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Everyone's investment scenario varies, and what you might consider a roller-coaster ride, another investor might consider an acceptable risk. Determining where your risk level sits is a key factor in learning what the best types of IRA investments will be for your retirement plan.
Every type of investment has different risks. Stocks are subject to the risk of the company performing poorly or failing to survive in tough economic times. Mutual funds are subject to the risk of poor management and poor investment decisions made by the manager or management team. Real estate is subject to the fluctuations of the real estate market as a whole or the particular sector (residential, commercial, land) in which you choose to invest. There is no such thing as a risk-free investment and you should always be aware of the level of risk you're willing to undertake, as well as the risks associated with each investment you consider. -
The best IRA investments for a person retiring in five years versus one retiring in 30 years will vary greatly. Investor should always take into account the time frame that they have until they expect to begin drawing on their IRA funds.
Investors with a longer time frame until they expect to retire will more commonly take a more aggressive approach in earlier years. This is because they have time to recoup any losses that may occur and will see several market cycles prior to their retirement. While time is no excuse for being haphazard in your approach to choosing the best IRA investments, it does allow you the opportunity to use higher risk investments and potentially reap the rewards.
If you have a shorter time frame until retirement, it is generally wise to choose a more conservative investment strategy. This is because you do not have the time to recoup large losses that may result from a more aggressive investment strategy in your IRA. Investors generally switch from an accumulation phase to a wealth preservation phase the closer they come to their retirement. -
Everyone is familiar with stocks, bonds and mutual funds. They are the most common types of investments that people hold within their IRA accounts.
Stocks are shares of a publicly or privately held company. They respond in reflection to a company's earnings and performance and may or may not pay dividends. The two most common types of stock are common and preferred (preferred stock has no shareholder voting rights). Individual stocks are generally considered to be a riskier investment as performance is dependent upon a single entity's performance.
A bond is where an investor loans money to an entity in exchange for a fixed rate of return over a fixed time period. For example, a municipal bond is where an investor loans money to a municipality. Interest on bonds is most often paid semiannually, or every six months. Bonds are considered a less risky type of investment due to the fixed rate and time.
A mutual fund is a collection or pool of assets that follow a particular investment strategy. Multiple investors make up the funds behind mutual funds and make their investment strategies possible. A benefit of mutual funds is an investor's ability to invest in multiple companies for less than the cost of acquiring individual shares of those companies. Mutual funds are perceived as more risky than bonds but less risky than individual stocks. -
While stocks, bonds and mutual fund may indeed turn out to be some of the best investments for your personal IRA, there are several other investment options available.
It is possible to purchase investments such as limited partnerships, private stock, real estate, tax liens and loan money from your IRA. However, owning these types of investments in your IRA requires a special type of account called a self-directed IRA. Consult your tax adviser, attorney or investment adviser prior to investing in any opportunity to review the associated risks and suitability for your personal scenario. You should also inquire with your IRA custodian on the types of investment permitted in your IRA. Not all custodians allow all types of IRA investments. -
With so many do-it-yourself investment websites available, it's simple for investors to carry out their own IRA investment strategy. However, the power of professional retirement planning advice should not be overlooked.
While you may be cautious of commission-based retirement planners or financial advisers, it may be worth your while to find a retirement planner who can help set you on the right path. They'll help you determine your time frame, risk tolerance and explain the various types of investments available. Many even offer a comprehensive written plan, and for a flat fee.
