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I am interested in starting a Roth sometime in the near future, but I'm worried about an economic downturn like 2008 eating up a lot of my savings at some point in my life. Did most mutual funds take big hits in 2008? Could someone provide some data of mutual funds that did/did not take big hits during 2008? Or how do I find this data myself?

I am 24, less than a year at my first job. I am in the 15% tax bracket. I have a fairly low risk tolerance for my retirement funds.

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    Don't forget that most of those funds regained their value in 2009. If you left your money in after the crash it wasn't that big of a deal. Dec 18 '13 at 18:55
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    2009 was up 26%, not nearly enough to break even to 2008. In fact, the two years combined ended down 20%, which for a risk averse investor is more than a big deal. Dec 18 '13 at 21:29
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    @JoeTaxpayer - you're right, it took more than a year to regain the prior value. I guess my point was that after the crash had happened was the wrong time to panic and adjust, but I didn't make it very well. Dec 18 '13 at 22:47
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In 2008, the S&P was down 37%. I love charts that show sector performance by year, as it helps show that 2008 wasn't like the crash of 2000-01 which was more tech-centric.

Funds that were more geared towards bonds would have been up as the 10 year Treasury was up 20%.

I understand you have a low risk tolerance. Over the long term, this will cost you. The CAGR for the S&P from 1928-2011 was 9.23%, for treasuries, 5.14%. This difference adds up dramatically over time. These rates double your stock investments every 8 years on average vs nearly 14 years for bonds.

See the MoneyChimp site to tinker with start/finish years to understand long term returns.

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  • So even though being more in stocks (relatively higher risk) would have been much worse for 2008, it would have been much better over a long term period even after 2008 (for someone who had been in a fund for 15-20 years)? Also I found this article which states the best mutual fund of 2008 was -28% (State Farm Growth Fund STFGX).
    – Adam Johns
    Dec 18 '13 at 16:18
  • @AdamJohns - I added a link to a great site, MoneyChimp. And you are right, stock funds were down, but bond funds were positive. Dec 18 '13 at 16:35
  • How easily/quickly can you move your investment strategy from stocks over to bonds (in a typical roth) if you become fearful of an impending crash like 2008? For example if in 2007 I predicted a 2008 crash, could I quickly shift everything over to bonds and come out on top for 2008, then shift back over to stocks after the crash?
    – Adam Johns
    Dec 18 '13 at 16:54
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    You really need to be careful about moving your money in anticipation of a downturn in the market. You can hurt yourself just as bad about being wrong about timing on getting out as getting in. Also, if you get out it is very difficult to decide when to jump back in. Pick investments you believe have a good long term outlook and try not to stress about short term market moves.
    – JohnFx
    Dec 18 '13 at 20:08
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I will solely address your fear because from what I read you fear investing in something that could possibly go down in the future. This is almost identical to market timing, so let's use the SPY as an example. Look at the SPY on Yahoo Finance, specifically in 2011. The market experienced a little bit of a pull back during the year, and some "analysts" claimed that it would fall below 600 (read this). In fact, a co-worker of mine said that he feared buying the S&P 500 in 2011 (as well as in 2010), so he bought gold (compare the two from 2011 to now - to put it bluntly he experienced 50% less gain than I did).

Did the S&P 500 ever fall below 600 in that timeframe, or according to the linked analyst (there were plenty of similar predictions then)? No. If you avoid doing something because you're afraid it could drop, technically, you should be just as afraid of it rising (Fear of Losing Everything, FOLE, vs. Fear of Missing Out, FOMO - both are real). That's not to say invest out of fear, but that fear cuts both ways, and generally, we only look at it from one side.

Retirement investing should be a boring, automated process where, ideally, we don't try and time the market (though some will try, and like in 2011, fail). If you can't help your fear, you can always approach retirement investing with automated re-balancing where you hold some money in "less risky" forms and others in "higher risk" forms and automate a rebalance every month or quarter.

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The literal answer to your question is that a number of different types of mutual funds did not have significant downturns in 2008. Money Market Funds are intended to always preserve capital. VMMXX made 2.77% in 2008. It was a major scandal broke the buck, that its holders took a 3% loss.

Inverse funds, which go up when the market goes down, obviously did well that year (RYARX), but if you have a low risk tolerance, that's obviously not what you're looking for. (and they have other problems as well when held long-term)

But you're a 24-year-old talking about your retirement funds, you should have a much longer time horizon, at least 30 years. Over a period that long, stocks have never had negative real (inflation-adjusted) returns, dating back at least to the civil war. If you look at the charts here or here, you can see that despite the risk in any individual year, as the period grows longer, the average return for the period gets tighter and tighter. If you look at the second graph here, you see that 2011 was the first time since the civil war that the trailing 30-year return on t-bills exceeded that for stocks, and 1981-2011 was period that saw bond yields drop almost continuously, leading to steady rise in bond prices.

Although past performance is no guarantee of future results, everything we've seen historically suggests that the risk of a broad stock-market portfolio held for 30 years is not that large, and it should make up the bulk of your holdings. For example, Vanguard's Target retirement 2055 fund is 90% in stocks (US + international), and only 10% in bonds.

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