You can invest your Roth IRA in the financial products provided by your financial institution within your Roth IRA plan. This usually includes common stocks but is rarely limited to that option. There are ways to broaden your options, but first you should be sure your choices agree with your investing style.
There are three main investing styles: conservative, moderate and aggressive, for which the two most important factors are age and tolerance for risk. A conservative investor should either have a very low risk tolerance, or be nearing retirement. If you're going to lose sleep at night worrying about losing money on any given day, consider yourself conservative. Age matters, because as you approach retirement, preserving your wealth is just as important as making it grow. If you're younger and more comfortable with risk, you can make moderate choices. If your'e starting your career and can accept volatility in the value of your investments, you can afford to be aggressive.
Savings accounts and certificates of deposit are solid interest earners for conservative Roth IRA investors. Early withdrawal can apply to CDs. Money narket accounts offer better interest rates with slightly more risk. Treasury inflation protected securities, also known as TIPS, can pay more interest than traditional savings accounts and will peg that rate of interest to inflation to ensure that you will not be losing money in an inflationary environment.
You may already own common stocks in your Roth IRA, but moderate investors should always keep at least a portion of their portfolio in a diversified basket of blue chip stocks or mutual funds. Investment-grade corporate or government bonds or bond mutual funds are also a prudent selection. They offer higher yields than savings accounts or money market funds, but generally maintain a low level of volatility.
For younger, aggressive retirement investors, speculative common stocks and aggressive growth mutual funds as well as low-rated bonds, which are called junk bonds, or junk-bond funds offer higher risk with the possibility of greater returns. Exchange traded funds, or ETFs, and real estate investment trusts, also known as REITS, offer a greater potential for gains, but also more significant risk. ETFs offer a diversified fund of stocks on a market-wide or sector basis, but unlike mutual funds, they trade in the open market like a stock, so can be subject to more pronounced price swings. REITS are diversified portfolios of commercial and residential real estate rental properties, which means they will rise and fall with the real estate market.
If you're looking for even more options, you should consider a self-directed Roth IRA, which allows you to invest in a wider range of options, such as foreign real estate, precious metals and energy extraction royalties. It's always wise to consult with your financial and tax advisers before choosing your investments, no matter your investing style.
Wayne Marks has more than 20 years of experience in finance, education, public relations and marketing in both New York City and Washington, D.C. He has worked for corporate and nonprofit organizations and holds a certificate from the Wharton School of Business.