IRAs can be invaluable tools for retirement savings, yet they can quickly lose value if not properly managed. Therefore, it is vital that you understand their risks and strategies to prevent losses in an IRA account.
An Individual Retirement Account, or IRA, allows you to invest almost anything, from cash accounts such as saving accounts and bank CDs to riskier investments like mutual funds and ETFs. Your investment mix depends on both your goals and risk tolerance.
Diversification
Diversification is one of the key strategies for protecting yourself against market fluctuations. While it does not guarantee profits or prevent losses, diversifying can help mitigate its negative impact. You can diversify your IRA portfolio by investing across various assets or industries or use low-fee funds like index funds to monitor the entire market through one fund.
When selecting investments for your IRA, take your risk tolerance and time horizon into account. If you are young professional with decades of savings ahead, taking on more risk to attain higher returns may feel more appealing to you.
For investors with shorter investment horizons, taking a more conservative approach that prioritizes protecting your savings might be most appropriate. You could consider target date or asset allocation funds that manage the composition of your IRA portfolio while selecting and altering its asset mix as you near retirement.
Rebalancing
Roth, SEP and traditional IRAs are designed to hold long-term retirement savings assets. Over time, your balance may rise and fall as the values of securities held within fluctuate. When one of your holdings falls below its targeted investment allocation value, that indicates it’s time to rebalance.
Rebalancing is designed to align your portfolio with your risk tolerance and goals, such as exposure to market declines prior to or early in retirement. For instance, having too much equity exposure leaves you exposed should the market experience a correction during retirement.
However, rebalancing can cost you money in transaction fees and (for those holding taxable accounts) capital gains taxes. Therefore it is vital to develop a strategy with your advisor in order to manage this process effectively and minimise associated costs. Furthermore it would be prudent to determine what accounts would best fit into your tax situation, such as whether tax-advantaged accounts would help lower rebalancing costs more easily; also try dollar cost averaging when adding investments into IRAs so as to minimize impact from volatile markets on portfolio returns over time.
Asset allocation
An effective investment portfolio that is well-diversified can reduce the effects of losses in any single asset class or economic sector, known as asset allocation. The goal is to strike a balance between risk and return over time by selecting stocks, bonds and money market securities that match up with your financial goals, risk tolerance and time horizon.
An effective asset allocation strategy also takes tax efficiency into account, with foreign equities often better placed in taxable accounts rather than an IRA due to ongoing withholding tax issues.
Over time, even the most carefully constructed portfolios can become unbalanced over time, necessitating regular rebalancing in order to remain aligned with your financial goals and risk tolerance. Rebalancing involves selling investments from overweighted asset categories while purchasing ones underweighted ones until your overall exposure range is equalized again. There are various methods available; consult your financial professional on which best applies in your situation.
Taxes
IRAs (Traditional, Roth and SEP) are tax-advantaged personal retirement accounts that offer tax savings when saving for retirement. You can invest your IRA with stocks, bonds, mutual funds, exchange-traded funds or real estate as an asset class – however as markets fluctuate you may find that its value fluctuates as well.
Not necessarily. IRAs enable diversification, so having assets spread throughout different sectors gives you more chances to reap gains when one area experiences decline.
But you must remember that IRAs are intended as long-term retirement savings accounts and that withdrawing any money before age 59 1/2 incurs an extra 10% penalty on top of normal taxes you owe. If your IRA is losing money, there are steps you can take to help stop it; choose investments wisely and create an overall strategy for growth and preservation.
