjakins at 7:26 PM on April 2, 2013 [2 favorites]

Don't think about trying to avoid things in a "bubble" (if US stocks are in a bubble right now, then bonds are doubly so. Markets are weird right now and there's no point in trying to predict what will happen) or fear losing money when you have such a long term time horizon. The things that are most important to remember for pretty much anyone looking to invest money for the long term are:

- Adequate diversification
- Regular contributions (the same principle of dollar-cost averaging, though the contribution doesn't necessarily need to be fixed or regular)
- Commissions and fees

So find a place to open a Roth, preferably one at a place that has lots of investment options and the lowest fees. You can compare some of them here. Get a good mix of domestic and international stocks and bonds and maybe a little real estate and rebalance a couple times a year. If even that is more than you can or want to do, you can also find asset allocation funds that will do it for you. There are also lots of good tools online to guide you through the process. The most important thing is that you are investing for your retirement. Try not to let yourself get caught up in the noise of market timing or whatever else unless you want to dedicate a lot of time to research and following markets.
posted by triggerfinger at 8:06 PM on April 2, 2013

Any time to start is better then no time.
posted by Bodrik at 9:53 PM on April 2, 2013

Any time to start is better then no time.

13 years later some of my investments from 2000 are back in the black. Hooah!

What I would suggest is reading about investment first and then, after erasing all debt, doing some limited investment in something stable until you understand the dynamics of the stock market, like tax free muni funds.
posted by rr at 11:20 PM on April 2, 2013

You cannot predict what the market will do. Because of that, you should start investing as soon as you possibly can. You probably will end up losing money at some point, but the idea being that in the next 25-30 years you will end up on the gaining side overall.


I mean, more universally, you want to buy low and sell high. So if the stock market is already high, you've missed an opportunity. But for retirement savings, you shouldn't care about the ups and downs. The more money you get in there the sooner, the better off you will be in 30 years.

As for what to invest in, pick a mutual fund or two that have an investing strategy you agree with. You can't be as good of a stock picker as the people who are paid to do it all day long. Unless YOU do it all day long. Traders can be lucky, but over time, you want smart and conservative.

It is very important to realize that you don't have *money* in investment accounts. You have stocks and bonds that add up to a certain value at a certain time. If you own 1% of GE, whether it's worth nothing on your statement or a trillion dollars, you still fundamentally own 1% of whatever GE is doing.

(Obligatory anecdote- I also had a pretty good balance in my 401k in early 2008. It lost about half its nominal value (17% in one day! yay!) all told. But I didn't touch it, I let it ride. It was back to par in 6 months, and doubled its original value by 2011-ish. Moral of the story: don't panic. Long term is the key. Once you start getting up in years, you'll want to move your strategy to be super conservative and insulated from the daily ups and downs, because you'd hate to turn 65 a month after you lost half your value. But until then, you should keep the pedal to the floor and let the experts make you some money.)
posted by gjc at 3:42 AM on April 3, 2013 [1 favorite]

Nthing gjc: Moral of the story: don't panic. Long term is the key.

Also agreeing with others - especially if you can't do a 401(k), start a Roth. We are exclusively in 401(k)s right now, but I want to open a Roth for the 2012 tax year.. so I'm probably going to start by putting the money somewhere "safe" since the market is so high right now. YMMV :)
posted by getawaysticks at 5:24 AM on April 3, 2013

Roth is also somewhat more liquid than a 401(k). Since the deposits are done with post-tax money, there are no penalties or taxes on taking that portion of the account out early.
posted by gjc at 6:43 PM on April 3, 2013

1. The DOW is not a great benchmark. S&P 500 is more reasonable, or perhaps something even broader.
2. The S&P PE ratio is only slightly high vs historic trends. Normally this would suggest a shift to bonds, but those are also at historic highs. So you'd be selling high and buying higher!
3. Certain valuable benefits to the Roth IRA are only available after 5 years.
4. Politics is a sausage factory. The Congressional brinkmanship you're uneasy about is par for course, but their incentives are to find a compromise rather than tank the US markets. If you don't feel like stomaching this, you can contribute your money now and let it sit in cash reserves if nothing else.
posted by pwnguin at 1:02 AM on April 4, 2013

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