As devastating as it is to see that your individual retirement account (IRA) is losing money, there are ways you can reduce this IRA loss and make things more manageable.
IRAs allow investors to diversify their portfolio with ease; however, this doesn’t make them risk-free; the stock market decline has already taken trillions out of retirement savings in America.
Open an IRA
An individual retirement account (IRA), also known as an Individual Retirement Account, allows you to save for your future tax-free. There are various kinds of IRAs you can open; traditional, SEP IRA (for self-employed), SIMPLE IRA plan (small businesses offering employee contributions) or even spousal IRAs are all great investment vehicles and can hold stocks, bonds, mutual funds and exchange-traded funds among many other investments.
Investing in an IRA can be risky, and market dips may temporarily cause your balance to decline. But you can avoid losing money by diversifying your portfolio, rebalancing regularly, and keeping invested for the long haul. If you’re just years away from retirement, waiting out bad economies rather than withdrawing early could save early withdrawal penalties; when things improve again you will see losses turn into gains when the economy recovers; the long-term benefits of investing far outweigh short-term volatility of market dips.
Diversify your portfolio
As markets fluctuate, your IRA could experience losses as the stock market becomes less predictable and stable. But you could ease any discomfort by diversifying your portfolio.
Diversification is the cornerstone of success when it comes to protecting an IRA against losses caused by one investment’s failure or market fluctuations. A well-diversified portfolio should consist of stocks, bonds and real estate investments to avoid such catastrophic scenarios.
Diversified portfolios consist of asset classes that are uncorrelated, such as stocks, bonds, real estate investments (such as rental properties or REITs) and company size/location diversification. Aim to avoid holding large amounts in any one company or industry by diversifying between small, medium and large firms from various industries and invest in bonds from various issuers/geographies to further diversify your portfolio.
Rebalance your portfolio
Over time, it can be easy for your investment portfolio to become unbalanced. Although your original target asset allocation, such as 80% stocks and 20% bonds may have seemed suitable at first, its mix may change substantially over time – potentially taking you far off track from your goal.
Rebalancing is the practice of realigning your portfolio to its intended asset allocation. This can be accomplished either by selling off high-performing investments and reallocating their gains, or investing extra funds in underperforming assets.
Rebalancing is crucial to meeting your investing goals and risk tolerance. Rebalancing prevents you from making emotionally driven decisions during volatile markets; for example, selling off stocks when the market declines can potentially leave you without potential gains later. Longer-term returns tend to be higher when your IRA contains more stocks than bonds; yet keeping some bonds will help balance out overall risk in your portfolio.
Wait out the bad economy
As economic conditions deteriorate, your IRA could experience losses. That is why it is crucial to diversify your portfolio by investing in multiple assets.
Be wary of high fees when investing. High fees from traditional brokerage, robo-advisor or mutual fund platforms can quickly diminish your IRA balance, leading to less investment for you in the end.
Also worth remembering: it is wise to visit the entity that holds your IRA and speak with their representative regarding what fees you are being charged – custodial fees or management fees could be eating into your returns!
There was once a tax loophole whereby you could cash out IRAs with losses and deduct them on your taxes, but this practice has since been shut down in 2018.