No. of Recommendations: 5

I'm writing this in response to an email from a woman named Bridget that we received asking specific questions about the use of options in an IRA and a regular account.

I'm responding to Bridget, but perhaps these general thoughts are helpful to others, too.

Bridget, as to your first concern:

*I agree that having approximately 30% of your regular portfolio's funds in one stock is far too much -- especially when it's a steel stock that hasn't recovered since 2008. That's severe under-performance. Now, you don't want to move all of the funds into something risky, but you certainly want to decrease this position significantly, in my opinion -- decrease it down to no more than 5% or so of your account. Overall, I would generally advise owning at least 20 positions, each around 5% or so. That's diverse enough but not overdoing it. You want your portfolio, in aggregate, to grow with the market (or ideally better than it, but with it would be good, too) over the coming decades. So, you can't risk having so much of your funds in any single stock that may not perform. Again, I would strongly recommend that you diversify downward from this 30% stake in one stock, down toward 5%, and then use the money to build a portfolio that is much better diversified, in strong and varied businesses.

*Second, your ROTH is 100% cash so that you can write puts. I agree with your concern that this cash isn't working hard enough for you. This is a ROTH IRA that should be invested in stocks, in my opinion, for growth. It's nice to earn some put income, but you're missing long-term stock upside. Plus, keep in mind that since 1900, about 60% of the market's returns came from dividends. So, you want to own stocks and enjoy increasing dividends, too, especially in a retirement account that may have decades to grow. As a solution, I would seek to invest your ROTH in strong companies that you can imagine owning for a long, long time (as long as merited). Again, diversify your ROTH into stock positions that are on average around 5% in size each (some could be 7% or 8%, if you really believe in them, but on average...)

Overall, it's excellent that you have such a good handle on options. That could come in VERY handy in the years ahead, especially after you have more assets invested and when you want to earn steady income with options (like in your retirement years!). But right now, from what I can tell, you are in your saving and compounding years. You want your money invested in stock to compound the coming decades.

So, although I don't know more about your investment situation (your debt, savings rate, goals, age, etc. -- although I am married to an actress!), I suggest (based on what I believe to be true with you) that you invest your ROTH in great stocks. And that you diversify your regular brokerage account, too, so that you don't have 30% or more in just one stock.

Again, I'd want to see these accounts invested in at least 10-12 stocks each, and ideally something more like 20 stocks each, each stock at around 5% of your starting capital -- and then let it grow over the years, as you keep saving and adding more, too! (Just as you're doing with your ROTH -- congratulations!)

I hope this helps. In sum, I think the concerns you shared are exactly right, so I hope that you can move to correct them.

I had to post this on a board because we can't provide specific investment advice in email, but we can provide our thoughts on a public forum.

Fool on!

Print the post  


When Life Gives You Lemons
We all have had hardships and made poor decisions. The important thing is how we respond and grow. Read the story of a Fool who started from nothing, and looks to gain everything.
Contact Us
Contact Customer Service and other Fool departments here.
Work for Fools?
Winner of the Washingtonian great places to work, and Glassdoor #1 Company to Work For 2015! Have access to all of TMF's online and email products for FREE, and be paid for your contributions to TMF! Click the link and start your Fool career.