All too often, people start putting money away in a savings account but fail to think about how to start investing. To stay ahead of inflation, your money needs to earn more than many traditional savings accounts pay. What’s your best strategy? Our research indicates that the best action a long-term investor can take is to invest at the first possible moment—regardless of what the market’s doing.
Source: Schwab Center for Financial Research. This chart shows the outcomes for four hypothetical investors who invested $2,000 a year for 20 years. Investor A invested each year at the market trough. Investor B invested immediately on the first day of each year. Investor C invested each year at the market peak. Investor D never implemented the plan and stayed in T-bills. Investors A and C invested their yearly $2,000 investments in T-bills while waiting to invest in stocks. Stocks are represented by the S&P 500® Index, with all dividends invested. Indices are unmanaged, do not incur fees or expenses, and cannot be invested in directly. Average results remained relatively unchanged when the study was extended to 12-month periods that began with a month other than January. In the case of the 12-month period from February to January, Investor B invested immediately on the first day of February each 12-month period for 20 years. Past performance is no indication of future results.
What’s the best way to invest my IRA savings?
First and foremost, make sure you’ve implemented an appropriate overall asset allocation with high-quality, low-cost investments across and within each asset class.
Once that’s done, you can potentially maximize gains on your investments by placing certain types of investments in certain accounts based on tax efficiency. Broadly speaking, investments that tend to lose less of their return to income taxes are good candidates for taxable accounts. Investments that lose more of their return to taxes would go in tax-advantaged accounts.
| Taxable accounts | Tax-deferred accounts such as traditional IRAs and 401(k)s |
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| Here you’d ideally place: | Here you’d ideally place: |
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The Roth IRA might be an exception to these general rules of thumb. Since qualified distributions do not require any additional taxes, investments you believe have the greatest potential for higher returns are best placed in a Roth IRA when possible.
Should I be in stocks? Bonds? Cash?
How you invest across stocks, bonds, and cash—your asset allocation—is one of the keys to long-term success. That’s because these three basic asset classes respond to the market differently. When one is up, another can be down.
For instance, stocks are the most volatile and respond more quickly to market movements. Bonds, on the other hand, can provide a more stable return. Investing in both can help smooth out volatility.
Choosing the allocation that’s right for you
How you allocate your assets should be based on three things:
Basing your asset allocation on these three important factors will make it easier for you to stick to your plan over the long term—even during years when there’s a loss.
Here are some model asset allocation plans that offer different balances of risk and return.
Strategic asset allocation models
Source: Schwab Center for Financial Research.