Like it or not, we are all heading for retirement and according to experts, most of us are terribly unprepared. For most people still working, pensions are a relic of the past. Hopefully the company you work for offers a 401K and you are taking full advantage of any matching opportunity. But for the majority of people, besides their homes, their IRA account is their largest asset. IRAs are wonderful accounts to save for the future. There are many benefits to consider in choosing either a ROTH and Traditional IRA account, depending on your current and future anticipated needs, but the question today is what are the basic investment options to consider for your IRA.
I believe the most common IRA investments are Mutual Funds. Established and managed by an investment company (think Vanguard, Fidelity, Schwab or 1,000s of other companies), these funds pool your money with the money of other investors to invest in just about any asset class, region, industry, or index you can think of. As a matter of fact, I dare you to think of something you can’t buy in a mutual fund somewhere. The main benefits of mutual funds are professional management and diversification, getting a broad exposure to many stocks or bonds in a single investment. For example, buying a fund focused on Brazil would allow you to own just about every listed company in Brazil. Investing in Brazil may or may not be a good thing, but I know I would rather have an expert on the Brazilian economy to pick companies rather than try myself. You also gain management expertise, a manager or management team whose sole job it is to try to make their funds one of the best.
Considering costs, there are basically 2 types of funds – Load and No-Load Mutual Funds. Loaded Funds charge an upfront commission, typically 3% to 5.5%. No-Load funds do not charge that upfront commission. All mutual funds have annual management expenses, these are the fees the company charges to pay salaries and keep the lights on. There are over 20,000 mutual funds in the US so picking a good fund can be tricky. For this reason, many people have defaulted to using Index Funds. These funds just buy an index, think S&P 500, and accept whatever the market returns. The tradeoff is since there is no active management, the costs can be much lower.
Another common investment is regular stock. If you love your Apple iPhone and think Apple is a great company, you can buy shares in Apple with your IRA. If you guess right, you can do very well, but the problem is you give up the diversification of a mutual fund because you own the shares of one or just a few stocks. Individual stocks usually make more sense as an IRA investment when you have a larger account and can buy shares in many different companies, building your own diversified portfolio. There are commissions to consider when buying stocks but there is no annual management fee.
A relatively new (10 years) choice is Exchange Traded Funds (ETFs). These trade like stocks, but look like mutual funds. Once again, you can find an ETF that invests in just about any asset class, country or industry. The main benefit is diversification and typically much lower management costs than mutual funds. ETFs typically just own indexes, but lately there have been actively managed ETFs. ETFs are many times used for short term trading rather than long term investing.
Other investment choices can include rental real estate, precious metals, private placements, and other unusual things. Tread lightly and seek out an experienced advisor who deals in these types of investments because you can get in real trouble with the IRS if you don’t follow very exact rules. You are not allowed to invest in collectibles within your IRA.
If you are starting out, I would suggest you spend a few minutes with a Fee-Based Advisor. These advisors can direct you in the direction you need to go based on your specific time horizon, income, risk tolerance, and general beliefs about investing and the world in general. You should be able to find an advisor that will give you an hour of their time for free or at a very low cost. But above all, be proactive. You and you alone are responsible for your IRA and the ultimate success of your retirement. Wishing you much success.