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I love IRAs. Traditional, Roth, SEP, rollover, all of 'em ... with an IRA, I can invest in nearly anything, get favorable treatment (like reduced fees or lowered minimum investments) from many brokerages and fund firms, and enjoy terrific tax advantages. I have three IRAs myself, and I might add a fourth later this year.
But if you're new to IRAs, or if your only investment experience is selecting investment options from the limited menu offered by your 401(k) -- or worse, buying a dot-com stock in late 1999 -- the investment freedom offered by an IRA can seem daunting. But have no fear, Fool. We're here to help.
While some investors do hold relatively esoteric investments like commercial real estate or hedge funds in their IRAs, the stock market is the sensible place for most of us to invest. Nothing else builds wealth for the average investor like the stock market's inflation protection, capital appreciation, and compounding effect over time.
Getting into the stock market via your IRA is easier than ever. Our IRA Center can help you learn everything you need to know about starting an account and picking investments. Here are three basic approaches to IRA stock investing, ranging from the extremely simple to the somewhat simple. Feel free to mix and match them as your investing skills and confidence increase.
Buy index funds
Low-cost mutual funds that seek to match the performance of an index are extremely popular IRA choices, and for good reason. Holding an index fund pretty much guarantees that you won't underperform the market over time, putting you ahead of the vast majority of investors in actively managed stock funds. If I had to pick one investment that I couldn't touch for 20 years, index funds would be on my short list of choices. They're as foolproof as stock investing gets.
As long as you've chosen a low-cost fund (check out ETFs like SPDRs (AMEX: SPY ) or Diamonds (NYSE: DIA ) and offerings from Vanguard and Fidelity, and stay away from broker-sold index funds), there's really only one downside to an index fund: You'll never beat the market. But for investors who don't want the risk or work of stock-picking, and who can meet their retirement goals with a market-average return, that's just fine.
You're already here at The Motley Fool, perhaps the best place in the whole known universe to learn how to choose and buy good stocks. Buying good stocks when they're selling at a discount to their intrinsic value is the way for an individual investor to generate above-market returns while managing long-term risk.
If you're new to stock-picking, you can start your education right now by reading through our Investing Basics collection.
And for some great investing ideas, check out our free Motley Fool CAPS community intelligence service, where the best stock-pickers in Fooldom pitch their favorite investments for all to see. Five-star rated companies such as Waste Management (NYSE: WMI ) , Quality Systems (Nasdaq: QSII ) , and ViroPharma (Nasdaq: VPHM ) could help fund a retirement in style ... but you'll never know unless you check 'em out!
Of course, that's where a long-term stock-picking strategy fails for some investors. If you don't have the time or inclination to research stocks and monitor your portfolio carefully year after year, it's hard to consistently stay ahead of the market with a stock portfolio. If this describes you, carefully consider the next option.
Hire someone to buy stocks for you
If you have several million dollars in your IRA, you'll have no trouble finding a capable investment manager to help you out. But if you don't, you can still get the services of a professional manager -- via an actively managed mutual fund.
Despite (or perhaps because of) the many years I spent working in the mutual fund business, I'm not a big fan of active stock funds. High fees and various institutional constraints ensure that most actively managed funds will underperform the market over the long term. There are exceptions, though ... if you know how to find them.
For instance, one fund discussed in this month's Rule Your Retirement newsletter managed to eke out a positive gain in 2008. It's not that well-known, and the fund is among the group of alternative funds that invest somewhat differently from mutual funds. But investments in companies like Consolidated Edison (NYSE: ED ) and Scana (NYSE: SCG ) , which have held up fairly well during the bear market, have helped avoid the big losses that other funds have seen.
To learn more about this fund and other great ways to reignite your IRA after the mauling you've seen in the past year, take a closer look at Rule Your Retirement. You can click here to get yourself a 30-day free trial, which will let you read Robert Brokamp's report on alternative funds right now. There's absolutely no hidden costs or obligation to buy.
This article was originally published on Jun. 25, 2007. It has been updated by Dan Caplinger, who owns shares of SPDRs. Waste Management is a Motley Fool Income Investor pick and a Motley Fool Inside Value recommendation. Quality Systems is a Motley Fool Stock Advisor selection. Try any of our Foolish newsletters today, free for 30 days. The Motley Fool's disclosure policy is flame-retardant.