Occasionally I receive questions from readers who contact me, and I do my best to answer everything that comes my way. One question that has come up more frequently in the past few months has to do with saving for retirement and the major losses we’ve seen in the stock market.
One of the main concerns has been with the fact that it seems like everything you put into your retirement account is being lost in a matter of months. Obviously, this doesn’t make you feel good about your decision to save and invest, but is it really that bad?
A reader asked:
Hi, Jeremy. I’m 31 and for the past year or so every time I get my statement in the mail I’m losing everything I put in. Last quarter I put around $1,500 into my 401k plan, but the statement showed a loss of -$1,613. I actually lost more than I put into my account. I know I should be saving for retirement, but I could put this money in the bank and at least come out even. It just makes no sense to keep investing right now. Am I wrong?
I’m sure many of you can relate to this story. The past year and a half have been difficult to say the least. This is especially true for those who are still relatively new to investing. If you’re just starting out and see that everything you’re putting in is vanishing a few months later, it’s easy to feel it’s not worth doing and you’re just throwing money away.
Don’t Think of it Like a Bank Account
The biggest problem many people have is they get their quarterly investment statements and think of them in terms of a bank account. Obviously, if you deposited $2,000 in your savings account at the bank only to get your statement a month later and see a lower balance, you’d be pretty upset. That’s because money in the bank is just money. You didn’t buy any assets with that money, and it is just a place to safely put your cash for a later date.
An investment account isn’t the same. You have to remember that you’re actually exchanging your money in return for another asset. In most cases, this means buying shares of a mutual or index fund. The important thing to remind yourself is that if you bought 100 shares of XYZ investment, you still have 100 shares regardless of what your statement says it is currently worth. You have actually purchased something, and in the future you may see the value of your asset change.
Even though your statement shows a loss on paper, think about it in terms of actually owning assets. You still hold shares of your investments, and nobody took those away from you. They have just been temporarily devalued by the market.
You Haven’t Lost Anything Until You Sell
You’ve probably heard this before, but it’s true. The losses are only paper losses until you sell. Going back to what was discussed above, you actually own shares of an underlying asset. The value will change on a daily basis, but once you sell, you no longer own that asset. That’s when your losses are realized. Once you no longer own something, you can’t benefit from any future appreciation. Of course, you can invest the proceeds in something else, but any loss you had on paper for that particular investment is locked in stone once you sell.
Try to resist the urge to see the gain/loss column on your statement as an actual gain or loss. I know, it’s hard to do. When you’re talking about thousands of dollars being “lost” in a short amount of time, thinking about it in terms of a paper loss provides little solace. Think back a few years ago when your gain/loss column was showing gains instead of losses. You were happy, right? Looking back, it’s clear that you didn’t really gain anything unless you sold back when prices were high and locked in a profit. The same thing holds true now.
You Want to be Investing Now
When you go grocery shopping, do you try to find things on sale? When you’re looking to buy a new car, do you try to get the best deal possible? Of course you do. We’re always looking for ways to find the best value. So, why does it feel so different when it comes to investing? If you can buy the same stocks today for 50% less than a little over a year ago, why wouldn’t you?
Of course, it’s all relative. Stocks are “on sale” right now, but compared to what? Some experts say stocks are just falling back to where they should be valued while others say many stocks are truly cheaper than they should be. In the end it doesn’t matter. The fact is that most stocks are cheaper now than they were a year ago. Were you buying in 2006 and 2007? As long as returns were positive, you probably didn’t think twice about investing even if you were buying at historically high points. So, now that stocks have come down dramatically, why would it be a good idea not to buy? Remember, you make money by buying low and selling high, not the other way around.
There’s obviously no crystal ball, and we have no idea what’s going to happen. Stocks may continue to fall for some time. It could take a few years to begin to see recovery. Or for all we know, there could be a 10% rally next week. Since nobody knows what’s going to happen and when, the best thing you can do is keep up with your plan and be glad that you’re picking up some shares at a lower price than you were buying a year ago.
Don’t Forget About Tax Benefits
The argument to divert money into the bank as opposed to a retirement account may make sense on the surface. If you’re putting your money into a safe cash account, you can’t lose anything. But you are in fact losing some important tax benefits. If you’re investing in a pre-tax retirement account like a 401(k) or a traditional IRA, you’re giving up an immediate tax break on those dollars. If you’re investing through a Roth IRA, you’re giving up tax-free withdrawals on those funds and any gains in the future. And in either situation, you’re giving up tax-deferred growth. The effects of deferring taxes can have a significant impact on the size of your nest egg 20 years from now, so giving that up for the sake of safety granted by a savings account can be shortsighted.
Keep Your Goals in Mind
Above all, consider your situation and your goals for your investments. If you’re like the reader and have 30 years until you’re looking to begin using the money, be thankful that you have that kind of time left and thankful that the market has presented a buying opportunity. If you are in a situation where your investments are going to be needed relatively soon, for retirement or otherwise, you’ll have a different set of goals. If that’s the case, make sure you’re investing in a way that’s appropriate for your situation.
The big thing to remember is that there’s no right or wrong answer. Your tolerance for risk and objectives for your money will be different than the next guy. Even so, make sure you’re armed with information before making a decision. Remember, your investment statements are not like bank statements. You’re actually buying assets, and you haven’t lost anything until you sell. And if you’re investing for the long-term, the money you invest today will pay off a few decades from now.
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About the Author: Jeremy Vohwinkle is a Chartered Retirement Planning Counselor® and spent a few years working as a financial planner. Today, he helps people make the most of their money by writing about personal finance here and elsewhere on the web. Jeremy is also Coach at Adaptu and a regular contributor for other publications such as Intuit, and American Express. Be sure to follow Jeremy on Twitter or Google+.