Younger investors need to keep their long-term perspective when dealing with a turbulent market and not give up on mutual funds that have a long-term strategy.
NEW YORK — It’s easy to talk about investing with a long-term focus when markets are rising, but much harder to keep looking ahead when they are treacherous.
While losses are bound to make many investors re-evaluate how much turbulence they are willing to endure, the massive pullback on Wall Street this year has led some to abandon a long-term perspective in hopes of preserving what’s left in their portfolios.
Regular, steady saving is important because even modest sums can grow to become large amounts if left untouched over time. And, keeping that long-term perspective makes it more likely an investor won’t be out of the market when a comeback begins.
It appears the market rout has led some investors who should have long-term targets to act like short-term traders. Online brokerage TD Ameritrade found in a survey last month that 63 percent of Americans have stopped making contributions to their retirement plans. In the telephone survey, conducted by Opinion Research, half cited economic woes for their decision.
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The logic seems sensible enough: Who wants to put a slice of their paycheck in a 401(k) or other account when the market is falling?
But those who continue to invest are essentially snapping up stocks during a 40-percent-off sale. That’s approximately how much benchmarks like the Standard & Poor’s 500 index have fallen since their peak in October 2007. And workers who don’t continue to add to retirement accounts can miss out on matched contributions from employers.
For investors who expect to draw on their holdings within the next few years or so for retirement or other reasons, it’s wise to consider a shift to less volatile investments. But nearly 1 in 4 investors age 35 to 44 in the TD Ameritrade survey of 1,055 adults reduced or cut entirely what they contribute to retirement accounts. With two to three decades until retirement, there is time for the market to recover.
“Time is money. People should look at the fact that if you don’t contribute at all, that will make a significant impact 40 years from now,” said Diane Young, director of retirement and goal planning at TD Ameritrade.
Fear can even short-circuit the effectiveness of mutual funds designed to help investors look years ahead.
Target-date funds, for example, gradually shift into more conservative parts of the market as an investor draws closer to needing the money.
But the funds won’t work if investors pull out when returns look ugly.
The declines have led some investors to abandon the long-term strategy that target funds offer. Net new cash inflows into target-date funds that invest in other funds plunged in September to $1.58 billion from $3.37 billion in August, according to the Investment Company Institute, the mutual-fund trade group.