The Gift of Roth

And a gift of knowledge

By Kaye A. Thomas
Posted December 23, 2008

Accounting for Active Traders

Schedule D made easy

The important thing isn't the money, or even the investment.

Last year I shared with readers here a gift idea I've been using with my daughters. They're young adults who should be getting in the habit of saving for retirement and other goals, and to help them along I made gifts of cash for the express purpose of starting, and then adding to, a Roth IRA. The main benefit I hope they'll get from the gift is not the money or the investment, but rather the transmission of a personal value about the importance of saving. Along the way, I try to impart some basic principles of investing in short letters that accompany the gifts. Here is this year's letter:

Something Different This Year

You’re giving me something different?

Yes and no. Once again you’ll get a contribution to your Roth IRA, but this time it comes with especially good news.

Such as?

I’ll give you a hint. It has to do with your investments.

They went up?

You wish! No, even better news than that.

So tell me already!

They went down. Quite a bit, in fact. More than 30% from where they were this time last year.

Ha, ha, that’s really good news.

It really is. You just don’t realize it yet.

I sense one of your fascinating explanations coming on.

Well, okay, since you asked. First of all, it doesn’t matter at all that your previous investments have gone down, because these are long-term savings and they’ll recover all that value and then some long before you tap into this account.

How do I know it won’t just keep going down?

For a while it may. There’s no way to know what the stock market will do next. We have over 100 years of history, though, in which it has always recovered from losses and gone on to new heights.

Okay, but even if the market decline doesn’t end up hurting me, how can it possibly be good news?

Because you have a rare opportunity right now to invest more money in the stock market while prices are far lower than they were in the recent past.

Are you kidding? I was thinking I should pull my money out until this storm blows over.

Lots of people are thinking that way. That’s one reason the stock market has gone down so much—and why this is such a great time to invest more.

I don’t get it. If everyone else is pulling out of the stock market, how can they all be wrong?

That’s just the way it works. Think of a stock chart with high peaks and deep valleys. What’s the absolute worst time to invest?

At the top of one of the peaks.

Right! You'd be buying at the highest prices. And how do you think people felt about stocks at the peak?

Um . . .

I’ll tell you: they felt great. The market was up so much that they couldn’t get enough of it. All that excitement about stocks is part of what created the peak. We never know in advance when the stock market is going to start to fall, but the time to be nervous is when everyone else is bubbling with enthusiasm.

And the valleys are just the opposite?

You bet. The stock market falls, people get discouraged and bail out, and that makes it fall even more. The best possible time to buy is when people are filled with gloom, because that’s when prices are lowest. Warren Buffett, the world’s greatest investor, summed it up nicely: Be fearful when others are greedy, and greedy when others are fearful.

So this is one of those valleys.

Yeah, not necessarily the lowest point, mind you, and it could take a while before the market starts to climb again. But this is a good time for a young person like you to be putting money in the market, provided that you have the patience to leave it there for a long time. Years from now you’ll be pleased with the results. In fact, you’ll probably wish you could go back in time and invest more money at today’s stock prices.

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