Where should I be investing money within my Roth IRA?
I'm 23 years old, just opened a Roth IRA, and I'm looking for the best strategy to grow my money. Obviously I have a long time horizon so I'm trying to determine the best investments that will help my funds grow over the long term. What do you recommend?
If you are 23 years old and you just opened your Roth IRA you most likely have less than $11,000 in your account since you are limited to $5500 annual contributions. Regardless of whether you have contributed one year with only $5500 or two for that size of an account a fund would be advisable.
The power of diversification is important for those funds. Diversifying a portfolio in order to reduce exposure to risk by combining a variety of different investments, such as stocks and bonds/fixed income which are unlikely to all move in the same direction. The goal of diversification is to reduce the risk in a portfolio. Volatility is limited by the fact that not all asset classes or industries, sectors or individual companies move up and down in value at the same time or at the same rate. Diversification reduces both the upside and downside potential and allows for more consistent performance under a wide range of economic conditions.
And the best way to diversify a small account or portfolio is through a basket of securities. Mutual funds have many different choices that would be appropriate for a Roth IRA with a long term investment horizon.
Global, small company stock mutual funds. You will have plenty of large-company stock funds available in your future employer plans, and not much of an opportunity to diversify into small, value, and international companies.
Ignore the ups and downs, they won't matter over decades. Just keep buying more when the funds are down at lower prices.
Hi there! It's admirable that you are thinking about the future at your age. It can't be a better time to start saving and preparing to reach your financial goals.
The best strategy to maximize the benefits of your Roth IRA is maximizing your annual contributions. You can put up to $5,500 each year. One of the best perks of a Roth IRA is that you will not pay taxes if you keep your account intact until you reach 59 1/2.
In terms of investment allocation, it really depends on the size of your Roth IRA relative to your other retirement and investment accounts such as 401(k). In general, we advise our clients to use a Roth IRA for high growth investments like growth stocks, small-cap, and emerging market stocks.
However, if the Roth IRA is your only retirement account, you may want to have a little more balanced and diversified approach.
Good question. This is real simple. You should look for three things:
1- 100 % should be in equities, none in bonds.
2- Broad diversification, not individual stocks, but an ETF or Mutual fund.
2- Low cost. The expense ratio should be very low and try to avoid annual retirement account fees.
You could consider Vanguard Total World Stock Index Fund, which provides shareholders low-cost exposure to stock markets around the globe, including the United States, developed foreign markets, and emerging markets. This is not real fancy but will meet all three goals.