Why young investors should "Stay the Course" and continue to invest

by Xin Lu on 9 October 2008 16 comments

With the recent upheaval in the financial markets, many individual investors are feeling the pain of shrinking investment accounts. In fact, retirement accounts have lost over $2 trillion dollars in value in the past 15 months. One of my friends says that it seems that every bit of money he contributes into his 401k is gone by the next statement.  I understand how he feels,  but I believe that young investors should try not to panic in these turbulent times and "stay the course" with their investments.

Right now, no matter what you have invested in in the past few years probably lost value, but if you have an investment plan where you regularly contribute money you would be buying in at a low point right now.  It is true that the market could fall further, but your regular investments would buy at those lower points, too.  This is basically dollar cost averaging and it is a strategy that has been shown to work even during The Great Depression .  If you believe that the stock market would recover some day then buying in at a low point is a good thing.

Another point is that noone knows when we will hit bottom and market recoveries happen just as fast as market crashes. If young investors like me are too spooked to put in any money now or just hold too much cash for a long time then we might miss the recovery and receive returns below the market.  Cash is a safe bet, but it is eroded by inflation so holding a disproportionate amount of cash is not the most profitable  investment in the long term.

Also, what many people are doing now is to cash out their stock holdings in fear of further drops.  I think this makes sense if the cash is needed for immediate use and if you believe the investments you bought will become worthless.  However, if you are a long term investor with a balanced portfolio of stock mutual funds then there may not be much to worry about.  It has been shown that individual investors in mutual funds tend to have less returns than that of the funds they invest in because they tend to pull out their investments at low points and buy in later at a higher point as an emotional response.  So if there is no need for the money and you believe that in the long term stocks will recover then it may be best to leave it alone even though it is stressful to see your nest egg shrink.

In addition to staying the course and continuing to invest, this could be a great time to diversify your investments since nearly every asset class has fallen in value.  If you are heavy in stocks then you could look into some real estate, commodities, or bonds. The goal is to have a well balanced portfolio that you understand, and eventually the current bear market would seem like just a bump in the road.

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Guest's picture
Guest

I am about to come into a small inheritance, one that is getting smaller by the day (parent's retirement account). My strategy will be to live off the inheritance (which is small enough to be tax-free), while banging as much of my taxable salary as the law will allow into my company's sweet 401K plan (6% matching) during this market trough.

Guest's picture

How young is "young?" It really depends on when you want to retire. If you won't need the money for the next 20 years, then I'd stay keep it in there. But 10 years before you plan to start using it, start converting more and more of it each year to more conservative stocks and bonds so your entire portfolio is very conservative by the time you retire. Thanks for the voice of reason, Xin!

Guest's picture
Guest

Fractional reserve system requires that a larger and larger proportion of our energy is spent servicing debt. This system requires perpetual exponential growth to remain stable. Unfortunately, we have finite natural resources...

See the problem?

This current system IS limited. Whether this is the final gasp or not before it all falls apart is debatable, but in the long term, say over the remaining lifetime of someone in their 20s, the system will not remain. Investing in something like that is ignorant.

See: Money as Debt as a basic primer.

Might think about investing in useful things, precious metals, good hand tools, land.

Guest's picture

If you buck the trend and buy when everyone else is selling, you will make money. If you sell when everyone else sells, you lose money. I think the Dow will bottom around 5800.

Guest's picture

"When people get anxious, get greedy. When people get greedy, get anxious." Just like you said, Xin, now is the time for young people to invest. The stock market seems like a scary place to be, but one of the main principles of investing is to buy low, sell high. If you've got the time, ride it out.

Guest's picture
Kelja

The system is breaking down. Expect bank and credit union bankruptcies. Expect stock markets to take extended 'holidays'.

This is real.

I checked my credit union yesterday. They said they're very busy lately. People are withdrawing money.

There will be opportunities after the smoke and dust settles, but we're in for more rough times.

What you might do, sell your portfolio, lock in losses for future tax write offs. Then immediately buy something solid, like gold and silver.

Problem is - because of blatant government manipulation - you no longer can buy gold or silver coins. Especially scarce are U.S. Gold and Silver coins which don't have to be reported to IRS.

You don't have to believe me. Call any major coin and bullion dealer.

Guest's picture
Kelja

Notice from a national gold/silver dealer:

Kitco is working diligently to fulfill all existing client orders. We apologize for any delays in order fulfillment which are a result of production and delivery delays imposed by certain mints and by our suppliers.

The following products have been temporarily removed from our Precious Metal Store until further notice due to production and delivery delays that retailers are currently facing; Gold Eagle 1 oz, Gold Maple 1 oz, Special Gold Maple 5 X 9 pure 1 oz, Gold Buffalo 1 oz, Gold Krugerrand 1 oz, Gold Bar 10 oz, Gold Bar 1 oz, Kitco Gold Bar 1 oz, Kitco ChipGold 10 g, Kitco ChipGold 20 g Gold Philharmonic 1 oz, Silver Philharmonic 1 oz, Silver Eagle 1 oz, Silver Maple 1 oz, Silver Bar 100 oz, Platinum Eagle 1 oz, Palladium Maple 1 oz, Silver Maple Olympic Coin 1 oz.

These products will be relisted and available for order as soon as fresh inventory is readily available. In the interim, we will focus on completing pending orders as our top priority.

