Why is My IRA Losing Money?
Individual retirement accounts (IRAs) can be subject to market fluctuations. Stocks, bonds, mutual funds and exchange-traded funds all fluctuate in value from time to time.
Diversifying your IRA investment portfolio should allow any losses to be offset by gains elsewhere; however, this isn’t always the case.
1. You’re Not Investing Enough
Value of savings accounts may dip if the market experiences a downturn; but that shouldn’t cause panic or sell them off immediately; market downturns won’t last forever and temporary loss won’t prevent you from meeting retirement goals.
Employer-sponsored plans typically invest IRA contributions automatically into a portfolio of stocks and bonds that correlates to your expected retirement year, with compounding helping your savings expand dramatically even with only an annual 5% return.
Vanguard recently conducted a study that reveals many IRA investors make a costly error when moving 401(k) funds to an IRA account, costing Americans billions each year in retirement savings. Here’s what you need to know to avoid it.
2. You’re Investing in the Wrong Asset Classes
Individual retirement accounts (IRAs) offer you the ability to invest in multiple assets, but their investment rules can be complex and even experienced investors may make costly errors when investing.
Asset classes available to investors include stocks, bonds, ETFs, mutual funds and real estate. When creating their portfolio, investors should choose an asset class that reflects both their investment goals and risk tolerance; typically stocks offer higher potential returns but carry greater risks.
IRAs can hold most financial assets except life insurance and collectibles. While you can use your IRA to buy real estate, doing so involves many complexities and restrictions. For instance, renting out vacation property through Airbnb could cause tax issues as your IRA cannot use that money for personal gain in the current year; this rule is known as the personal benefit rule and it’s essential that investors understand it before investing in rental properties.
3. You’re Investing in the Wrong Custodian
Many investors use their IRA to invest in hard assets like real estate, gold and other precious metals as inflation hedges to preserve purchasing power as they near retirement.
However, many IRA custodians don’t allow their clients to make such investments due to traditional brokerage firms making more money selling traditional investments such as stocks, mutual funds and ETFs than from investing in alternative assets like real estate or private placements.
Due to their unique financial information requirements and lack of audit by a public accounting firm, non-traditional investments often lack liquidity compared to traditionally traded assets. Unfortunately, fraudsters still try to sell fraudulent investments through legitimate custodians despite this risk, potentially violating an IRA and incurring costly violations which may even disqualify it altogether. It is therefore critical that when investing non-traditionally you select a custodian who can support and facilitate such endeavors.
4. You’re Investing in the Wrong Funds
Your IRA could be losing money due to your investments not reflecting your risk profile and time horizon. Make sure your portfolio reflects this by diversifying and investing across risk profiles.
Rebalancing your portfolio regularly is critical in protecting its overall value, so as soon as an asset class, economic sector, or geographic region loses value it could bring down the entire account. Rebalancing is therefore essential.
As part of your financial plan, it is wise to consult a financial advisor periodically when making changes to your IRA. They can ensure it remains diversified while supporting long-term goals; additionally, tax advantages make an IRA all the more attractive when used correctly for retirement savings; an experienced advisor can point the way.
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