Deciding where to place your hard earned cash to maximize growth potential can be a daunting task. Navigating the murky world of investments requires a combination of knowledge and experience, with inexperienced investors at a greater risk of making costly mistakes. The best way to even the odds and increase the likelihood of making smart investment decisions is to learn as much as possible about the options available to you. Armed with this information you can weigh the pros and cons of different investment strategies to find the one which best reflects your financial situation. Here we look at how you can make smart investment choices in the allocation of assets within your Roth IRA:

Understand the Roth IRA

Before you can truly benefit from your Roth IRA, you must first understand how this individual retirement account works. The Roth IRA is an investment account offering specific tax advantages. Contributions to your Roth IRA are made with after-tax dollars. These contributions are essentially used to purchase other investments as directed by the owner of the IRA. This allows investors to make personalized choices regarding the different types of investment accounts in which they wish to invest.

Understand risk tolerance

When selecting the types of investments held in your Roth IRA, you must understand and consider your personal risk tolerance. Your risk tolerance is basically the amount of risk you are willing to accept in regards to investment returns. High risk investments generally offer a higher return while low risk investments offer lower returns. As a general rule, the older you get the lower your risk tolerance as your investment strategy changes from growth to preserving your capital. Investors usually fall within one of the following four categories: aggressive, moderately aggressive, moderate to moderately conservative and conservative.

Asset allocation

Once you have determined what level of risk you are willing to assume, you can then decide which investments will make up your Roth IRA. There are 22 different types of asset classes, with investors having the choice as to what combination of assets will make up their portfolio. Inexperienced investors are often encouraged to invest in mutual funds. The benefits from mutual funds include increased diversification, professional management and lower initial investment requirements. Once you have decided how much money you are investing in each type of investment you are ready to set up a deposit schedule.

Manage your Roth IRA

The Roth IRA like other long term savings plans is designed to offer maximum growth potential for long term investments. To truly take advantage of the benefits offered by the Roth IRA, you will have to be consistent and disciplined in your management of the account. By contributing the maximum amount allowed each year, you can steadily grow your retirement fund, while at the same time avoiding early withdrawals which reduces the amount of money that could be used for investments. When set up and managed correctly, the Roth IRA is an excellent tool in building your retirement fund.

Trisha Wagner is a writer for, a site which strives to educate it’s readers on the pros and cons of the Roth IRA.

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