Best Buys for Your IRA

If, on the other hand, your IRA represents only a small part of your total investment portfolio, it can be much more concentrated. You can use it to house a single security or asset class. Assuming you have a choice about how to balance your investments, it would be advantageous to put the investments that generate the biggest tax bills in an IRA.

For example, if you want to allocate 60% of your portfolio to stocks and 40% to bonds, you should keep the bonds in an IRA. That's because the interest that bonds pay is taxed as ordinary income, whereas the long-term capital gains generated when you sell stocks held for more than a year are taxed at a lower rate. If, like me, you have substantial short-term capital gains due to investment activity, your IRA would be a good place to concentrate that activity.

Another advantage to putting your least tax-efficient investments in IRAs is that it simplifies your tax returns. It's not necessary to report gains and losses on the individual investments held in an IRA, so you won't have to spend hours slaving over Schedule D forms.

The conventional wisdom is that younger investors can tolerate more volatility than older investors because they have a longer-term time horizon. But that doesn't apply to everyone. If you're going to be pacing the floor all night because your portfolio is down 15%, you should only consider an investment approach that severely limits this possibility.