I am interested in opening an IRA account for retirement but have been holding off due to the current swings of the market. I don't want to put say $3000 in an IRA account this year and then loss on the investment the following year if the market crashes. What are the chances of losing a significant amount, or are there safeguards to prevent this?

  • 1
    @D Stanley wrote a spot-on answer. Here's a piece of advice that comes from 40+ years of investing. If you have it, add more money when you feel the worst about the market (see this March when the it was down 35%). You might buy at the low if you're lucky but more than likely, you'll just get discounted sale items at various prices. Human nature tends to wait until it looks safe out there which means after the market has recovered and you're paying more (note the 50% market rally since the March lows). Fear isn't an easy emotion to conquer but in this regard, it will serve you well if you do – Bob Baerker Jun 5 '20 at 19:13

What are the chances of losing a significant amount, or are there safeguards to prevent this?

It depends on what you invest in. The riskier your investments, the larger your chance of loss. On the other hand, the larger your chance of gains as well. So you might also miss out on a year of gains if you wait.

Your choice of investment in the biggest safeguard that you can use. If you can't afford a loss or don't want to incur a loss (psychologically) then you can invest in lower-risk markets like bonds, but the gain from lower-risk investments over long periods is much lower than you'll get in riskier equity markets. Sure, there are things like put options (which have upfront costs) and inverse ETFs to limit losses, but downside protection comes at a cost - either an upfront cost like option premiums or at the expense of reduces profits. You can also employ strategies like stop-loss orders that can force a sale after a drop, but then the question is when to get back in? If you don't get back in at a lower level than when you got out then it accomplishes nothing.

That said, how long do you have until you retire? If you're not going to retire for 30 years, then what happens in the next year is not that relevant, especially if you are going to continue investing in your IRA going forward. If this is the only investment you ever make, then yes you're taking a risk, but you also don't know if the market will continue the rally that it's been on.

The timing of your initial investment is not nearly as important as the discipline to keep saving.

  • The one thing that I'd add is that for those who are risk averse, low/no cost long stock option collars can keep you in the game when the market tanks and a 35% drop like we experienced in March won't faze you. As you noted, the cost with a collar is an opportunity cost since profits are capped. – Bob Baerker Jun 5 '20 at 19:12

One big feature that retirement funds have is that you can change not only how you invest new dollars, but you can also change how you invest the money already in your account, without worrying about taxes.

You have a deadline for IRA investments coming in mid July. (Hint don't wait until the last day to open and fund the account, they can get swamped.) Decide how much, and which fund you want to invest in. It has been suggested you want to start in a less risky bond index fund, so you might want to do that. The key for you now is to get started before the 2010 IRA fund season ends.

Then next year (by mid April which is the regular deadline) either put new money in that same fund or put some or all of it into stock index fund. Then over the years you can either add a few more funds such as an international fund. Each year you can divide the new money or not. You can also decide to sell some or all of a fund and redistribute the funds. This selling and then reinvesting of funds could be taxable in a non-retirement fund, but not in a retirement fund.

Yes the market can have have bad years. There is also a feeling that if you invest in the wrong thing you can lose everything. But with a broad diversification that a mix of index funds gives them, investors can minimize the risk. Younger people can afford to be more risky, and people nearing retirement or in retirement may want to be less risky, but you have to see retirement investing as a very long game.

  • YM 2019. Assuming OP had compensation in 2019 -- they didn't say, and thinking about an IRA now could be for money earned now. – dave_thompson_085 Jun 7 '20 at 4:42

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.