Don't time the market with your retirement

At the end of December 2007, I completed the paperwork to roll over my former employer's 401k into a Scottrade IRA. The transfer completed in the first week of January and I started gradually buying up stock. The markets tanked in January, and my portfolio simply kept bleeding away as I continued to catch the falling knives.

A friend decided to move a chunk of his 401k into a cash fund, because he didn't want to lose money. In doing this, I felt he was trying to time the market. I referred him to various articles explaining the reasoning of staying in the market versus cash. But it was already done, and there was a 60-day waiting period before he could move the cash back into a mutual fund.

While I consider myself a long-term-buy-and-hold investor, I've also been fairly risky with my investments. I know I have a 30+ year time horizon for my retirement portfolio to grow, so I'm pretty heavily overweight on growth stocks and am prepared to ride the roller-coaster of volatility. My friend on the other hand probably had less tolerance for market volatility. His answer to me was "Nobody ever complained about not losing money."

So while my stocks jittered and juked up and down in January and February, my friend maintained a stabler portfolio. In the beginning of March I reminded him that his 60-day waiting period is probably over, and that he should be moving his cash back in. He missed the big rally that started on March 18. My IRA clawed its way out of -10% all the way up to +8% today, all in the span of 5 trading days.

His remark strikes me still, because while surely he didn't lose money, he lost the opportunity to make money. This is where risk aversion can have a detrimental effect on retirement returns. For my time horizon of 30+ years I am eager to see how my growth weighted stocks will perform. Hopefully, they're not all subprime, right?