How Comfortable Are You With Investing Your Retirement Funds?
If you qualify for an individual retirement account (such as an IRA or RRSP) and believe it would be beneficial in your situation, one of the emotional hurdles to getting it set up is figuring out how comfortable with investing you are.
My own main IRA is with Zecco.com. My IRA there is self-directed, which means that I choose when to buy and sell investments and what specifically to invest in. I’ve selected a huge variety of things, including ETFs and mutual funds, but am mostly investing in individual stocks now. I love using Zecco (especially now that they’ve improved their interface) but it took me a while to find a brokerage company that I liked and to get comfortable enough with investing to use a self-directed account.
There are many other companies that offer IRAs where you get to make your own choices about stocks and mutual funds. A few that I’ve tried are USAA, Sharebuilder, and Scottrade. Some companies allow you to invest in real estate as well.
If you’re a very hands-on person who loves doing research and are either experienced with investing or willing to become that way, a self-directed IRA might be right for you. You have to be comfortable making buy, sell, and hold decisions, and you must not be prone to panicking or getting greedy (since nothing protects you from yourself.) Self-directed IRAs are not for everyone. It suits my style perfectly though now.
If you’re comfortable with evaluating your tolerance for risk and understand the importance of asset allocation, but aren’t interested in individual stocks or managing investments from day to day, choosing a mix of funds from across the various types of asset classes might be more your style. You could choose good funds that align with your objectives and level or risk tolerance.
Using this method, you leave the choice of the individual stocks, bonds, etc. contained within the funds you’ve selected to the fund managers, and you just worry about the selection process and monitoring the overall progress instead. I do have a small IRA with Janus that is a single mutual fund, and I hold a few other mutual funds within my Zecco IRA as well. I selected all of those back when I didn’t feel as comfortable with evaluating individual investments. I suspect this is the most common way of handling IRAs. Many folks go through companies like Vanguard or Fidelity when using this method, but again there are many companies out there that you could use.
If your eyes glaze over when someone says things like beta, cost basis, or asset allocation, you may be more comfortable using a target date or life-cycle retirement fund, or with having a professional manage your retirement investments.
Target-date or life-cycle funds aren’t things that I have personal experience with, so I can’t say much about them. But the basic premise is that you pick the fund meant for the date you want to retire, and the fund manager(s) do all the work over the years. In theory the asset allocation is automatically adjusted as you get closer to retirement. It sounds like a sort of “set it and forget it” method of planning for retirement, but I don’t know how well it works. A quick Google search reveals a lot of criticism of these types of funds.
Professionally managed IRAs
This leaves professionally managed IRAs. My husband uses this method, because he is not into investing, and I’m too chicken to mess with his retirement money. While I feel comfortable managing my own, I’d feel terrible if I made a suggestion and he followed but it turned out to be bad.
There are many different kinds of professionals who can take care of your IRA. Some are fee only (like the one my husband uses), and others get paid on commission (which means that they are probably interested in making sales.) If you go with a professional, I’d suggest picking someone with a fiduciary duty toward your money. That means that they must legally put your best interests first. Professionals with a fiduciary duty have to offer you investment choices that they believe would best meet your stated needs and goals, not just any investment that happens to align with your goals (but that may pay the best commission as opposed to being the best choice for you.)
Choose what works best for you
Overall, it’s a matter of what will work best for you and what you are comfortable with. And there’s nothing that says you can’t change over time, if your needs or interests change. I’ve used every method (except for target and life-cycle funds) over the years and finally settled where I am now. Now matter which method makes you most comfortable, the important thing is to get started — and then monitor your investments and at least make sure that they aren’t doing worse than the market.
What has your experience been like in this area? Are you just getting started? Have you changed over the years, or did you find something that suited you right off the bat?