This checklist is based on an article published on moneytalknews.com website by Marilyn Lewis.
If you’ve built up a large IRA savings account use this checklist to see if your asset allocation is on track.
1. Use your age to decide what to put in stocks.
The rule of thumb is:
• Subtract your age from 100
• Invest the remaining percentage in stocks
For example is you’re 55 years, subtract 100 from 55 which leaves 45. Invest 45% of your portfolio in stocks. Since life expectancy has gone up, some experts recommend that instead of using 100 you should use either 110 or 120. See CNN Money’s Ultimate Guide to Retirement. So in the example above, subtract 55 from 110 instead of 100, leaving 55. Put 55% of your portfolio in stocks.
2. Find your tolerance for risk.
Stocks offer better returns on your money, but at higher risk. Investing your money in low risk investments, will result in a very low rate of return. The closer you are to retirement the more conservative you should be regarding your investments. How much you put your savings in stocks is up to you and your comfort level. If the money is in your IRA you’ll want to be conservative so that you can at least protect your capital.
3. Pick a stock fund
In an article published in the New York Times on July 19, 2016 titled “Who Routinely Trounces the Stock Market? Try 2 out of 2,862 Funds.” By Jeff Somer.
The article cites a series of annual S&P Dow Jones studies that found “that over extended periods, the average actively managed funds lags the average index fund”. The best way to invest is to buy index funds as they in most case outperform actively managed mutual funds. Index funds are cheaper to own than managed funds as the management expense ratios (MER) are much lower.
According to Vanguard, index funds offer built-in benefits:
1. Low costs.
Index funds hold investments until the index itself changes. They therefore generally have lower management and transaction costs.
2. Lower risk through broader diversification.
Some index funds give you exposure to potentially thousands of securities in a single fund.
3. Tax efficiency.
Broad index funds generally don’t trade as much as actively managed funds might so they’re typically generating less taxable income, which reduces the drag on your investments.
4. Diversify
By spreading your money among different investments you reduce risk. By picking the right group of investments, you may be able to limit your losses and reduce the fluctuations of investment returns without sacrificing too much potential gain.
For the remainder of your portfolio after your stock market investments, Money Talks News founder Stacy Johnson suggests dividing it, putting half into a low cost intermediate bond fund and the rest into money market deposit account or other insured fund.
Another step in diversifying your portfolio is to buy physical gold, either gold coins or bullion. According to the World Gold Council, an allocation of 2% to 10% can materially reduce volatility and increase risk-adjusted returns. Your investments in your IRA should contain a mix of index funds, low cost intermediate bond funds and money market funds plus a diversifier such as physical gold.
