Importance of Stocks in IRAs

Be Sure to Stock Up in Your IRA

by Ken Morris

Retirement statistics show that today's Americans are enjoying longer lives and cite inflation as retirees' greatest economic worry. For that reason a fixed monthly income stream may no longer be sufficient to fund a satisfactory lifestyle during retirement years. To protect against inflation, the ability to grow assets and retain the purchasing power of money is essential. Based on historical performance, that's where stocks may offer an advantage. By offering a combination of capital growth and dividend income, stocks offer the ability to potentially offset the eroding effects of inflation. However, there can be no assurance that past performance will guarantee future results.

Few investment vehicles are of a longer-term nature then an Individual Retirement Account (IRA), and no other financial asset has historically offered a higher return over the longer term than common stocks. Ibbotson Associates, an oft-cited research firm, reports that for the 40 year period from 1964 through 2003, stocks offered an annual total return of 10.61 percent compared to 7.76 percent for corporate bonds, 7.53 percent for long-term government bonds, and 6.03 percent for Treasury bills.

If you reinvest dividends within your IRA, returns can be considerably greater. Using Ibbotson's figures, $1 invested in a broad index of U.S. common stocks on Jan. 1, 1964 through Dec. 31, 2003 with all dividends reinvested would have grown to over $56.46. Remember, dividends and capital gains accumulate in your IRA on a tax-deferred basis. If you sell stock in your IRA for a gain, no tax is due on that gain until you retire and begin distributions, provided the gain is reinvested back into your IRA.

Diversification--widely accepted as the best way to minimize the risk of investing and achieve reasonable returns--is easy to achieve with the vast array of stocks available among hundreds of industries. Moreover, stocks can be easily liquidated to take profits or reduce losses, unlike many other investments that may lock-in investors for a particular period of time.

A diversified high-quality portfolio of stocks can offer the IRA investor both capital appreciation and dividend income. Of course, investment decisions should be made only upon a full consideration of the particular financial situation. Consult with an investment professional about the possibilities of equities within your portfolio.

Past performance does not guarantee future results. There is no assurance this trend will continue. The market value of securities fluctuates and you may incur a profit or loss. This analysis done not include transaction costs and tax considerations.

The S&P 500 is an unmanaged index of 500 widely held stocks. Long Term Corporate Bonds are debt obligations of the issuing corporation. US Government Bonds are issued and guaranteed as to the timely payment of principal and interest by the federal government. Treasury Bills are certificates reflecting short term (under one year) obligations of the US Government.


About the author: "Can somebody please help me watch, manage, invest or oversee my 401k" is the question Mr. Morris hears most often that causes him the most concern. Fearing the American worker is being left in the dark, Mr. Morris, a fee based Investment Advisor Representative, based in Central Ohio, with Raymond James Financial Services, Inc., helps get the most out of their retirement.

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