A Great Pick for Your IRA

To my way of thinking, it's never too early to contemplate where, exactly, you want to send this year's IRA contribution. After all, that represents $5,000 you can put to work on a tax-favored basis -- and a cool $6,000 if you were 50 or older last year. Considering that every cent that stays in your account (as opposed to Uncle Sam's coffers) is a cent that's working for your financial independence, this is one deal you don't want to miss. But now's the time to get going: Given our busy lives, next year's tax filing (and IRA-funding) deadline will be here before you know it. And when it comes to growing your nest egg, there's no need to make a hasty decision.

Haste makes waste
You can always go the index-fund route, after all. Plunk down your IRA cash on theSPDRs (AMEX: SPY  ) exchange-traded fund -- a dirt cheap S&P tracker -- and you'll instantly procure exposure to the likes of IBM (NYSE: IBM  ) and Microsoft (Nasdaq: MSFT  ) . Johnson & Johnson (NYSE: JNJ  ) and AT&T (NYSE: T  ) are in the ETF's mix as well.

Alas, you'll also procure market-lagging performance. Though some crafty types can recover a portion of their costs, index funds are more or less destined to lose to the benchmarks they track by about the amount of their fees.

I think you can do better than that. That's especially true when you consider that, thanks to their typically low rates of turnover (and therefore their small capital gains payouts), index funds aren't the smartest plays for your tax-favored accounts anyway.

Enter actively managed funds
Instead, consider using your IRA account as a parking spot for those investments that, at least in relative terms, tend not to be especially tax-efficient -- high-turnover mutual funds included. It's true that most funds that fit that profile aren't fit for investing. Their managers' high-churn ways simply reflect a tendency to chase last year's winners, as opposed to a strict valuation and sell discipline.

There are important exceptions to that rule, however. And among the picks that appear in the portfolio of the Fool's Ready-Made Millionaire lineup, there's a small-cap fund with a triple-digit turnover rate. The manager's strict sell discipline -- a key aspect of the way he plays effective defense -- accounts in part for that aspect, and over the long haul, he's cranked out peer- and market-besting returns for his shareholders.

Make no mistake: Past performance, as they say, is no guarantee of future results. But given that the manager who racked up that track record remains large and in charge, I like this fund's chances -- a lot, particularly since it currently favors very attractively valued names such as Hornbeck Offshore Services (NYSE: HOS  ) and EMCOR Group (NYSE: EME  ) , both of which sport price-to-earnings ratios that hover near single-digit territory.

A Foolish final word
If you're in a pinch and need an IRA pick in a hurry, SPDRs are a worthwhile choice, albeit one that's destined to lose to the market and won't allow you to take maximum advantage of an IRA's tax-favored treatment.

If, however, you're interested in a set-and-forget lineup of terrific IRA picks that has what it takes to beat the market over the long haul, stay tuned for the reopening of Ready-Made Millionaire. That'll occur next month, at which time you'll be able to check an IRA-worthy lineup of stocks and funds you can use to feather your nest egg.

In the meantime, be sure to learn more about the service by clicking right here. We'll let you know just as soon as we reopen, and you'll be able to snag a free copy of The 11-Minute Millionaire, a Foolish write-up designed to help you navigate up markets and down.

Shannon Zimmerman runs point on the Fool's Ready-Made Millionaire service. Microsoft is a Motley Fool Inside Value recommendation. Johnson & Johnson is an Income Investor pick. The Motley Fool owns shares of SPDRs. You can check out the Fool's strict disclosure policy by clicking right here.


Read/Post Comments (0) | Recommend This Article (11)

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: 739781, ~/Articles/ArticleHandler.aspx, 11/26/2014 6:29:19 PM

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