Best Buys for Your IRA

Editor's note: As a special feature for April, TheStreet.com is offering a seven-part series on maximizing your IRA. This installment is Part 4. Click here for Part 1, Part 2, Part 3, Part 5, Part 6 and Part 7.

You can put anything in an IRA, from bank CDs or Treasury bills, which are virtually risk-free, to highly risky investments such as individual Chinese stocks. Where your own IRA investments fall in this range of risk parameters depends on:

• The size and character of your overall investment portfolio.
• Your individual attitude about taking risk in the financial markets.
• How long you have been investing.
• How much time you want to devote to managing your own investments.

The term "risk" is usually used to describe the volatility of investment returns. A high-risk investment might be up 100% one year but down 50% the next. This type of volatility is unacceptable to most investors. On the other end of the spectrum, a low-risk investment might increase in value at 3% to 5% per year for many years.

Generally, risk and return are positively correlated: Riskier or more volatile investments tend to produce higher returns over the long run. Investors demand this additional compensation for putting their money into more volatile investments. In general, common stocks tend to provide higher returns over the long term than bonds, and bonds tend to provide higher returns than money-market funds.

Perhaps you are very new to investing and this is the first year you have contributed to an IRA. Let's further assume that this new IRA is the only investment you own, other than a savings account at the local bank that you use as a reserve fund for emergencies. If you're nowhere near retirement, it probably makes sense to put your initial investment in a stock mutual fund or exchange-traded fund.