Pay Dirt is Slate’s money advice column. Have a question? Send it to Kristin and Ilyce here. (It’s anonymous!)
Dear Pay Dirt,
I made a colossal mistake concerning my retirement.
When I started working full-time at 18, I got a great benefits package, including the option to invest in a simple IRA. In addition to the 3 percent employer match, I’ve been making additional contributions, trying to increase my percentage a bit whenever possible, currently at 21 percent.
The advice I’d always been given is that novice investors should never try to play the market, no attempts to buy low/sell high or pick additional stocks, and that seemed very sound, as I have no experience in the field, so I just kept my hands off and assumed that the fund manager was doing whatever needed to be done.
Fast forward 20 years. Late this past February, I needed to visit a branch of the bank that holds the IRA on another matter. The manager I spoke with there accessed my account, did a double-take, and said something that made my blood run cold.
Bank Manager: “What’s all this money doing sitting as cash?”
Me: “It’s doing what???”
Yep. Apparently my strategy was too hands-off, there was no automatic investment into safe index funds as I assumed was happening, you have to actively put IRA money somewhere. So there’s two decades of potential compound interest down the drain.
My instinct was to correct that immediately, but on the advice of a friend, because of the political turmoil, I figured it couldn’t make much difference to wait another couple months. I should have acted then, because the market’s only trended up, although…who knows for how much longer, because of course there’s still political turmoil.
I’ve now got $130,000 I need to do something with— just planning to go with my bank’s S&P index—but since I’m investing that big a chunk all at once as opposed to just a monthly contribution, buying when the market is strong seems like a bad idea. But at what point is that disadvantage outweighed by just starting to earn interest sooner? I don’t want to make another mistake.
—IRA Indecision
Dear IRA Indecision,
I understand why you’re terrified. You just discovered you lost 20 years of compound growth, and now you’re paralyzed by the fear of making another devastating mistake. The thought of investing $130,000 all at once, when the market “feels high,” makes it seem like you’re just going to lose it all in a crash. That fear is understandable—but it’s also leading you astray.
Here’s what you need to hear: The biggest mistake is waiting for the perfect moment to invest.
You’re trying to time the market, which is exactly what you were warned against as a novice investor. You already tried this strategy in February—you waited because of “political turmoil”—and the market went up. You lost money by sitting on the sidelines. There will always be reasons to wait: political uncertainty, inflation fears, international conflict, election years, blue moons, or even a bad Tarot card pull.
What you have to remember is that the stock market is a long-term investment. You invest because you believe that the economy will be bigger and better in the future than it is today. There’s never been a losing 20-year period. Stocks go up and down every day, which is why investing in index funds (a diversified basket of stocks that is designed to move with the market) is so popular.
Yes, the market has been exceptionally strong over the past few years. But, that doesn’t mean it will collapse tomorrow. There will be downturns, sure, but no one knows when the downturn will happen, or when the market will recover and go even higher. While dollar-cost averaging works, so does lump sum investing. The point is, every day you wait is a day you’re not earning returns.
I know the fear of buying before a crash is visceral. If you absolutely cannot bring yourself to invest it all at once, split it into four monthly chunks and invest $32,500 each month for four months. But start this month. Don’t wait for some perfect moment that will never come.
The real risk isn’t investing when the market is high. The real risk is letting fear keep your money sitting in cash—again—while you wait for certainty that doesn’t exist.
—Ilyce
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