Best Buys for Your IRA

How can you do that? By owning enough short-term fixed-income instruments to dilute the impact of fluctuations in the more volatile segments of your portfolio, usually represented by common stocks.

I'm a strong believer in diversification. If you're just starting out, this means that you will probably want to use mutual funds or ETFs as investment vehicles. Personally, I would recommend going with a low-cost index fund such as those offered by Vanguard, or the use of Spyders (SPY Quote), an exchange-traded fund that tracks the S&P 500 index, for the equity portion.

There is no evidence that it's possible to pick an actively managed mutual fund that will outperform the overall market over time.

There are also mutual funds and ETFs that track bond indices.

Using index funds and ETFs satisfies a couple of important requirements. First, your portfolio will track the market, reducing your anxiety. You may still lose some sleep when the market is down, but you won't have to worry about your fund underperforming the market. Second, investing in index funds is easy and doesn't require much time. The only thing you need to worry about is occasional rebalancing to keep your portfolio in line with your asset-allocation objectives.

If you have a larger portfolio, you may still want to use index funds or ETFs. There are plenty of alternatives that allow you to track a wide range of assets, including foreign stock markets or individual industries. The more complex the approach, however, the more time you will probably have to spend monitoring your investments.

As I said, my own approach is to reserve my IRA for U.S. common stocks that I usually hold for less than a year. I have other investments outside my IRA, including real estate, fixed income and oil and gas royalties, so my total investment portfolio is well diversified. This approach keeps me very busy, and I spend a couple of hours each day following my stocks and looking for new ideas to invest in. It is time-consuming, but it is something I love to do, and the results so far have made the time spent worthwhile.

Coming up next: A more detailed description of Moore's own investment approach.