Investing can be a double-edge sword if not approached properly. As much as it can offer potential profits, your investment portfolio is also susceptible to the daily ups and downs of the financial markets. Losses can add up and your retirement may seem further away from your grasp. Choosing safer investment options, like a Roth IRA, can protect your capital from risk and volatility. Read more on how to invest profitably in an Individual Retirement Account for the absolute novice.
Divide Your Assets Strategically
Understand the phrase “asset allocation” as this will come up a lot in the paperwork. Although it sounds complicated, asset allocation simply denotes how your cash is distributed among different investment choices. From a big picture view, this encompasses stocks, bonds, and cash investments. Going into specifics, this has to do with large capitalization companies, corporate bonds, municipal bonds, and so forth.
If you allocate $20,000 in your IRA and it’s distributed evenly into stocks and bonds, then your asset allocation is 50/50. The higher amount you allocate on stocks and similar assets that are considered to be relatively higher risk, the greater potential ROIs to be reaped from the account. However, keep in mind that it also entails a higher degree of risk as opposed to an IRA account that is primarily invested in bonds.
Choose Where to Invest
There are many options, the most common of which include mutual funds, index funds, and ETFs. The latter is considered to be a low-cost means to track specific indexes, such as the S&P 500. Buying into a fund means you’re buying a curated selection of investments rather than just shares in one company. For example, investing in the Russell 1000 index fund means you’re buying into 1,000 companies listed in the U.S. equity markets.
As a general rule of thumb, you’ll want to invest more of the equity component of your portfolio to the larger asset categories, such as large capitalization companies and developed markets. Small and mid-sized company stocks and emerging markets should only come secondary unless it fits your strategy.
Capitalize on Tax Advantages
A practical way to capitalize on the tax benefits of your account is to load it with the right assets. Any stock that increases in value over time will generate higher ROI for your account compared to a taxable ITA, or individual trading account. Nonetheless, dividend-paying stocks are the key to really harness the compounding potential of an IRA. If shares in a stock you’re holding via an IRA pay dividends, no taxes are accrued and you are allowed to reinvest the entire amount to add more shares. While the difference may seem infinitesimal, you want to stretch every dollar in your investment portfolio to maximize your retirement nest.
Investing in an IRA or in any asset for that matter should not be overwhelming to the regular Joe and Jane. Be a proactive investor and learn more about the pros and cons of each asset, how to minimize risk, and how to avoid overhead fees.