So you have decided to invest in an IRA. Congratulations! This is a big step towards having a comfortable retirement. However, opening up an IRA is the easy part; now you need to know how to invest in it so that you are able to make the most out of it.
How to Invest in an IRA
Whether you have a Roth IRA or a traditional IRA, you need to know how to invest in it. With an IRA, you have access to a larger selection of options with regard to investment options. Knowing what an IRA is and how to invest in it will be very beneficial to you.
IRAs are great if you are self-employed or your company does not offer a 401k. You can use this as your retirement savings. Even if you have a 401k it’s a good idea to have additional retirement savings. This will help you to be prepared for retirement and make sure that you will be able to live a good, comfortable life when you no longer work for a living.
Assess Your Risk Tolerance
The first thing you are going to have to do is assess your risk tolerance. This will allow you to know where you should be investing your money to get the best returns. Age is probably the biggest factor when it comes to risk tolerance. The younger you are the riskier, you are allowed to be.
A common rule that you can use to discover how to invest your money is to take your age and subtract it from 100. (You use 110 if you want to be a bit riskier.) So if you are 20 years old you can invest 80% to 90% into stocks and 20% to 10% in bonds.
As you age, your risk tolerance will decrease because you need something a little more stable. If the market takes a dip when you are younger, you will have more time to recover as opposed to when you are older.
If you already have most of your retirement savings in a 401k that is fairly stable and conservative, you could use your IRA to be a little riskier. It will give a little bit more freedom to be adventurous. Just remember to not do anything too; adventurous, you still need to make directions with some research under your belt.
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Don’t Neglect Mutual Funds
There are a lot of people out there who ignore mutual funds in favor of stocks and bonds. However, this is not the best strategy. You should actually want to have a good base of mutual funds because it creates diversity in your portfolio.
Mutual funds are great because you are essentially buying a group of different investments rather than pouring all your money into one stock. It is easier to get better results from your portfolio in this way because the money is being invested for you.
You can still invest in individual stocks, but if all your investments are placed there, it might be too risky. Even though you can get a better return on investment with individual stocks, it takes a lot of time and research to get it right. If you have that time then by all means go for it, but for the average person who does not have the resources to do this, adding in some mutual funds will be beneficial.
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Rebalance Your Investments
As you get older, you will have to reassess your investments and change the balance of stocks to bonds. Leaving your investments as is for the rest of your life is a big mistake because you put yourself at more risk if the market does take a dip.
You will also need to take into account any increases in income. The more money you make, the more money you should invest and save for retirement. You don’t want to have to lower your standard of living because you don’t have enough in your retirement accounts.
Make sure that you are always investing an appropriate amount for your salary. It is better to save and invest more than to continuously increase your standard of living if you do not need to.
Get Some Professional Help
Sometimes it is better to just hire a professional rather than going at it on your own. Whether you have no clue what is going on with investing, or you just can’t be bothered to pick your own investments, getting a professional to help you is what you need.
You can do this by calling up your brokerage and asking for a financial advisor. Many brokerages have advisors on staff that can help you choose investments and answer any of your questions. If not, you can go ahead and hire your own financial advisor. There are many companies that offer financial advisors and help you manage your investments. One of these companies is blooom.
Other companies use something called Robo-advisors, which will manage your investments for you. There is a fee for this, and you will have to open up your IRA account with a company that offers this service. Betterment and Wealthfront are good examples of these.
Remember to always do your research when you are handing over your investments to someone else or to an automated system. It is safe, but you want to make sure that you are going to receive the service that you want. For example, if you want to be almost totally removed, you need to make sure that the rebalancing of your investments will be handled as you age so that you don’t have to worry about it.
Just Do Something
You can make all the excuses in the world to not do something. There will always be something that will stop you if you let it. At the end of the day, it is better to have a very safe and conservative mutual fund than nothing at all.
There are many people that get in their own heads about investing and end up crippling themselves. Sure it might take some time to be an investing pro, but at least start somewhere so that you are in a better place when you do have all the information you need.
If you really don’t know what you are doing, then it is better to err on the side of caution. This way you can avoid any potential losses that you don’t know how to handle. Once you start, you will find it easier to keep going.
Final Words
IRAs are powerful investment opportunities that can help you save for the retirement you want. Investing the right way for your risk tolerance forms the base of successful IRA investing.
Remember that any investment is better than no investment. Don’t feel like you have to have all the information in the world before you start. You will learn as you go along. The younger you start, the better for you and your family.
