$200k in an IRA, unallocated. What's the safest investment?

Question

We have $200k sitting in an e-trade IRA, for retirement. We just rolled the money into this IRA, and the funds are unallocated. We're pretty risk-sensitive, but this money will be untouched for decades, so we'd like it to do at least a little work, but without too much risk of loss.

Suffice it to say we know next to nothing about investment. Is there a good rule of thumb or general advice as to where the IRA funds should be allocated that would minimize risk, but still bring a little bit of a return?

Answer 1

Note that long term you need to plan for possible inflation, so "a little bit of return" generally wants to be at least high enough to offset that plus "a little bit". Which is why just shoving it in a bank, while extremely safe, isn't usually the best choice.

You need to make some decisions about how you trade off risk versus return, whether you will comfortable riding out a downturn while waiting for recovery, and so on.

My standard advice, as someone else who knows how little he knows: It's worth spending a few hundred of those dollars to talk to a real financial planner. (NOT someone who has any interest in selling you particular products, like a broker or agent!) They can help you ask yourself the right questions about comfort and goals and timeframe to pick a strategy which suits your needs. It won't be "exciting", but it sounds luke you agree with me that this shouldn't be exciting and "market rate of return" (about 8% annually, long term) is generally good enough, with more conservative positions as you approach the point of needing that money.

Answer 2

The safest investment is probably a money market fund [originally I said a TIPS fund but they appear to be riskier than I had thought]. But you might not want to invest everything there because the returns are not going to be great. High returns come with high risk.

The best portfolio has some percentage (which may be 0) of your money in a safe asset like a money market and some in a risky portfolio (this percentage may also be zero for some people). You should consult your own risk aversion and decide how much money to put in each. If you are super risk-averse, put almost all of it in the money market. If you want a little more return, put more of it in the risky portfolio. This is a fundamental result of finance theory.

What's the risky asset? A fully diversified portfolio of bonds and stocks. People don't agree on exactly what the weights should be. The rule of thumb back in the day was 60% stock and 40% bonds. These days lots of financial planners recommend 120 minus your age in stock and the rest in bonds. But no one really knows what the perfect weights in the risky portfolio should be (the rules of thumb I just gave have little or no theoretical foundation) so you have to choose for yourself what you think makes sense.

Answer 3

if you don't intent to touch the money for 10 years or longer, then dumping 100% into a low-expense-ratio index fund seems like a perfectly reasonable thing to do. it is simple, low maintenance and fairly mindless. just remember to reinvest the dividends occasionally (e.g. every 6 months).

however, if you are the kind of person who is going to lose their nerve when the market goes down 30%, then putting some of your money into a bond index fund or even a treasury note fund would be better than selling stock in a down market. just figure out how much of your portfolio you are comfortable losing, and put that in stocks. then put the rest in some stable value fund and watch it's value get slowly washed away by inflation while your stock investments rise through violent swings.

Answer 4

Define "risk-sensitive":

1. risk of capital loss: invest in IRA "savings account". FDIC guaranteed (within specified limit). Exposes you to risk of declining interest rates.
2. risk of capital loss and declining interest rates: invest in Certificate of Deposit from FDIC bank. Exposed to risk- higher interest rates.
3. risk of lost opportunity: see S&P 500 returns over "...for decades" vs above strategies.
4. risk of inflation: it gets more complicated; not worth going into.
5. etc. there are numerous risks to consider. Thankfully, taxation risk isn't one of them.

The point is, define Your risk, and your choices will narrow. Some investors worry more about what next months statement will show & lose sleep over it; some investors do not want to miss the average historical rates of return for equities (stocks) and are willing to tolerate fluctuations in monthly statements.

Answer 5

Your funds are in a retirement account. Withdrawals from your IRA will be penalized if you withdraw before you turn 59.5 years old, and you appear to be decades away from that age.

The general advice I would give you is to pick a "target year fund" that targets the year you turn 59.5. The stock market is more volatile, but its average gains will protect you from inflation just eating your funds. Bonds are in counterpoint to your stocks - more stable, and protecting you from the chance that stocks dip right before you want to withdraw.

Target year funds start with higher amounts of stock, and gradually rebalance towards bonds over time. Thus, you take your market risks earlier while you can benefit from the market's gains, and then have stability when you actually would want to retire and depend on the savings.