A-Train Finance

Timing the markets can be very difficult. In order to maximize returns on your Roth IRA, there are certain strategies that you should implement. Everyone has their different take, but there are some ways that are more efficient than others. I will review four of the most straight forward ways to do this and each strategy’s individual strengths and weaknesses.

Monthly Contributions-
If you divide the maximum yearly contribution of $5000 dollars (it was raised by $1000 this year) by 12 months you get $416 per month. If you are more likely to save money by getting it ‘out of mind’ then this might be a good strategy for you. If you contribute and then invest this amount every month, you will be doing something called dollar cost averaging. What this means, is that you’re buying every month on a certain day, at whatever the current market price of the stock or mutual fund is. Sometimes it will be higher and sometimes lower, essentially averaging the price you pay for your total shares over time. This is the main benefit of this approach, along with providing a simple system for investing and purchasing stocks. This also means that you will be paying commissions every month, in addition to being subjected to market conditions. You might end up paying a premium for a stock that was abnormally high at the time. Depending on your broker your commissions for trades may be more or less, anywhere from free to 15 dollars per trade. If it’s on the latter side, it might be wise to invest less frequently in bigger chunks, which brings us to…

Quarterly Contributions-
Essentially the same deal as monthly contributions, but only four contributions every year, once every three months. This method does allow some dollar cost averaging but not nearly as much as monthly contributions. You will be paying 1/4th the commissions to your broker though, as you’ll only be making 1/4th the amount of purchases. This strategy might be more difficult for people that have trouble saving up money while it’s accessible. To maximally contribute, you’d have to be putting away $1000 dollars every three months.

Yearly Contribution-
Putting in the full $5000 (or whatever you are able to contribute) at the end/beginning/middle of the year. This increases your exposure to price risk, so with this method it is much more important to try to make your investment at a point when prices are lower. This has the maximum commission benefit, as you’ll only be making one or two trades a year, but it is important that you pick either for the very long term, or pick very well for the year-which can be extremely hard to do.

Random Contributions-
For some people that don’t have consistent incomes or have trouble sticking to a regular monthly budget, this may be the best option for Roth IRA investing. If you have extra money, do a little research and pick a stock that you’d like to invest in. I wouldn’t recommend investing less than $100 at a time because even at that rate you’re still taking an instant 7-15% loss every time you pay a commission to buy or sell. If you don’t have much to invest, try Zecco which after $2,500 in equity allows you 10 free trades every month. A great alternative for someone who is just getting started with investing.

Everyone has a different style for contributing to their retirement accounts and something different works for everyone. I hope this gives a little bit clearer a perspective of some of the different styles so that you can better pick what is best for you.