How Can I Stop My IRA From Losing Money?
Tax-advantaged individual retirement accounts (IRAs) provide tax breaks when saving for your future, but market volatility or high fees could cause your IRA to lose money.
NerdWallet’s team of experts specialize in personal finance, investing and retirement topics. All articles written for NerdWallet have been thoroughly researched and fact checked before publication.
Keep an eye on fees
Individual retirement account fees may not be top of mind, but they can have a devastating impact on your investment returns over time. Fees that are hard to identify such as wrap fees can eat away at them even more rapidly; such costs are charged against an IRA’s balance perpetually and compounded annually.
Other costs to consider can include transaction and brokerage fees, which can reach as high as 2% of each trade. Account maintenance fees or custodial charges can also add up, so look for providers that do not levy such charges so your IRA costs remain as minimal as possible – perhaps you can even find one offering no custodial fees with accounts with certain minimum balances!
Rebalance your portfolio regularly
Rebalancing regularly helps ensure that your portfolio stays true to its initial asset-allocation strategy and can also protect you against falling prey to short-term market dips.
If the value of your IRA has decreased, now may be an ideal time to rebalance by selling any investments that have become overweight and buying any underweight investments. The goal should be to reduce overall exposure by changing how many equities and debt instruments make up your portfolio.
Rebalancing should be undertaken regularly; however, you may choose less often if frequent trades have an adverse impact on your investment account’s performance. Rebalancing can have tax ramifications when conducted within an unregistered non-taxable account; so be mindful of this before proceeding.
Rebalancing can also provide an ideal opportunity to invest any surplus funds such as tax refunds or inheritance. But remember that investing is a long-term game; stay focused on your goals for maximum results.
Avoid impulsive decisions
IRAs provide tax benefits for retirement savings, yet can also be vulnerable to emotional investing decisions. Rebalancing is essential to keep your IRA investments aligned with your risk tolerance and goals – to avoid making hasty decisions such as selling stocks that perform well impulsively and investing across asset classes that offer diversity so as to limit overexposure to one type of risk.
As part of your financial goals, it is also essential to set clear and prioritize them over impulse purchases. Budgeting software and automatic transfers from paychecks into an IRA or investment account are tools you can use to assist with this goal setting process and overcome behavioral factors like reference dependence and loss aversion – two psychological phenomena where individuals tend to assess changes in wealth relative to their relative status quo (Kahneman & Tversky 1979).
Maintain an emergency fund
Emergency funds provide a vital financial safety net, helping protect you from incurring high-interest debt or deplete your retirement savings prematurely.
Emergency funds should cover three to six months of expenses. Although it may take time to save enough, you can accomplish your goal through effective savings habits: reduce spending, find money-saving alternatives or increase income sources.
Start small and increase the amount you set aside as time goes on, using windfalls like tax refunds or cash gifts as fuel for building an emergency fund. Making saving for an emergency fund a top priority means setting up automatic transfers so as to prevent easy access and using it impulsively; alternatively you could consider opening an outside savings account, so as to not forget your goal! This can help ensure you stick with it!
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