Personal Finance: Don't be afraid of your IRA
It's a no-brainer to open an IRA by April 15 for tax advantages, but after the stock market trauma of the last few years, picking investments for it doesn't seem simple.
It's a no-brainer to open an IRA by April 15 for tax advantages, but after the stock market trauma of the last few years, picking investments for it doesn't seem simple.
"I know I should be saving money for retirement, but I'm scared," said investor Dena Cohen. "I've been told that since I'm in my 30s, I should be in the stock market, but I don't know what to do."
That uncertainty often causes people to skip IRAs. But there are options for everyone, from those opening their first IRA to advanced investors interested in tweaking based on market conditions.
Financial planners have not strayed from their usual advice for people in their 20s, 30s, and 40s, despite the more than 50 percent decline in stocks and the subsequent 70 percent upturn.
If you have years to go before you retire, you are likely to make more money in stock funds than in CDs, said financial planner Gary Bowyer. On average, bonds gain 5.5 percent a year, while stocks return 9.4 percent. Although some years are awful, Bowyer said, gains close to the average are likely over 20 or 30 years.
Go with index fund
His advice for people in their 20s: Choose a stock market index fund such as the Vanguard Total Stock Market Index fund, or a mixture of U.S. and international stocks through a fund such as T. Rowe Price Spectrum Growth or Primecap Odyssey Growth. Both are almost entirely in stocks, so if you cannot stomach the full force of a market downturn, use a fund containing some bonds, perhaps the moderately conservative Vanguard LifeStrategy Moderate Growth. For people younger than 40 who will not be scared by stock downturns, financial planner Mark Wilson chooses LifeStrategy Growth.
Financial planners want people to have a mixture of stocks and bonds. For someone around 40, it might be about 70 percent in stocks so money grows significantly over time and 30 percent in bonds in case the market tanks.
But what if you have been doing that and wonder whether you would be better off adding stocks or bonds through this year's IRA? Analysts have expressed concerns about both: The possibility that stocks would fall around midyear as the government pulls away from economic-stimulus efforts, or that bonds would decline if interest rates rise.
Most financial planners tell people not to worry about short-term downturns: Saving a little every month in stock and bond funds will work over time. For an IRA, a simple balanced fund such as the Vanguard Balanced Fund would commit about 60 percent to stocks and 40 percent to bonds, Bowyer said.
Alternatives
Still, if you do not want to take a chance investing in stocks just before a possible downturn, Jack Ablin, a strategist with Harris Private Bank, suggests a Seix Floating Bank Rate fund. It invests in bank loans, which would make it vulnerable if the economy worsens and people cannot repay their loans. But if the economy continues to strengthen and rising interest rates threaten bonds, Ablin expects this fund to do well.
It has become popular to look for investments that do not act like stocks or bonds, that make money when both fail you. Bowyer puts 15 percent of his clients' money in such "diversifiers."
His selections: Hussman Strategic Growth, which shorts, or bets against, stocks so investors can make money in downturns; the Merger Fund, which buys stocks in pending acquisitions and makes money if the merger occurs; and the Pimco All Asset All Authority, which can buy stocks, bonds, and commodities and can short stocks.
The Merger Fund lost 2.26 percent in 2008, while the overall stock market lost 38 percent. In 2009, it climbed 8.8 percent, as the market rose more than 23 percent. The Pimco fund lost 6.9 percent in 2008 and gained 19 percent in 2009. And the Hussman fund lost 9 percent in 2008 and gained 5 percent in 2009.