I generally hear people recommending that you invest your IRA money in an index fund, but if you have a long time before retirement, wouldn't it make more sense to invest in an agressive mutual fund? The tax free nature of an IRA makes it seem like that would be the best place to own an aggressive mutual fund, that way the taxes from the higher turnover rates don't eat away your gains. Can someone explain to me what I'm missing?Zach
Can someone explain to me what I'm missing?High management fees and the lack of sufficient correlation of this year's winners with next year's.Hyperborea
Can someone explain to me what I'm missing?There's plenty of room for a range of opinions.IMO, your retirement portfolio should contain your most conservative investments. The performance of these investments will determine your standard of living in retirement. If you have retirement investments that throw off income, then you may prefer to keep those investments in an IRA, while preferring to keep your retirement investments that appreciate mostly through growth in non-retirement accounts.Additionally, speculative investments should form only a small fraction of your total portfolio. By their very nature, you might hit some out of the park home runs with one or two of your speculative investments, but most of your speculative investments will be foul outs or strike outs.I think an interesting question is whether IRAs have the value they once had given the changes in tax law. IRAs have the unpleasant feature of turning all appreciation into ordinary income, which is taxed at a relatively high rate, plus there are all those rules to be dealt with. The flip side of the coin is Congress wrote sunset provisions into the tax law they passed this year, and Congress seems to tinker with the tax law every three or four years anyhow.I see frequent posts on TMF's discussion boards from members who bravely write, "I can handle risk." I'm confident most of these members think all they have to do is buy a penny stock and hang on for the wild ride to wealth. It just doesn't work that way in the real world. There's a huge difference between volatility and speculation, and from my observations, most TMF members don't understand the difference.David JacobsTMFDj111
but if you have a long time before retirement, wouldn't it make more sense to invest in an agressive mutual fund?I have my Roth IRA overweighted in small caps and foreign, not because they are sometimes considered more aggressive, but because my 403(b) is lacking suitable exposure in those areas.But I wouldn't suggest a really aggressive fund--taking on more risk does not always produce better returns.There is also the psychological aspect: if the aggressive funds produce significant losses, would you stick with a prudent investment strategy, or would you be convinced that the stock market is legalized gambling and swear off of it for too many years? And would you know if the fund is prudently aggressive or reckless? For example, a lot of people were looking forward to the Jacob Internet Fund (JAMFX), which had a subscription price of $10, a nice, aggressive Internet fund (when some Internet funds were experiencing a 200% or in once case a 400% gain in one year), but now, about 4 years later, it has a NAV of $1.53. This is an example where the latest hype and aggressive style can really backfire. (And I also recall when PCs were hot, or going back to my childhood I remember when Electronics were hot, and when Aerospace was the hot sector, and each one turned out to be a bubble that burst, and it took years before they became a reasonable, sane investment.)So, yes, maybe something a little riskier than the S&P500 or Total Stock Market fund may be used, but one doesn't want to take too much risk that there is a good risk of almost total loss.
<<wouldn't it make more sense to invest in an agressive mutual fund? The tax free nature of an IRA makes it seem like that would be the best place to own an aggressive mutual fund, that way the taxes from the higher turnover rates don't eat away your gains. Can someone explain to me what I'm missing?>>You can not claim a loss in an IRA
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