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May 23, 2022

Why is My Roth IRA Losing Money?

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Are you wondering, “Why is My Roth IRA Losing Money?” You're in luck! While we didn't dig up any extra money to hand out, we did manage to dig up some answers.

Meghan Rabuse, aka the Family Finance Mom, joins me to discuss why your investment accounts might not be growing lately.

With the stock market down lately, it can be scary times for investors, especially if you're just getting started. Meghan breaks down how we can rest easy knowing that this crazy financial time will eventually pass.

Get her take on the state of the stock market and how to stay calm in uncertain times.

Why is My Roth IRA Losing Money?

If you want the answer to the question “Why is My Roth IRA losing money?”, you have to understand a bit about the stock market. The market moves in a cycle.

That means there are times when the market is up and times when the market is down. Though if you've only heard the investing hype, this might come as a shock.

When people shout about the benefits of investing, they often point out how investors enjoy 9-10% returns. That's true, but there's a lot of fine print. Because the market moves in a cycle, you shouldn't expect 9-10% every year. Some years, the markets may earn a lot more than that. Other years, it could be a lot less.

Understanding Market Averages

Meghan says that investors need to understand those 9% or 10% numbers are averages over the long run. That's the kind of average growth you see over decades, not months or even years. So depending on when you started investing, you might only be up a few dollars in your portfolio. And if you invested at the start of the market downturn, you could actually have less money in your Roth IRA than when you started.

Fear not, though! That is what is called paper losses. You haven't actually lost any money in your portfolio. Your portfolio is still holding the same number of shares. They're just valued at less right now.

Meghan says that the only way to truly suffer a loss in a market downturn is to sell. If you don't sell, you see the loss on paper (or on your computer or phone screen), but you won't actually take a hit financially.

Stay Put When Others Sell

So you're probably wondering how you actually get to see that growth that investors talk about. Meghan says the trick is to stay put. She says that it's really hard to keep investing when you see people running for the exits. But that long term growth only happens over an extended period of time. That's why it's important to keep your money in the market whether it's up or down–and continue investing more if you can!

If you're struggling with adding to your investments when you see a lot of red in the market, Meghan says that you can tell yourself your favorite investment is finally on sale. Just like you might eagerly scoop up a bunch of purchases during a semiannual sale online or at the mall, you can treat the stock market the same way.

Don't Try to Time the Market

Of course, some people will always try to time the market. But that's a fool's errand. Meghan says that timing the market requires you to be right not just once, but twice.

In order to successfully time the market, you have to both accurately predict the top and the bottom. That's so highly unlikely. In fact, Meghan says that most professional money managers can't even do it. Something like 75% of professional money managers can't beat the market in the long run.

Index (Not Netflix) and Chill

So if the pros can't beat the market, what does that mean for you? Meghan says you want to find yourself a low fee index fund and let time do the work. By investing in an index fund that mirrors the S&P 500 or something similar, you invest in slices of hundreds of companies. While that doesn't spare you from dives in the market, it can help those dives be a lot less painful.

Not sure what that means? Let's take Netflix as an example. When some people hear about investing, they consider going all in on their favorite stock. If you did that with Netflix recently, you might have seen the stock fall 35% in a single day. Ouch. But it wasn't just one bad day for Netflix; Netflix is down 60% for the year. And if you went all in on that stock, that means your portfolio would reflect those losses as well.

Consider More Diversification

That's why it's so important to diversify. Diversification is built into index funds because your money is spread out across hundreds of companies.

If you want to diversify more, you can also look at investing in different things. Meghan says that investors often use stocks, bonds, commodities, or even investments in other geographies as a means to balance and diversify their portfolios.

By investing more broadly, you have exposure to different risk profiles and economies that behave differently at different times. In theory, then, that means when one asset class is down, another might be performing better. Diversification is a way to smooth out or soften the impact on your portfolio during times when the market isn't stable.

Keep More Money in Your Roth IRA

Now that you know more about typical market behavior (slumps are normal!), there's one other thing worth assessing. Are you the reason your Roth IRA is losing money?

There's only so much we can do to guard against market downturns and inflation. But there's a lot you can do in terms of managing your Roth IRA better.

The beauty of a Roth IRA is it is an account you manage. After all, that's why it's called an individual retirement account. You control where you open your account, and you control what investments you hold inside it. That's very different from a 401k or 403b, where you have to pick from sometimes very limited choices that your employer offers.

To start, you want to make sure you're using a platform like M1 Finance. That way, you have access to a lot of options and you can dodge a lot of fees. If your IRA is actively managed with a broker that charges high fees, you could really see your balance take a nosedive. In a market like the one we are in today, losing 1, 2, or even 3% to management and account fees on top of a down market means your Roth IRA could really be losing money!

After you open your account, you also want to make sure you invest your money. Meghan and so many other money nerds recommend index funds–and for good reasons! But you can invest your money however you see fit.

The trick is to make sure you actually invest. Many times, people open Roth IRAs and never tell their money where to go once it is in the account. If you leave your money in a money market account or settlement fund, that's no different than stuffing your money under your mattress. It'll be there but it isn't going to grow.

Final Thoughts on Why Is My Roth IRA Losing Money?

If you want to make sure you see growth in your Roth IRA, make sure you do these four things:

  1. Invest for the long run
  2. Diversify your investments
  3. Look out for high fees
  4. Double check that your money is actually invested

It's true that no one knows what the market will do next. But we can look at the historical performance to see that ups and downs are perfectly normal. While it definitely won't be the most exciting part of your financial journey, investing consistently no matter how the market is performing should help you grow your wealth in the long run. That perspective should help you rest–and invest!–easier.


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Guest Bio – Meghan Rabuse

Meghan spent nearly a decade as a Financial Analyst, before spending the last 7+ as a SAHM to three little ones.

She shares simple money tips for moms to help their family reach their financial goals by building a financial plan they can LIVE with!

Resources – Meghan Rabuse

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Carpe Diem Quote

You may encounter many defeats, but you must not be defeated. In fact, it may be necessary to encounter the defeats, so you can know who you are, what you can rise from, how you can still come out of it.

 Maya Angelou

Are you wondering “why is my Roth IRA losing money”?  What do you think of the advice from Meghan Rabuse?

Please let me know in the comments below.

Andy Hill

Andy Hill, AFC® is the award-winning family finance coach behind Marriage Kids and Money - a platform dedicated to helping families build wealth and happiness. With millions of podcast downloads and video views, Andy’s message of family financial empowerment has resonated with listeners, readers and viewers across the world. When he's not "talking money", Andy enjoys being a Soccer Dad, singing karaoke with his wife and relaxing on his hammock.

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