Q: I'm a thirtysomething
small-business owner. When I left my job at a large corporation, I
rolled my retirement savings over to a self-directed IRA. I often
considered tapping it when money was scarce, but I wanted to save
it for retirement. Figuring I had lots of time, I invested in some
very aggressive mutual funds that had great track records. Now
I've lost more than half of my money. I'm considering
pulling out whatever's left and investing it in my business.
What should I do?
A: First, the short answer: Hang
with it. By the time you're ready to retire, your money will be
there for you.
Now, in several parts, the longer answer:
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1. Re-assess your risk tolerance. Let's face it,
everyone loves a winner, and for the past several years, stocks
have made lots and lots of people very wealthy. Unfortunately,
prices can go only so high before gravity brings them back to
earth. But like a rubber ball that, as the song says, comes
bouncing back to you, quality investments generally rebound if you
have time and patience. You have the former; all you need is the
latter.
Let's look a bit beyond your current state of misery and
examine what might be happening. Aggressive funds are great when
they're setting the world on fire but not when they're
going up in flames. If you find that the ups and downs in your
selection of investments are making you lose sleep at night, you
may have invested too aggressively, no matter how long you have
until you retire. If this sounds like the case, go to the next
step.
2. Rethink your asset allocation. If I've said it
once, I've said it a million times: Past performance is no
indication of future returns. This means you can't believe
everything you read about a mutual fund, no matter how many stars
Morningstar gives it (even Morningstar admits their star ratings
aren't necessarily predictive of future performance, but
that's another story). Nonetheless, funds with strong,
long-term track records don't usually turn into permanent
duds.
The key to successful investing is to invest across different
sectors of the markets (small-, medium- and large-sized companies),
investment styles (growth and value), countries (U.S. and foreign)
and finally, to include some asset classes that don't
necessarily move the same way stocks do (real estate, bonds and so
on). If you have several funds and they're all dropping like
rocks, there's a pretty good chance they're in the same
market sector and may have similar portfolios. Check a recent
annual report (visit the fund's Web site for a look at their
top 10 holdings) and see how similar they are. Consider switching
to other funds in the same family, or if there are no fees or tax
consequences, switch to another family.
3. Dollar-cost average. If you'd like to continue to
invest after you've checked your risk tolerance and
re-allocated your investments, consider adding to your account on a
steady basis. It's tough to invest when everything is going
down, but that's the time when prices are low. While it's
next to impossible to buy in at the bottom and sell out at the top,
adding money monthly can help you make the most of your
investment—and you don't have to worry about when to get
in. Just make sure you don't put in too much (the annual limit
for an IRA contribution is $2,000).
4. Bad markets happen. Losing money during market
corrections doesn't make you a bad investor (based on the drop
in Microsoft's stock, Bill Gates' net worth dropped from
about $66 billion to less than $40 billion since August, so
you're not alone). On the other hand, cutting and
running-withdrawing money from your IRA and paying taxes and
penalties-is another story. If you can't add to your account
and just can't bear to look at it, don't. Staring at it
daily won't make it go up, and it will only make you more
upset. After you've done all you can, give it a chance to get
itself back together. Like any good relationship, sometimes all you
need is a little breathing room.
Lorayne Fiorillo is a financial advisor and senior vice
president at a major brokerage firm. She spent six years as the
on-air financial commentator for EyeWitness News and 11
years as a market commentator for National Public Radio. She is the
author of the new book, Financial Fitness in 45 Days: The
Complete Guide to Shaping Up Your Personal Finances
(Entrepreneur). She specializes in retirement and business
planning for small businesses.
The opinions expressed in this column are
those of the author, not of Entrepreneur.com. All answers are
intended to be general in nature, without regard to specific
geographical areas or circumstances, and should only be relied upon
after consulting an appropriate expert, such as an attorney or
accountant.