Many households possess Individual Retirement Account (IRA) accounts to save for retirement through various channels such as investment professionals, brokerage firms, banks and mutual fund companies. Your money in an IRA typically won’t be taxed until you withdraw it later on.
During times of market instability, your IRA balance may experience fluctuations that cause its value to drop; but this should not necessarily be seen as bad news.
Diversify your IRA portfolio
While no investment can guarantee against loss, retirement accounts like Roth IRAs and traditional IRAs offer individuals greater control of their investments than workplace retirement plans such as 401(k). One effective strategy to reduce risk exposure is diversification.
Diversification can help protect against unsystematic risk by lessening the impact of one poor-performing investment. For instance, consider investing in two businesses that produce different products; both are currently expanding well; yet if demand for organic baby food decreases while interest in biking increases rapidly, one business’s profits could suddenly suffer significantly.
Diversifying your IRA can be accomplished easily and affordably by purchasing a mutual fund or ETF (exchange-traded fund), which invests in various stocks, bonds, real estate properties, international securities and more. You could also work with a robo-advisor to tailor an individual portfolio based on your investment objectives and risk tolerance – either way be sure that fees don’t eat into your returns too quickly!
Invest in suitable investments
IRAs allow investors to diversify their portfolio with stocks, mutual funds, ETFs and other investment products tax-deferred until withdrawal is required in retirement.
Asset allocation is vitally important for long-term returns and can account for as much as 90% of your investment performance. But sometimes even with proper allocation, market fluctuations can undermine its success.
As your retirement date nears, it may make sense to switch some of your IRA assets from stocks to bonds or more secure investments in order to generate interest while protecting it against market downturns. By doing this, your money may still earn interest while at the same time keeping its value more secure than with stocks alone.
Rebalance your portfolio regularly
Your investment portfolio should ideally include investments from different asset classes – stocks, bonds, cash, real estate and precious metals among them – to help mitigate risk and avoid major fluctuations wreaking havoc with it all at once. Doing this helps spread out risk across a range of areas while protecting it against being derailed by any one event that might otherwise threaten it all at once.
Rebalancing is one of the best ways to help your IRA grow, which entails selling off high-performing investments and investing new money into underperforming ones. Rebalancing can either be done manually or using an automated robo-advisor service which automatically rebalances it for you.
Additionally, it’s also crucial to think carefully about your time horizon when making financial decisions. As retirement draws nearer, your IRA may need to shift focus from growing assets towards protecting it; this can be accomplished either through realigning asset allocations or switching into an annuity that protects against market fluctuations.
Monitor your account carefully
Your IRA value will fluctuate depending on the value of its holdings – such as stocks, bonds, mutual funds or exchange-traded funds – as well as your decision to sell any investments for more than you paid for them.
Taxes will usually only apply when withdrawing funds from an IRA at retirement. IRAs were created specifically to provide tax benefits for future retirees.
As with any investment account, an IRA is subject to market risk; by diversifying your portfolio and using dollar-cost averaging to reduce this impact on growth. But keep in mind that required minimum distributions (RMDs) must begin taking place at certain ages which could impede its long-term growth potential – so consult a financial advisor if in doubt about what actions to take.