One of the big advantages to an IRA over a 401k is your ability to invest in whatever you want for the most part. This can also be a huge disadvantage if you make poor choices or if you just keep your money in cash and forget to invest it all together. I’ve made both mistakes, and have seen investors do this on their own when I worked at Etrade, so in today’s video I will help you make smart choices for your IRA and avoid common mistakes.

You need to make your investment choices for your IRA in two situations.

1. When you open an ira to save for your retirement and deposit money into the account.
   
2. When you open an ira to transfer an old 401k into the account.
   

I say this because sometimes people think that just by opening an ira and putting money in it, they are investing. You aren’t. You may still get a tax deduction for your deposit, but your money isn’t invested until you actually purchase investments with the cash you deposit in the account.

Both situations are similar in how you will invest. the difference will be that in situation 1, you will be starting with a smaller amount most likely and investing as you make deposits. With situation 2, the 401k provider you had will sell your investments and send cash to your IRA account, so you may have a larger lump sum to invest in this scenario.

Question 1 Determine how conservative or aggressive you want to be with your investments. ask yourself: When do I plan to use this money and how many years from now is that? If you’re 35 and loosely plan to retire at age 65 then you have 30 years before you’d need the money. Financial professionals like myself typically believe you can invest aggressively if your at least 10 years away from needing the money, so if you’re 60 and plan to use the money in 5 years, then you’d want to be invested much more conservatively than someone further from needing the funds. If however your 60, but have other income sources and don’t see yourself using your IRA money until your 75, then you can still be invested a bit more aggressively than the person that needs the money at age 65, so it’s not all about age, it’s really more about when you plan to use the funds that help to determine the balance of conservative to aggressive investments.

Question 2 to ask yourself: how do you feel about seeing your money fluctuate in value over the years?  The S&P 500 has an average of a 5% pullback three times a year, a 10% correction every 16 months and a 20% or greater plunge every seven years. 

Most people will say they don’t like losing money and ideally want to make money without risk. If you find yourself in this thought process, then it would be beneficial to educate yourself further on how markets perform over time and give yourself some confidence in taking on some risk because you can lose out on a lot by investing too conservatively for too long. Go ahead and subscribe if you’re new here and let me know below if that’s a video you’d like to see!

If you really can’t stomach the thought of your money going up and down in value, then you’ll want to invest really conservatively, meaning mostly in bonds, CDs, and High yield savings accounts. You may barely keep up with inflation invested this way though and it’s typically best suited for those who are already in retirement and dependent exclusively on their accounts for income through retirement.

Most people find themselves somewhere in the middle, where they want to take on some risk, but also stay somewhat conservative

Question 3: Do you want to choose your own investments, use a robo-advisor, or hire a professional like me to help you?

Now, since you’re watching this, I’m going to show you how to take the questions you’ve answered and choose your own investments. First, decide how conservative or aggressive you want to be using an asset allocation calculator like this one from smart asset. This is going hand in hand with question 1 and the descriptions for each allocation help guide you through this too. Typically the further you are from retirement or needing the money, the more aggressive you can be because you have both income and time on your side to recover from those market losses I mentioned earlier.

Once you find your allocation which just means how your portfolio is split up between different investments, you will then find investments for each section. You can use individual stocks and google something like “large-cap stocks” or “small-cap stocks” and choose a few from each category, but there is added risk investing in individual stocks and they require more research and attention, but take a look at this video for help on researching individual stocks:

For this video, I’ll keep it simple and show you how to use index funds to fill your portfolio, which is a great way to invest for your retirement anyway. If you do like the idea of stocks, you can either use a brokerage account, or you can mix them in with your index funds.

Now, after you have your allocation you can google “best index fund” for each category and choose one from there. Anything from fidelity, vanguard, or Schwab will be great, just make sure it’s an “index fund” so you know the fees are low. let’s do a quick walkthrough so you can see my exact process. As you go through each one, jot the name down because the next step will be determining how much gets invested in each.

I’ve noted a fund from each category below that I found during this video’s research process, but I’m just listing them to make your life easier, not to actually recommend them since I don’t know your specific situation and what’s suitable for you.

The last step will be to purchase each of the funds in proportion to how much you have. For example, if you have $10,000 and you’re investing in the moderate allocation, then you would be 65% in stocks which equals $6,500, and 30% in bonds which equals $3,000 and the remaining $500 would be in cash.

You now know your split between stocks and bonds. the next step is to break that down further and see how the stock portion is allocated, so of the $6,500 you have in stocks, $2k would be in large-cap, $2k in mid-cap, $1k in small-cap, $1k in international, and $500 in emerging markets.

for bonds, all $3k would go into corporate bonds and for the cash, you can choose the highest yielding option your firm has.

Now you know how you’re allocated, which investments go in each allocation, and how much of each investment to buy. you can do this with any amount you have, just take the amount your investing and multiply that by the recommended percentage allocation for each piece of your portfolio. When you have all this info you just go to the “trading” section in your investment account enter each symbol and quantity, and click buy!

Let me know if you have any questions in the comments below, subscribe if you’re new here because it really supports my channel, and I will see you next week bye!