How Do I Keep My IRA From Losing Money?
Individual retirement accounts (IRAs) are an excellent way to save for retirement and provide tax advantages such as deferred growth and tax-deferred withdrawals.
Many investors become disheartened when their IRAs start losing money, but what many don’t realize is that such losses are normal and there are ways they can be avoided.
Diversification is essential in protecting your IRA against losing money, meaning investing across different asset classes such as stocks and bonds. Diversifying helps spread risk out over time as investments do not move in unison with each other, which lowers overall risks.
Example: If you invest in a mutual fund or ETF that tracks the Standard & Poor’s 500 index, for instance, your money would be spread among hundreds of companies. But for more protection against losses, it may be worthwhile adding funds that offer aggressive growth potential or international stocks; you could even consider adding small-cap funds – which tend to be riskier but may offer better financial returns because they include start-up businesses less established than larger funds.
Your asset allocation should depend on both your risk tolerance and how long until retirement you have left to save for it. For instance, if five years remain until your goal, shifting some investments away from stocks to bonds or cash may make more sense than sticking solely with stock-heavy funds.
When opening your quarterly IRA statement, you may discover that its value has slowly decreased due to various factors, including an unpredictable economy that may alter its worth over time. There are ways you can protect your IRA against losing money such as diversifying and rebalancing it regularly.
Rebalancing involves selling investments from overweighted asset categories and using the proceeds to purchase investments from under-weighted ones, helping your IRA protect itself in case of market crashes by moving money between different asset classes without incurring transaction fees and tax consequences; but moving between different asset classes may incur transaction fees and tax consequences; it would be wise to consult with a financial professional on how best to minimize these costs and avoid capital gains taxes by shifting between taxable accounts and retirement accounts as much as possible.
Waiting Out the Bad Economy
As with any investment account, an IRA is at risk when the stock market crashes. To minimize your losses during such times, take steps such as diversifying into less risky investments like bonds, certificates of deposit or money market funds in order to mitigate them.
As you approach retirement age, it may be wise to transfer all your assets to more conservative investment vehicles such as deferred annuities. These retirement savings vehicles protect your money from market crashes by not permitting early withdrawal without incurring taxes and penalties.
Keep some cash reserves in your portfolio as an emergency fund in case the market crashes again and again. However, with this strategy it may take years for your IRA to grow; its effectiveness depends on both your risk tolerance and financial goals; young investors often find this approach too risky.
Selling Your Investments
IRAs can be an excellent tool to help individuals meet their financial goals, and although market dips may arise from time to time, retirement savers shouldn’t let it prevent them from contributing regularly. Retirement could last several decades and any possible investment losses pale in comparison with potential gains over time.
Meghan recommends keeping your IRA well diversified, which means investing in individual stocks as well as mutual and exchange-traded funds that hold various stocks. Only this way can your portfolio truly diversify itself and can reduce risks in case of market crashes or economic disasters.
She recommends considering tax-loss harvesting as an annual strategy, enabling you to offset up to $5,000 of capital gains with losses through this practice. You’ll have to abide by the “wash sale rule,” however – no selling within 30 days prior or post purchase, etc – as well as take into account your tax bracket when harvesting losses.