Do you have a Roth IRA with your favorite mutual fund company? Do you have several? How do you choose which investments to classify in a Roth IRA? Many people mistakenly think that a Roth IRA is an investment unto itself, but actually it is really a tax classification that can have many types of investments instead of simple a mutual fund or a bond fund. But, then the question becomes, “What types of investments should you hold in a Roth IRA or multiple Roth IRAs?” There are several types of investments you may want to consider above and beyond a simple index fund.
It has been a rocky road in Europe this summer and into the fall, but that does not mean that all international companies and their stocks are having a rough few quarters. Many financial planners have laid low in talking about developing markets, BRIC countries (Brazil, Russia, India, and China), and others lately. But, international companies cannot be ignored. The United States’ stock market capitalization is relatively small when compared to the rest of the world’s stock markets. Also, over 50% of the S&P 500 companies now come from sales abroad. It is impossible to escape the allure of international companies when there are so many more than foreign companies with stock than simply domestic ones.
One of the best investments to hold in your Roth IRAs is great dividend stocks. I love companies that pay a dividend. Even when the stock market seems to be on a roller coaster, dividend stocks provide investors with a rate of return and an income while they wait for a stock’s share prices to improve again. Maybe your chosen stock has been beat up by the overall market and caught up in the undertow, but with a good dividend payer, you can wait it out and earn a return in the process. Look for companies that have continually increased their dividends year in and year out. You also want to look for a company with a good dividend yield that will at least keep up with the rate of inflation while you wait for the share price to rise.
Real Estate Investment Trusts (REIT)
Similar to dividend stocks, REITs or real estate investment trusts are another great choice if you are looking to diversify your portfolio of Roth IRA holdings. A real estate investment trust can invest in many different types of real estate ventures such as commercial malls, office space, residential rental properties, and a host of other types of real estate investments. REITs are required to distribute 90% of their income each year as a dividend to their shareholders. So, REITs make another great choice as investments to hold in your Roth IRA that are very much like a dividend paying stock.
I’m personally not a big fan of gold because of its tremendous volatility. It makes me nervous, but there is definitely some rationale for owning a basket of precious metals. Precious metals can be a wide range of investment options from the allure of gold, silver, copper, and many other types of metals. It is often best to remember to keep these types of investments as a relatively small portion of your overall retirement portfolio. While these great investments to hold in your Roth IRA provide you with diversification and often move inversely stocks and other investments, they are still risky investments that you should not gamble your entire retirement on.
Am I talking about pork bellies and wheat futures when I tell you that commodities should be one of the many investments to hold in your Roth IRA? Yes and no. Buying futures contracts is extremely risky, volatile, and complex, and it is not for everyone. That is why you should leave that kind of investing for the professionals. That does not mean that you cannot find a great mutual fund or exchange traded fund (ETF) that can provided you with a wide diversification of many types of commodities that could round out your investment portfolio and Roth IRAs.
Index funds that track major indices such as the S&P 500, Russell 2000, Wilshire 5000, or Dow Jones Industrial Average typically make up the bulk of someone’s investment portfolio and Roth IRA account balances. That is definitely a great strategy to have, but it is not the only one. There are many options that you have available to you to diversify your Roth IRAs. There are many great investments that you can hold in a Roth IRA that have the potential to pay an excellent rate of return.
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