Self-curating a retirement portfolio can be intimidating, but it can also be empowering. After all, you have upwards of decades to get it right. For many income earners, a Roth IRA is the way to go, but how do you know what to invest in within your account?
The best approach is to segment your Roth IRA between different types of investment vehicles. That way, you have built-in diversification, which every investing expert touts as the beacon of long-term investing.
Why choose a Roth IRA in the first place?
With a traditional IRA, you're investing pre-tax dollars that will be taxed when you take your money out of your account at a later date (with no penalties, as long as you're 59.5 years or older).
A Roth IRA is different because you're investing income that has already been taxed, so it doesn't get taxed later. Roth IRAs are good for people who expect to be in a higher tax bracket when they retire.
Load up on ETFs in your Roth IRA
ETFs help you achieve diversification seamlessly. You can use your Roth IRA to invest in market-wide ETFs like the SPDR S&P 500 ETF (SPY), the Invesco QQQ Trust (QQQ), and the SPDR Dow Jones Industrial Average ETF (DIA). These three ETFs cover the core indices of the U.S. market.
Once you've invested in these types of funds, you can get more thematic with your Roth IRA investments. For example, you can go with an industry like cybersecurity—there's the ETFMG Prime Cyber Security ETF (HACK). Another example is autonomous technology, for which there's the ARK Autonomous Technology and Robotics ETF (ARKQ).
Consider target date funds for your retirement portfolio
TDFs (target date funds) are specially designed to rebalance the closer you get to your retirement date. For example, if you're planning on retiring around 2060, you can get a TDF with that date.
The closer you get to the specified year, the less risky the fund behaves (it transitions from stocks to bonds for increased liquidity). A longer time horizon helps you maximize capital gains within these funds.
ESG funds can help you achieve your retirement goals.
If you want to include impact investing in your strategy, retirement is the perfect place to do it. Funds like SPDR SSGA Gender Diversity Index ETF (SHE) or Invesco Solar ETF (TAN) help cater to environmental, social, and governance criteria.
There are also ESG-oriented index funds, including the Pax Ellevate Global Women’s Leadership Fund (PXWIX) and the iShares MSCI USA ESG Select ETF (SUSA).
Successful Roth IRAs welcome individual stocks—to an extent.
Individual stocks offer less diversification opportunity than funds, but that doesn't mean you need to avoid them in your Roth IRA investment. Have a healthy mix of blue-chip stocks (successful stocks that have been around for a long time) and startups that you believe in.
For example, you might use your Roth IRA capital to invest in Apple (NASDAQ:AAPL) and HubSpot (NYSE:HUBS), or Tesla (NASDAQ:TSLA) and Beyond Meat (NYSE:BYND).
All of the specific stocks and funds used in this piece are examples only. The most important thing is to segment the investments within your Roth IRA (or other type of retirement fund) into different investment vehicles so you can cover your bases.