The Best Funds for Your IRA

Getting your financial house in order always seems to be No. 1 on your to-do list this time of year, doesn't it? Indeed, if you're reading this, I'm guessing that at least one of your New Year's resolutions has to do with investing. Good for you! Still, at the risk of raising a sore subject, I just have to ask: Have you thought about tax time yet?

The good/bad news
Uncle Sam's favorite time of the year is just a mere three months away, you know, but that bit of bad news is actually good news, too. In addition to being the day that taxes are due, after all, April 15 also offers one last chance to make your IRA contributions for the previous tax year.

Still, just because you can put it off until then certainly doesn't mean that you should. If you want to be smart and deliberate about your investment decisions (and you know you do, Fool), now's the time for all good investors to come to the aid of their portfolios. Remember, it's No. 1 on your to-do list.

Get on with it
OK, I'll stop reminding you of that and just cut to the chase with two quick-and-dirty ways to make smart IRA decisions fast. We'll call 'em the no-brainer and the brainer.

The no-brainer
Two words: index funds.

In a pinch, index funds such as Vanguard Total Stock Market Index (FUND: VTSMX  ) and Fidelity Spartan 500 (FUND: FSMKX  ) are pretty tough to beat. These funds track sturdy benchmarks (the MSCI U.S. Broad Market Index and the S&P 500, respectively), and their portfolios are anchored in market stalwarts such as Johnson & Johnson (NYSE: JNJ  ) , Citigroup (NYSE: C  ) , and Microsoft (Nasdaq: MSFT  ) . Their low-rent price tags, moreover, give them an important competitive advantage over more expensive rivals. And these days, of course, index funds come in all shapes and sizes. There are the popular exchange-traded funds (ETFs) such as SPDRs (AMEX: SPY  ) and the Nasdaq 100-tracking Cubes (Nasdaq: QQQQ  ) and a clutch of mid- and small-cap contenders, as well.

In the latter category, one ETF worth considering is the iShares Russell 2000 Index Fund (IWM). For the five years that ended with November 2005, this puppy has brought home an annualized return of nearly 10%. That mark easily outclasses the S&P, which eked out a miniscule gain of just 0.64% over the period. What's more, its namesake bogey has been a long-haul overachiever, too, cranking out a total return of more than 556% during the past 15 years while the S&P 500 racked up just roughly 420%. The iShares fund is priced right, too. As with any ETF, you'll need to factor brokerage fees into the equation, but once you're invested here, this fund's expense ratio will ding you just 0.20% per year.

The upshot, then, is this: If it's 11:59 p.m. on April 15, you could do a lot worse than simply writing an IRA check for an index fund or ETF like iShares Russell 2000.

But then again, you could also do a lot better. Who wants to make a decision as important as where to invest IRA dough for the year in a pinch? No one, that's who. And so it's for that reason that we bring you ...

The brainer
As big a fan of index funds as I am, I'm a bigger fan of assembling a portfolio that includes both actively and passively managed picks. Why so? Well, just as small-cap stocks sometimes outpace the big boys -- and just as value sometimes trumps growth -- indexing and active management frequently trade pole position. Indeed, over the last five years, the typical actively managed fund has trumped the S&P by a sizable margin.

And that's just the typical actively managed fund. Imagine the possibilities if, when you went fund shopping, you brought the same kind of analytical rigor to bear on funds that some folks bring to stocks.

Actually, you don't have to imagine. That's precisely what we do each month in the pages of Champion Funds, which you can try for free by clicking right here. In the newsletter, I highlight both index picks and Championship-quality funds that are actively managed. These funds sport talented stock pickers with long-term track records of success. They also have reasonable price tags. Indeed, the average expense ratio of the funds I've recommended to subscribers hovers around 1%; the industry's typical entrant will ding you roughly 1.5%.

In terms of performance, the newsletter's focus is on the long term, and while we'll soon be celebrating our second anniversary, here's what I can report: So far, so good. Taken together, my picks have bested the market by roughly 10 percentage points -- a significant margin in the world of mutual funds, not to mention in the world of IRAs. So, if you're currently contemplating where you should plunk down 2005's $4,000 contribution limit, I think (at the risk of sounding immodest) that you owe it to yourself to read through Champion Funds.

And in the meantime
Don't wait until tax-filing day is upon you to make your IRA contribution decision, OK? If you're anything like me, you're going to be busy enough as it is.

This article was originally published on March 1, 2005. It has been updated.

The brand-new issue of Shannon Zimmerman's Champion Funds newsletter service releases today at 4 p.m. EST. You can take a risk-free gander at today's issue, as well as every issue and pick published to date, with a30-day free trial. Shannon owns shares of Vanguard Total Stock Market. Microsoft is a Motley Fool Inside Value recommendation. The Fool has a strict disclosure policy.


Read/Post Comments (0) | Recommend This Article (0)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 501075, ~/Articles/ArticleHandler.aspx, 9/21/2014 4:15:56 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement