It depends on what the IRA funds are invested in. If the IRA funds are invested in money market instruments such as U.S. Treasuries or bank CDs, the IRAs are safe. On the other hand, due to the current economic instability globally and domestically that causes so many fluctuations in the stock market, IRA funds invested in stocks or stock mutual funds are riskier.
Are there any best practices to adhere to when investing in an IRA?
It depends on time horizon and risk tolerance. If your IRA investment is for long-term goals and you can tolerate risk, an IRA account is better off with stocks or stock mutual funds. When investing for the long run, the best practice is to use the dollar-cost averaging technique by allocating a fixed amount of money to buy a particular stock or stock mutual fund on a regular schedule. The dollar-cost average enables you to buy more shares when prices are low and fewer shares when prices are higher.
Due to the instability of the economy, is an individual better off investing in a traditional IRA or a Roth IRA?
The decision to choose between a traditional IRA or a Roth IRA should be based mainly on tax consideration. If an individual anticipates a higher tax bracket in the future, this individual is better off investing in a Roth IRA.
We would like to thank Gow-Cheng Huang for his insights in this interview.
Huang teaches financial management, global finance and investments at Alabama State University. Huang’s research interests are in the areas of market efficiency, return anomalies and behavioral finance theory. His work has been published in finance journals such as Financial Review, the Journal of Empirical Finance, Review of Quantitative Finance and Accounting, the Journal of Real Estate Finance and Economics, and Real Estate Economics. Professor Huang earned his Ph.D. in finance from the University of Alabama in 1991.