What is an IRA invested in?

[Guest eve23]

I'm considering opening a Roth IRA sometime in the next few months and so I've been doing quite a bit of homework on it. I've never invested in anything other than my savings account so I'm pretty "green." One thing that I haven't really been able to find out is what exactly is an IRA invested in? Is it the stock market? I'm not at the point where I feel I could successfully juggle my own portfolio if such is the case. I've heard it's good to get a ROTH IRA from a discount brokerage firm. Do they handle the IRA and where the money is invested or do you? Thanks for any help you can offer.

[Guest eve23]

I forgot to also ask what are the risks included with getting an IRA. Is it possible to lose money (principal)?

[John G]

IRAs or Roth IRAs were created by Congressional legislation to encourage retirement accumulation. Think of the IRA as the envelope use for mail. Lots of things can be put inside, the envelope is just a container. So it is with IRAs.

Savings accounts are advertised as "safe" and "insured" - this is very misleading information. While you are not supposed to lose your initial principal with Federally insured accounts, there is a bigger risk. The bigger risk is that your savings will not grow sufficiently to meet your future needs, or will grow sufficiently to overcome the erosion of value from price inflation. Right now, some savings accounts have yields that are not even 1/2 the rate of inflation.

You need to spend some time educating yourself about the general concepts of investing. Besides money markets or CDs, your investment options include stocks, bonds and mutual funds.

Let me jolt you.

I am guessing that you are very young and in the early part of your working career. If this is true, I would suggest that you should invest 100% of your retirement assets in a no load stock mutual fund.... one that can go down in value.

Why? Because investing in the stock market is a wager on the future, growth and our free market economy. The stock market goes both up and down.... however, there are many more up years than down years and the best up years blow away the worse down years. Over the long haul, equities (aka stocks) tend to provide a return of around 10% a year. Time is an investors friend. Over the long haul, the trend for equities is up. You are likely to be investing for many decades, so just ignor the short term movements and stay with the plan.

A simple recommendation: call Vanguard or look them up on the web. This is a mutual fund company with many choices including a number of index funds with very low costs. Read the materials. Be sure to ask them for anything they have for beginners. A mutual fund is another kind of "envelope"... a company that buys a bundle of investments (stocks, bonds, etc.) and when you give them money you own a small part of their portfolio. When you buy a mutual fund, they do the "juggling". Someone just getting started does not have sufficient expertise or enough assets to effectively own individual stocks.... probably doesn't want to spend the time studying companies either.

I suspect the above recommendation to invest in stocks might scare you. You fears are due to a lack of basic knowledge about investing. Dedicate some time to reading Kiplinger Financial, Worth, Money or other personal finance magazines.

Post again if the above is not clear or if you have additional questions.