I’d like to respond to a reader question that I received as an anonymous comment to a previous post entitled Starting my Roth IRA. Here’s the question:

“Any advice for newbies on how to pick what you’ll invest in with the IRA, especially for those not savvy with stocks, etc.?”

First of all I think the reader mentions a very important aspect of an IRA. A Roth IRA (or a Traditional IRA) is not an investment in and of itself. You may hear someone say that you should open up a Roth IRA because they have great returns. You have to remember that the IRA doesn’t produce returns; the investments IN the IRA produce these returns. An IRA is like a basket which holds these investments.

Now, on to what investments to pick for your IRA.

Realize up front that your IRA may not be your only investment account. Even though you may want a well diversified portfolio, your IRA doesn’t have to be. You may have a 401k or a 403b at work. You may also have a money market account that you use as an emergency fund.

You aren’t more diversified if you hold the same mutual funds in your IRA as you do in your 401k. The same applies to holding cash in your IRA if you already have a cash reserve elsewhere. These aren’t the only scenarios, but I’m illustrating a point. You may want to figure out what you’re ideal portfolio would consist of, see what you already have, and begin to fill in the blanks.

I would make sure that I had a sizeable amount of cash in an emergency fund. I would hold this cash in a money market account outside of an IRA, but read my post, Best of the Roth IRA, and you may decide to hold it inside.

Mutual funds are a great way to provide instant diversification because you’re immediately invested in a wide array of stocks or bonds. ETFs or Exchange Traded Funds are very similar but don’t have some of the fees that mutual funds will usually have. You may choose index funds because you want to match the returns of the general market as a whole. I choose to hold these types of investments in a 401k because my only options are a handful of funds.

After mutual funds and ETFs, you can move on to individual stocks and bonds. I would start with solid blue chip companies that pay a dividend. Start by looking at the 30 companies that make up the Dow Jones. As you begin accumulating more and more stocks, you’ll be able to build off of this solid foundation. Essentially you’re creating your own personal “fund” at this point.

I choose to buy individual stocks in my Roth IRA because I already have cash in a money market and mutual funds in a 401k.

It may seem very daunting at first as you decide what to specifically put in your Roth IRA, but as you look into some of the different options, you’ll be amazed at how much you’ll learn so quickly. Also, once you set up your account, say, with an online brokerage such as Scottrade, you’ll have access to a lot of information that can help you decide what to choose.

I hope all this helps. There’s no one right answer, and everyone’s situation is different. If you still have questions, feel free to email me with more information about your specific situation and I’ll help out as best I can.

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