It seemed like a good deed at the time. Back in March, I helped my sister-in-law, Wendy, set up her first Roth IRA. She knew I was keen on retirement savings, and she asked why a Roth IRA was any better than a savings account. I explained that an IRA offered a tax advantage; you never pay taxes on money withdrawn from a Roth after age 59.5. Plus you could invest in assets like stocks and bonds that would likely outperform a savings account over time.

It sounded good to her, I guess, because I convinced her to take $5,000 from her savings account and put it into a Roth IRA. She chose a socially responsible investing fund specializing in large US companies. I figured this was fine to start, since the most important variable at this point is her savings rate. Naturally, I patted myself on the back for helping a young person take that scary first step into investing for retirement. Oh, and I told her not to check her balance every day, because investors who peek a lot tend to make impulsive moves. She followed this advice diligently and didn't check until this month, when she sent me an email.

"I happened to look at my money when I was on the site changing my address. Why am I supposed to put more in there when I have actually lost almost a thousand dollars in just a few months?" she asked.

Oops. Wendy knew perfectly well that investments fluctuate, but I failed to explain, if this can even be explained, that there's a big difference between reading a book about investing and actually seeing your own money disappear. So, Wendy, the rest of this column is for you. I'm going to try to convince you that not only is it normal for your investments to take a dive sometimes, it's actually good news.

Fall In Love With the Bear Market
The day Wendy sent that email was the day the S&P 500 hit bear market territory: down 20% from its most recent high. That evening, I turned on my favorite financial podcast, NPR's "Planet Money," and heard reporter Jacob Goldstein say this: "In the long run, the decline may be good news for a lot of ordinary people: steady, long-term investors who contribute part of every paycheck to a 401(k), and who aren't planning to retire anytime soon. The bear market means that something you buy every month - stocks - just got a lot cheaper. And every dollar you sock away in your retirement fund today gets you a bigger share of all those future profits."

Now, I know this sounds like a pitch from a stockbroker. "Don't worry about that money I lost last month. Send me more money!" But Goldstein is no Wall Street apologist. He's right.



Future Possibilities
How do we know stock prices are going to go back up? Couldn't the Dow drop to 5000 and stay there until I retire? Yes, it could. It hasn't happened in U.S. history yet but it did happen in Japan, where the Nikkei 225 hit nearly 40,000 in 1989 and currently sits below 10,000. This is a good argument for international diversification: investors who own only U.S. stocks are taking unnecessary risk if we turn into Japan. What if every stock market has lousy performance for the next 30 years? Unlikely but possible, and a good reason to own assets other than just stocks.

Why Not Sell?
Why do I have to keep my money in stocks while the market is going down? Couldn't I sell my stocks, stick that money back into a savings account, and buy back in when stocks are cheap? That would be great, wouldn't it? It's called market timing, and the evidence is overwhelming that nobody can do it reliably. Vanguard published an amazing simulation that lets you decide when you're going to get in and out of the market and then shows you, in nearly every scenario, how much money you would have lost by playing this game. As Larry Swedroe, author of the "Wise Investing" series, puts it, "There is never a green light that goes off to let you know it is safe to get back in." Losing money some of the time is part of investing, period.

Painful to Watch
OK, I get it, but watching 20% of my money disappear is just too painful. So own a hearty serving of bonds in addition to your stocks.

"Even when you're young, it's OK to invest more conservatively," says Tim Maurer, a certified financial planner and co-author of the new book "The Ultimate Financial Plan." "If your personality is such that if you put $5,000 in the Roth and it goes down 20% in three months, and that is going to freak you out, there's absolutely nothing wrong with adjusting your strategy."

As a young investor, the best way to do this is to choose the mutual fund equivalent of high-water pants: a target-date retirement fund (TDF) designed for people older than you. TDFs hold a diversified mix of U.S. stocks, international stocks and bonds, so you don't have to juggle or meet the minimum balances for multiple funds. As the fund gets closer to the target date, it holds more bonds and becomes less risky.

For example, say you're 30 and hope to retire in 2046. Instead of choosing a 2045 target-date fund, which probably holds 90% stocks, it would be absolutely fine to choose, say, a 2020 fund holding 65% stocks. The fund company isn't going to card you, and people on the street can't see your mutual fund choices unlike your pants.

Last week I sat down with a friend to help him establish his first Roth IRA. Right off the bat, I warned him that investments go up and down. "Uh, yeah, I know that," he replied. But next time the market takes a dive, I expect to get the email anyway.

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