How Can I Stop My IRA From Losing Money?
IRAs are great ways to save for retirement, but investing in risky assets could cost you. To protect yourself from losing money in this way, diversifying your portfolio, monitoring fees carefully and investing in safe assets are all strategies worth trying.
To protect your IRA and avoid losses, consider consulting with an advisor. SmartAsset offers an easy and free tool that connects users to qualified professionals in their local area.
Diversify your IRA portfolio
Diversification is an integral component of successful investing, and an essential strategy that can protect your IRA against losing money. Diversifying across asset classes such as stocks, bonds, real estate and even cash helps mitigate risk by protecting you against losses in one asset class which would otherwise ruin the whole portfolio.
Imagine investing $10,000 between two companies producing organic baby food and bicycles; should both companies fail, your investments would all be at risk of going bankrupt and you may lose all your investments. By diversifying your IRA portfolio with various assets such as international stock funds or bond index funds, this risk can be managed.
To further reduce losses, invest in ETFs and mutual funds that boast low investment fees – for instance target-date funds are an increasingly popular 401(k) option that work towards your retirement date with lower fees than individual stocks.
Invest in suitable investments
As it’s essential that your investments match up with your goals and risk tolerance, it is also key that they be cost-effective investments – brokers charging front-end fees or using proprietary funds with high expense ratios should be avoided; look for no-load mutual funds with expense ratios of under 1% instead.
Your age also plays a critical role in choosing an IRA investment strategy. Younger investors with more time before retirement can afford to take more risks, but as retirement nears it’s often wiser to diversify into bonds instead.
Other strategies you might want to consider for retirement savings include investing in index mutual funds and ETFs as core holdings, which offer diversification at reduced costs. You could also leverage peer-to-peer lending platforms such as LendingTree or Peerform in order to earn interest on your money, providing another means of supplementing retirement savings with extra income.
Rebalance your portfolio regularly
Rebalancing is the practice of returning your portfolio back to its initial asset allocation mix, in order to reduce risk. Your investment portfolio can become unbalanced over time due to performance differences among investments or asset classes, and therefore requires periodic rebalancing to remain in its intended form.
Rebalancing your portfolio requires selling some “winners” while simultaneously purchasing underperforming assets in order to bring back in line with their original percentages. While this may seem counterintuitive, rebalancing can help safeguard Roth IRA accounts from incurring unnecessary losses.
Rebalancing an IRA portfolio requires careful consideration of your investment timeframe, goals and risk tolerance. Seeking advice from a financial professional may help ensure you stay on track without missing opportunities. Also note that investing in a taxable brokerage account could cause you to pay taxes when selling investments to rebalance – potentially significantly decreasing returns – making tax-advantaged retirement accounts like Roth IRAs preferable as this reduces taxes when selling off investments for rebalancing purposes.
Monitor your account carefully
Ruled surrounding Individual Retirement Accounts (IRAs) are stringent. Violating self-dealing rules — when an IRA owner or “disqualified person” uses their account for personal gain or to satisfy personal financial objectives — could void your tax benefits of an account and can result in penalties from both the IRS and Department of Labor. For your own protection, follow these guidelines set by these two agencies so as to comply with IRA regulations without violating them.
If a significant portion of your IRA investments is concentrated in one asset class, economic sector or geographic region, you could become susceptible to losses should market volatility arise. Rebalancing can help mitigate this risk.
As well as rebalancing, it is also wise to carefully verify the information provided in your IRA statements. This is especially critical for alternative investments which may be difficult or impossible to value accurately. If you’re concerned about its accuracy, an independent third-party valuation may provide more accurate details.