Why is My IRA Losing Money?
Traditional or Roth IRAs allow you to invest your money without incurring taxes until distributions are made, giving you more flexibility than a taxable account would offer in terms of choosing where your investments go; such as stocks or more conservative alternatives like CDs.
No matter how secure an investment may be, even the best can sometimes lose money over time. Your IRA could be at risk due to several reasons;
1. You’re investing too much
Individual Retirement Accounts (IRAs) allow you to invest money without incurring taxes on realized gains or earnings, making this investment vehicle ideal for diversification across a wide variety of assets.
Your IRA investments may fluctuate with the economy. But there’s no need to panic if you experience losses; losses are normal and can even offer opportunities to buy low.
An IRA may also lose money if its portfolio isn’t diversified properly. Diversifying involves investing in different asset classes such as stocks, bonds and other assets to reduce risk by spreading your investments among various classes or economic sectors so if any one class or sector experiences declines you’ll still experience gains from other areas to offset any losses from one.
Keep in mind that your IRA’s overall investment performance is more important than any individual stock or bond. Over time, your IRA investments may experience substantial value growth; to stay invested successfully over the long-term requires selecting an appropriate portfolio tailored to both your long-term financial goals and risk tolerance.
2. You’re investing too little
Many people who open Roth IRAs or other tax-advantaged retirement accounts don’t know where they should invest the funds once they have them in their account. Meghan and other money nerds recommend investing your contributions in target-date mutual funds, bond funds or carefully chosen stocks; however, according to a Vanguard study two thirds of last minute IRA contributions end up sitting in money market funds that essentially serve as glorified checking accounts.
Due to a poor stock market performance in 2022, many IRA investors are experiencing their balances decline sharply. It can be frustrating seeing your hard-earned dollars decrease in value; but don’t panic; depending on how much and close you are to retirement age your IRA could still recover over several decades and end up with a healthy nest egg; patience is the key when sticking with long-term plans.
3. You’re investing too late
Watching your retirement savings dwindle can be distressing, but as long as you are investing according to your long-term goals and risk tolerance, don’t panic. No one knows when or if the stock market will dip or rise again; so the best course is often sticking with a plan and accepting its fluctuations as part of life.
Consider also that saving for retirement is a multi-decade process; even if your IRA balance drops significantly in 2023, there’s still plenty of time to catch up due to compound interest returns.
However, as you near retirement age, it may be worthwhile to diversify some of your IRA money into safer investments like bonds. When lending money to corporations and the government as investments like this they promise to return your principal plus interest over time; providing some protection in case you need to withdraw earlier from your IRA to cover expenses, buy real estate or start your business venture.
4. You’re investing in the wrong asset class
If your IRA is losing money, it could be that its investment types don’t align with your long-term goals and personal risk tolerance. An IRA was designed to help save for retirement while investing in growth – not as an avenue to buy into short-term fad investments that wouldn’t normally make the cut in taxable accounts.
Example: It would not be wise to invest in an exchange-traded fund that invests in electric vehicles or cryptocurrency, nor engage in prohibited transactions such as self-dealing.
IRAs typically contain various asset classes, including stocks, bonds and mutual funds. To reduce short-term market dips and make your IRA portfolio as resilient as possible it is important to diversify and rebalance it regularly in order to keep it balanced. Rebalancing also acts as an excellent way of maintaining liquidity within your IRA portfolio.
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