You’re saving in your IRA. First of all, congrats! That’s a great accomplishment on its own as you’re putting your money away in a tax-deferred account, or in the case of a Roth IRA a tax-free account! However, for most people, just putting money away is not enough to accomplish all of their retirement goals. The next step you have to focus on is investing those savings for the long-term and for some, that can be overwhelming. Especially when you know you’re investing to outpace inflation and grow a sizeable sum, which history has shown is done by investing in stocks.
Stocks can be scary with the volatility, the future unknowns, and the unsettling feeling you have when you experience loss. However, if you have 10 years or more until retirement, you must remember that market volatility is part of the ride and part of your overall plan is to continue to save and invest into that volatility. After all, some of the best times to invest is during a market pullback when prices are lower than normal.
What Are The Choices?
IRAs allow you to invest in almost anything depending on the custodian you use that holds your IRA. You can choose mutual funds, exchange-traded funds (ETFs), individual stocks and bonds, and more. Understand what is available before you open your IRA however as if you were to open your IRA with a bank then most likely you will be limited to saving type accounts and certificates of deposit (CDs). And before you invest, decide the best way to manage your account. You can choose to work with a professional that will manage your account on your behalf or you can choose to manage the account on your own. The great thing about technology today is you have so many options to choose from.
Things To Consider
To be successful in investing, you need to balance your comfort with the amount of risk you’re taking and your time horizon. And when we talk about risk, we’re talking about your exposure to stocks mainly. If you’re young and investing your account too conservatively, it’s possible that you may never reach your goals. On the other hand, if you’re too aggressive when you’re older, you’re exposing your nest egg to the market volatility that can erode the value of your account leaving you no time to recoup any losses. You always want to ask yourself these questions:
- “Do I NEED to take on risk?” – For most people, taking a loss has a greater emotional effect than experiencing a bigger gain. If you are not where you need to be in terms of reaching your goals, then yes, perhaps you need to take on a greater level of risk. However, if you are on track to reach your goals, why take the additional, unnecessary risk?
- “Am I WILLING to take on risk?” – This is a very non-quantitative concept and comes down to your gut feeling. There are those of us who are comfortable with risk, and others who will just never sleep well at night knowing they are risking something so certain for the uncertain. If you are just not comfortable then there are some real adjustments that need to be made to ensure you still reach your goals. Taking on market volatility that you are not comfortable with only leads to poor decisions at the worst times.
- “What is my ABILITY to risk?” – This is all about your budget and what you can afford. Would you have sufficient assets to sustain your current lifestyle if the market pulled back? Would you be able to invest more to take advantage of a downturn? You never want to be in the position of having to take from your account early because you invested too much or have no emergency savings on hand.
Investing is about the taking of risk. Prudent investors know there are some risks worth taking and some that are not. It’s important that you know the difference. Based on your time horizon, your comfort level with risk (that gut feeling), and your ability to save and invest all goes into the equation of what the proper asset allocation is for you within your IRA. Your percentage invested in stocks, bonds, and cash is an ever-evolving strategy that will change over time and will always lead you back to asking yourself those three questions about your need, willingness, and ability to take on risk.
