Saving and investing for retirement should be at the top of your financial priorities, and an IRA is an effective tool for reaching that goal.
IRAs can hold various assets, from CDs and Money Market Accounts to stocks and bonds – which often fluctuate in value over time. All investments within an IRA may experience fluctuations, which is perfectly normal.
1. You’re Under-Invested
An investment portfolio that is strategically diverse is key to long-term investing success, and IRA accounts offer an array of investments such as stocks, mutual funds, exchange-traded funds (ETFs), individual bonds, real estate and precious metals.
Stocks are among the most popular IRA investments due to their potential to grow rapidly over time through compound interest. They should always be combined with more stable investments like bonds that reduce risk while providing steady income streams.
Investors need to understand what kind of risk they’re taking and how best to diversify their portfolios. Some investments such as cryptocurrency trading and rental real estate carry higher levels of risk compared to stocks and bonds.
Vanguard recently conducted a survey that revealed 28% of investors who converted from employer-sponsored retirement plans left their funds in cash following the rollover, potentially costing Americans billions each year in retirement wealth loss.
2. You’re Not Diversified
Most investors understand they need to diversify their portfolios, and much ink has been spilled on this subject. Diversification is central to an effective investment strategy; particularly important when used within retirement accounts such as IRAs and 401(k).
An Individual Retirement Account or 401(k) account allows you to invest your money in stocks, bonds, mutual funds and exchange-traded funds (ETFs). As these investments fluctuate in value over time, their effect can wreak havoc with your balance in an IRA account.
If your IRA is losing money, it may be because its diversification is inadequate. When speaking of diversification, one should think beyond investing in stocks versus bonds: diversifying across industries or sectors may also help. For instance, adding positions in technology or media companies can protect your portfolio against negative changes to one of those industries, as can geographical diversification.
3. You’re Taking Too Much Risk
Watching your IRA balance decline is unnerving, but it’s important to remember that losses you experience are temporary. Provided your investment account features appropriate asset allocation and low fees, stocks will significantly boost the growth of your money over time – hence their prominence within an IRA account. In contrast, bonds provide steady income streams while helping mitigate their equities counterpart’s volatility.
High investment fees can eat away at your returns when markets decline. An online fee analyzer can be useful when switching over from your workplace retirement account into an IRA in order to find lower-cost funds.
As you approach retirement age, it may make sense to move more of your IRA assets into safe investments such as corporate and government bonds; inflation tends to push interest rates up over time which provides an effective return. With a Self-Directed IRA you may also invest in private loans which pay out a steady and predictable stream of income according to borrower terms.
4. You’re Taking Too Little Risk
An Individual Retirement Account, or IRA, allows you to invest money toward your retirement with greater freedom than employer-sponsored retirement plans like 401(k). An IRA gives you the power to select from various investments such as stocks, bonds, mutual funds, ETFs, property and more for maximum control and flexibility in investing for retirement.
Dependent upon your goals and investment timeline, depending on which your desired return lies you may need to take more or less risk in order to achieve it – this is known as your risk tolerance.
As an effective way of testing how much risk you can stomach, imagine a market decline and ask yourself whether or not you could stay calm if things went south.
If it has been more than one year since you last invested in your IRA, now may be the time to begin doing so. A little research will help you discover an investment strategy tailored specifically to your needs and goals; investing long term will also give you greater purchasing power when withdrawing retirement funds later on.
