Investing in a down market
January 5, 2009 •
Q: We have been contributing to the government's TSP program for the past few years and are now concerned about the current economic crisis. Should we stop our contributions into TSP? Or should we ride out the crisis and take advantage of buying lower-priced stocks with our contributions? My husband is 40 and I am 36; we have no debt and a sizeable emergency fund.
--Cassandra, Naples, Italy
A: Oh contraire! You guys sound as if you’re building a great foundation: no debt, big emergency fund, and the capacity to save. (And you’re living in Italy, too – my favorite country outside the United States!) A financial planner considers that the dream scenario! Based on your age, I think you have about 10 to 20 years until you retire and begin to use your retirement savings to supplement lifestyle expenses. In the investment arena, we call that a long time horizon. That means you have sufficient time for the market to go through its ups and downs and arounds.
In fact, because of your long time horizon, the current markets may be offering you a tremendous opportunity to buy at cheaper prices. Warren Buffett, arguably the world’s greatest investor said in a recent NY Times opinion piece, “A simple rule dictates my buying: Be fearful when others are greedy, and be greedy when others are fearful. And most certainly, fear is now widespread, gripping even seasoned investors.”
I’ve been heard to say that your investment portfolio is kind of like a dress, you have to like it and it has to fit and make you feel good. My recommendation would be to look at where the money is being invested; not wondering whether or not you should invest at all. Choose an investment mix that suits your tolerance for risk and keep investing.
In addition to what you’re currently doing, I recommend you look into investing in a Roth IRA. The IRS has income limits ($166,000 to $176,000), but if your modified adjusted gross income falls under that amount, you and your husband are afforded the opportunity to invest up to $5,000 each in the Roth ( for 2008 and 2009). It works this way: you deposit after-tax money (I call it grocery money) into your IRA where it grows over time tax-deferred and then at age 59 and ½ and after you have held the account for at least 5 years, you can withdraw any earnings tax free! It’s a wonderful way to have some control over your taxes in retirement. I think your inclination of taking advantage of a down market is smart. Keep up the good work and don’t lose the faith!




