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 Wall Street is treacherous. Investors who only take in the scary view of the moment might face the more frightening prospect years from now of having saved too little.
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. Dumping stocks and rolling money into cash or bonds might feel good — even wise — but those who are years away from needing their savings should consider the ramifications of their moves.
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.
But the punishing market has made it hard to imagine a recovery. The Dow Jones Wilshire 5000 Composite Index, which reflects nearly all stocks traded in America, lost a quarter of its value in September and October. That’s a paper loss of $4 trillion.
“There’s just been no place to hide. Diversification has just not helped you much,” said Greg Carlson, an analyst at fund-tracker Morningstar Inc.
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 Corp., half cited economic woes for their decision.
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 such as the Standard and 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 one in four 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.
“I don’t think people understand what their risk tolerance is until it’s tested,” she said.
Fear can even short-circuit the effectiveness of funds designed to help investors look years ahead. Target-date funds, for example, gradually shift into more conservative parts of the market as in investor draws closer to needing the money. But the funds won’t work if investors pull out when returns look ugly.
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