Smart IRA Stocks and Bonds Selection

By: Simon Napper

Most of us have money invested for our retirement. Many of us do little to maximize the size of our nestegg. Nearly all of us don't know what to do. Running after the latest fad without understanding the fundamentals can be very stressful and not very rewarding.

If you have an IRA, the freedom of choice can either paralyze you because there is simply too many alternatives, or set you free to use the most efficient and effective funds. Getting better returns with low risk does not require you to have detailed knowledge of investing and to endlessly study the latest trend. Better returns are a matter of having the right amount of diversification. If all of your money is in a small number of segments (e.g. US stocks, emerging markets and fixed income) then, over the long term, your returns are likely to be lower and more volatile.

MyPlanIQ created SIB portfolios (Simpler Is Better) - market index funds from key asset classes that can be used to measure historical returns to show the impact of asset class selection rather than fund or stock selection. SIB portfolios for different numbers of asset classes are built and used to benchmark returns. From this, conclusions can be drawn as to what is an effective investment strategy for today. For example, if you start with 60% bonds, 20% US stocks and 20% international stocks, after six months it is likely that the ratios are no longer 60/20/20 and you need to rebalance the funds to bring it back into the correct ratio. Over the past decade 'buy and modify' (Tactical Asset Allocation or TAA) evolved whereby you keep the same asset classes but you may change the ratios depending on market conditions. For example a 60% bonds, 20% US stocks and 20% international stocks portfolio may see the bond and US stock ratios increased at the cost of the international stocks when international economies are faltering.

Four different SIB swere created from three to six asset classes.

The Three Asset Class SIB: has bonds US and international equities - heavy dependence on the US and the rest of the developed world. With a conservative strategic asset allocation strategy, the portfolio would consist of 60% fixed income and 20% each for US and international equities.

Four Asset Class SIB: Adds emerging markets to the three asset class SIB. Note that the international asset class means established nations such as those in Europe and emerging asset classes are represented by developing nations. With a conservative strategic asset allocation strategy, the portfolio would consist of 60% fixed income and 13.33% each for US, international and emerging market equities.

Five Asset Class SIB: The five class SIB takes both REIT and Emerging markets and adds that to the original SIB. The five asset class SIB is a strong platform for portfolio creation. It has broad diversification and, with tactical asset allocation, good returns. If you are using a five asset class portfolio, you are in good shape - but take a look at the six asset class portfolio because it will be increasingly important when inflation starts to appear.

SixAsset Class SIB: Commodities are now added to the portfolio. This asset class and will helps broaden diversification. As adding another asset class does not significantly improve the result within the 5 year timeframe, it may be asked whether the extra effort is worth it. Broader diversification is good, but is it really necessary? In our view, the addition of commodities will be increasingly important as a hedge against inflation as the recovery slowly continues and there is increasing inflationary pressure.

The three asset category portfolio is out of date. Check your 401K and/or IRA to make sure you have at least five asset categories. This is not rocket science and you should be able to increase your returns and be in control of improving your returns. SAA should deliver in the 5-6% range and with a TAA strategy it is possible to get in the 10% range - remember an additional 6% over a decade will double your money.

Asset allocation is the fundamental key to good returns at a low risk. This approach is understandable and everybody should be following a solid asset allocation strategy. The reason is simple - more money for your retirement and less stress getting there.

MyplanIQ has more details on strategies and results for a wide number of plans.

Article Source: http://yourfinance.co.za

About The Author
Simon Napper is President and Founder of MyPlanIQ. MyPlanIQ the only provider of advanced investment strategies totally customized to personal risk profile and plan funds.