The number of potential investments in an IRA has increased since this investment arrangement was developed for the public in the 1980s. This has certainly widened the gap between IRAs and 401ks as far as public preference goes. More investment options are almost always more attractive to people when compared to schemes that restrict choices.
However, each IRA custodian is free to set certain limits on the kind of investment options allowed under its supervision. A brief description of the types of financial instruments available with a variety of IRA custodians follows. Do not assume that any one custodian will allow all of these options simultaneously.
• Stocks
These are the classic investment options. A stock is also known as a share. That term is used because each stock is literally a piece of ownership in a publicly-traded business.
Once you buy stock in a company, you agree to share in that company’s financial destiny. If the business underlying the stock falters or fails, you will suffer as your stock price falls.
If the business succeeds, then you will profit. That is why investors take such great pains to study the fundamental health of the businesses in which they invest.
As an IRA investor you have one significant advantage over typical investors when it comes to owning stocks. You can afford to have much more patience.
Since you are planning your retirement, you do not need the stock to start churning out profits right away for you. You only need to hope that the business improves over the course of decades.
This is a much more likely proposition than immediate profits. Retirement investments in stocks can improve their likelihood of long-term success when purchased through index funds described below.
• Bonds
Many retirement portfolios and IRAs are chock full of bonds. This tendency increases as the holders of these accounts become older. Bonds are considered to be much safer than stocks but are hampered in their ability to produce gains.
A bond is a form of debt. Many bond holders may find the tables reversed for them when they buy these financial instruments. With bonds, the issuer is basically asking prospective buyers for a loan.
In the case of federal bonds, the US government issues them because it needs immediate money to fund itself. When it offers these bonds, it basically goes into debt, asking the public to buy them in exchange for an interest rate that will yield payouts over the course of 10 years or more.
When a bond reaches its maturity date, the government stops paying interest and returns the principal to the buyer. State and local governments can also issue bonds, as can large corporations. Interest rates will vary between these entities but they are usually low when compared to the profits that stocks can return.
• Commodities
A commodity is a welcome relief to some investors who tire of the abstract nature of their ownership in stocks and bonds. This class of investment involves physical materials that are used in both industry and in human consumption.
Commodities are mostly raw goods that are either grown or extracted from the ground. Examples include aluminum, wheat and natural gas.
Since many commodity investments are fast-paced and temporary, an IRA will usually invest in them through index funds as described below. However, precious metals form one class of commodity that an increasing number of IRAs buy and hold.
Interest in precious metals IRA options has risen considerably because these commodities act as superior hedges against inflation.
Because there is so much interest in precious metals in IRAs, the number of options for investing in them with these retirement accounts has increased considerably. With an IRA, clients can buy both coins and bars made from precious metals such as silver, gold and platinum. In addition, they can buy stocks and mutual funds that use precious metals as their underlying assets.
• Index Funds
Investing in single stocks can be risky because it may lose a lot of proportional value. On the other hand, there is a general advance in the whole stock market, even though this advance is punctuated by setbacks and even general losses in recessions such as that begun a few years ago. Nevertheless, the market as a whole generally moves forward.
Investors noticed this occurrence a long time ago and formed special investment schemes known as index funds. These funds pool monetary resources from their investors and buy a wide variety of financial instruments.
Sometimes these underlying assets are all from the same market sector. The diversification of funds allows investors to profit from a general advance in stock prices while lessening the impact of any one asset’s failures. These are very popular forms of IRA investments.
• Exchange-Traded Funds
These are similar to mutual funds or index funds except they offer investors a little more liberty and some tax advantages. Unlike most index funds, you do not have to wait until the close of a business to buy and sell shares in these funds. You can trade ETF shares all day long just as if they were stocks.
ETFs merit mention here in particular because they have become a popular but indirect way of investing in commodities such as precious metals. The latter, in particular, can be troublesome investments when bought directly in physical quantities such as coins and bars. These solid assets must be stored and maintained. This costs money and detracts from possible gains.
With an ETF, on the other hand, you buy into a fund which owns and maintains the precious metals for you. When you need to liquidate some holdings, your ETF shares will share liquidity with most stocks and commodities but you will not need to worry about any physical items. In an IRA, they offer a very safe way to invest in precious metals for the long-term.
• Alternative Investments
Many people are not aware that their custodians offer a very wide array of investment options that even go beyond exotic things such as silver and gold. You can invest in herds of cattle, art and even real estate. However, as with precious metals, there are additional costs that may have to be covered by your IRA funds. Using real estate as an example, you must be able to purchase the real estate outright and also pay certain fees and charges up front.
Given that an IRA has such excellent tax advantages, it only makes sense for everyone who has any long-term investment plans to own one. IRAs are restricted to contributions of about $5,000 yearly so they should not be your only retirement investments. However, these investment schemes can provide solid and dependable bases for retirement plans and other investment portfolios.