- Investing in your IRA is like planting a fruit tree in your back yard. It won't mature overnight, and it will periodically drop all of its leaves before it produces any fruit. As long as you don't give up on your fruit tree in the short term, it has the opportunity to grow tall and produce fruit season after season. Although no one can guarantee your investment returns, you will want to take a similarly long view with your IRA mutual fund investments
- With the understanding that you must allow time for your investments to bear fruit, you will want to better understand yourself as an investor. Ask your brokerage firm for their investor questionnaire. You will be asked questions about your investment goals, your tolerance for risk (the possibility that your investments will lose money), your time horizon (the amount of time before you need to spend your money) and your reaction to hypothetical investment situations, among other questions. Your answers will suggest what type of investor you are, from "conservative," meaning that you shouldn't invest much money in stocks, all the way to "aggressive," meaning you should invest almost all of your money in stocks.
- Now that you have a better understanding of your individual requirements, you can narrow down the mutual funds that would be appropriate for your IRA. One way to eliminate a lot of mutual funds from consideration is to decide whether you would rather pay extra for an actively-managed mutual fund or stick with less expensive "index" funds that passively invest in a particular index, such as the S&P 500 index. The evidence that index funds outperform actively-managed funds over time is compelling and can greatly simplify your decision-making.
- You can take much of the hassle and worry out of handling your own investments by choosing an all-in-one fund. All-in-one funds comes in two types: "target retirement" and "balanced." Once you have chosen a retirement year (for example, 2025), the target retirement fund will become more and more conservative as 2025 approaches, ending in a mix that has low exposure to stocks and substantial exposure to bonds and cash. The balanced fund, meanwhile, maintains a specific ratio between stocks and bonds as long as you hold it. Balanced funds can range from conservative to aggressive.
- You have answered the questionnaire, you know how involved you want to be as an investor, and you've decided whether to go with indexed or actively-managed mutual funds. Now you can check with your brokerage firm and locate the funds that are best for you. Many discount firms such as Schwab and Fidelity offer free one-time advice with an investment professional. These and other firms also offer robust mutual fund screening tools, allowing you to screen out all of the funds that do not fit your criteria. Ask an investment representative to walk you through the screening process. Even if she can't recommend specific funds, she can help you narrow down the universe of available funds so that you can identify the best funds for your situation.
Investing Long Term
Investor Questionnaire
Mutual Fund Types
All-In-One Funds
Finding the Funds
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