Guest's picture

Its the same advice most level headed advisors give and I agree with this. Another thing I'd like to add, stop watching the daily fluctuations, you'll just get spooked. Hold on and add to the strong companies you would like to hold long term. Now is a great time to have Cash, and cash should be used to invest long term.

Guest's picture
Plex

Young people should be investing everything they reasonably can right now. It is amazing how people are so willing to buy when stocks are way up and are so willing to hide it all under the bed when the market crashes.

In the long term, the only people who lose are the people who miss the recovery (whenever it happens). THAT is when fortunes can be lost and it is easily preventable, all you have to do is not pull out or even increase your investments.

Have any of the people screaming to buy precious metals, mattresses and shovels actually looked at a chart of the market over the last 100 years? Guess what? It goes up in a steady curve, even during the Great Depression!

Blips like these aren't even a speck in the eye of the market in the long term. Buying now will only increase your share of the markets overall upward return.

Guest's picture
Guest

To quote above, "How young is young?" - and not saying that the commenter feels this way, but it struck a nerve.....

It's so interesting to me that the baby boomers who have caused most of this mess, and have taught their children to perpetuate this mess still believe that they are "young" and somehow, not a part of the system.

Honestly, as a person in her late 20's who has never racked up consumer debt, who has paid off all of her student loans, who drives a 10 year old car - I'm supremely frustrated by the "me, me meeeeee" baby boomers who continue to ruin society with thier self-righteous greediness.

Of course, the response will be, "what about civil rights? where would you be then?" My answer to that would be that the call for civil rights comes with any advanced society. Sorry, you don't get a medal, and you need to take a look at history. My entire childhood witnessed a generation of people interested only in themselves - with the guise of protest. Protest got chic - that's where the numbers came from.

I could rant all day - but I'm tired of feeling guilty when I don't have a reason to.

Guest's picture
Howard

Maxey Sanderson makes another good point, that in addition to the benefit of dollar cost averaging, any employer match to a 401k is a return on your investment you shouldn't pass up. You can read his article here: http://news.planlab.us/2008/10/what-should-i-do-with-401k/

Guest's picture
Cheaplee

I always like to tell friends that you don't have to be in the stock market 100% of the time to be in it for the long term. I encourage readers to not only use ETFs for cost benefits and diversity, but people should follow market volatility as well. Since markets fall 3 to 4 faster than they rise, individual price movements increase substantially. When this happens, volatility rises. Volatility can be measured across the total market through the VIX indicator. And when the VIX increases to a certain point, I sell. When it comes back in, I buy. I keep it that simple! In addition, you can also use stops to protect your positions.

Nonetheless, there is no law that says you have to be fully invested 100% of the time. Sometimes, it doesn't make economic sense.

-Lee from www.cheaplee.com

Guest's picture
Payne

Just because you are buying at a lower point it doesn't mean you're buying cheap stock. The company may be highly overvalued to being with and even with the recent correction the company may still be overvalued. Even looking at the PE ratio tells you nothing because you need to look at future earnings, not historic earnings.

Just become some strategy worked during the Great Depression it doesn't mean it will happen today. Past performance is no guarantee of future returns. Someone dollar cost averaging into an index fund that tracked the Nikkei 225 index between 1990 and 2008 (a long time period) would have lost a lot of money because that index went down by about 70 per cent, yet before 1990 the Nikkei only went up.

Guest's picture
AlexiusXerxes

I am someone who may not be retiring for close to 30 years, believes the market will turn around, and at this point would not mind to have a extra aggressive portfolio. For me, would you say it's a smart move to have a portfolio of 100% stocks?

Guest's picture

1. Buy gold, hand tools, move back to a farming existence because we're screwed

2. Invest as much as you can if you're 'youngish' because the market will swing upwards again *crosses fingers*

Honestly, these are just opinions. No one knows what is actually going to happen. If they did, they'd be billionaires.

But I don't think becoming a farmer is the answer (why? not everyone can be a farmer, for one reason).

I'd say to investigate both arguments thoroughly and make a decision based on what you feel is most accurate.

Personally, I am leaning towards #2 because telling me that the stock market will disappear, currency will disappear, bartering will come back and everyone will be farmers is too off base for me. We're more of a tech-based society anyway. We're too reliant on technology and cars to go back to the 'old times'.

Even if it all becomes true, gold isn't necessarily going to be any better than iron ore for example. It's just a metal, it's just a material, and you can't even consume it (unlike oil or food), which means the value is something WE place on it as a society, not what value it actually has.

If everyone considered gold and diamonds to be worthless (unlikely), then they would be. They are, after all, just metals and stone. It's just that we put a heavy value on it, therefore it's valuable.

Water might actually become our most precious resource. So what should we do? Stock up on fresh water?

Anyway.

Fabulously Broke in the City
Just a girl trying to find a balance between being a Shopaholic and a Saver...

Guest's picture

Gold can't be used to even make tools. It's only real useful purpose is to be part of the machinery of a space shuttle since it's a reliable metal. But it's so damn expensive, the cost is prohibitive to be used en masse.

I'd bet more on iron ore than gold if you want to play the metals game. And apparently we're running out of that too.

Fabulously Broke in the City
Just a girl trying to find a balance between being a Shopaholic and a Saver...