Dear Dagen: What Funds Should I Buy Now in My Roth IRA?

I need to put $3,000 into a Roth IRA by April 15. I am 26 years old and a novice investor. I would like to put this money into some sort of mutual fund or funds but I'm unsure about what type of fund in which to invest. Do you have any suggestions?

Brett

The advantage of investing through an IRA instead of a 401(k) is that you get to choose any mutual fund you like.

And the disadvantage is that you get to choose any mutual fund you like.

When you go to pick a fund at random, the choices can be overwhelming. Finding a spouse seems easier. There are, after all, about 6,000 different funds in this country.

You simply need a strategy that will winnow that list down and prevent you from going for the first fund that looks decent.

Don't Buy Anything

First, you only need to make a contribution to your IRA by April 15. You don't have to pick a stock or bond fund by that date as well. You can put your $3,000 in the IRA (Roth or otherwise) and take your sweet time deciding what investment to actually buy. The money can sit in a money market fund while you research funds or other options.

An IRA isn't an investment, like a stock, bond or fund. It's only a type of account. It's a wrapper of sorts of that goes around your money and lets it grow tax-deferred.

Shoot. Your cash can simply stay in a money market fund if you're really afraid of the stock market. But with decades to go until your retirement, you can and should take on more risk than that. No risk, no reward.

The Simple Plan

Keeping most of your money in stocks should produce the biggest booty over time. The idea is that you get paid for taking on risk. And stocks over longer stretches of time should produce higher returns than bonds. According to data from Charles Schwab, a portfolio with 95% in stocks and 5% in stocks and cash produced an average annual return of almost 11% from 1970 through 2002. But one with just 20% in stocks delivered 9% a year over that same period.