Carrie Schwab Pomerantz
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Dear Carrie: I have $34,000 dollars in an IRA that I want to diversify in aggressive stocks. I retire in five years. How should I do this? -- Michael

 

Dear Michael: Your situation is interesting because it brings up a key question that every investor must ask: what's the best way to invest that suits your timeline and feelings about risk? So, before we get into how to invest in aggressive stocks, I think we need to back up a bit and ask a more fundamental question:  should  you?

The answer depends not only on how many years you have until retirement, but also on what percentage of your portfolio this $34,000 represents and how much risk you're willing to take.

For instance, if this money represents all or a significant portion of your retirement savings, investing aggressively might not be the right choice. The more aggressively you invest, the greater the potential for loss. Stock prices, particularly over short periods, can fluctuate wildly. Consider that annual returns for the S&P 500 index have ranged from -37 percent to 28.7 percent over the past 10 years (2000-2010). And a more aggressive portfolio could have had even more extreme swings. Can you handle this kind of risk so close to retirement? Should you?

 

HOW MUCH OF YOUR PORTFOLIO TO PUT IN STOCKS

Before you make any investment decisions with the $34,000, I suggest you look closely at your entire portfolio. How much do you already have invested in stocks? Do you have enough in bonds and cash? As you near retirement, you actually might want to consider a more conservative investing approach. For example, a typical moderate portfolio might have 60 percent stocks, 35 percent bonds and 5 percent cash. A more conservative portfolio might reduce the stock holdings to 40 percent and up the bond and cash percentages to 50 percent and 10 percent respectively.

How does your current portfolio match up? If you already have a high percentage in stocks, that IRA money might be more suitably invested in something else. But if, after considering your overall portfolio, you're still intent on investing in stocks, then you're right that you need to make sure you're adequately diversified. That's no easy task, so here are some guidelines to help you get started.

 

WHAT A DIVERSIFIED PORTFOLIO REALLY MEANS

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Carrie Schwab Pomerantz

Carrie Schwab Pomerantz is a Motley Fool contributor.

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