Managing Your IRA for Maximum Gain

When it comes to your IRA, saving money is only half the battle. You also need to think about how you're investing it.

The key to getting the biggest bang for your buck is asset allocation. The right mix of stocks, funds, bonds, cash and other investments should balance risk and return in a portfolio.

And Americans are either doing a great job at monitoring their retirement accounts or really falling asleep on the job, depending on who you ask.

Many 401(k) investors are following the common wisdom of harnessing higher-risk investments earlier in their careers and transitioning to less risky options as they get closer to retirement, according to a recent study by the Employee Benefit Research Institute.

"What's interesting to note is how differently individuals in these plans choose to allocate their assets," says Dallas Salisbury, president of the institute. "The actual numbers end up fitting with what most advisers say people should be doing."

But another recent study showed that at least some IRA holders were not rebalancing their portfolios on a regular basis. When John Hancock Financial Services surveyed account holders in 2004, more than half -- 58 percent -- said they had a specific plan for their asset mix, says Wayne Gates, the company's vice president of fixed products. And 90 percent of that group said they were at or near their target. But 59 percent of those with a specific plan also admitted they had not done anything to rebalance their portfolios in the past year.

When asked how much time each month they spend monitoring their accounts, IRA holders averaged about 35 to 40 minutes. And that's not nearly enough, says Gates.

"The fact that they are investing or saving is very, very important -- that's No. 1," he says. "But No. 2 is asset allocation and rebalancing."

Check your money often

Part of the secret of saving for your own retirement is getting into the habit of regularly looking after your own financial interests.

Even if you have a portfolio of managed mutual funds, you still want to check in every so often and see what the fund manager is doing with it. Is the fund manager trading stocks within the fund that are costing you money? Or is the manager making decisions that put your portfolio in a higher risk category than you'd like?

Maria Scott, editor of the American Association of Individual Investors Journal, says you should review the progress of your mutual funds every quarter.

"Make sure the manager is managing the fund as you expected. If it diverges from your original goal, find out why the manager has invested in different stocks. One clue to the fact it's changed is comparing the performance of a mutual fund to an index that covers the category you think best represents what that fund should be doing, such as a small-cap index."

If your fund isn't performing the way you think it should be, that could be a clue that the fund's stock mix has changed.

"If a value fund had suddenly taken off last year when most didn't, that may be because the fund switched over to more growth-oriented stock," says Scott. "You need to decide if the manager was right in making that decision."

Got a plan?

Like anything else, it helps if you have a plan. How much money are you putting in and into what asset classes? What rate of return are you expecting from each and are you getting it?

And once a year, go through and make sure your investment strategy matches your personal risk tolerance, says Scott, "especially given the bear market of recent years."

"It's a good test of whether you're overly committed to a particular area -- the stock market in particular," she says. But you don't have to obsess, either. Just "once a year," says Scott, "at whatever time is easiest for you."

Gates recommends regularly following the performance of your investments, then sitting down annually to look at how those investments fit your investment strategy and risk tolerance.

And it never hurts to talk to a professional.

"The shift away from defined-benefit pension plans has shifted an incredible burden to employees," says Gates. "It's an awesome responsibility, and most people don't have the expertise to do that."

What you want in an adviser: someone who can give you neutral advice and won't benefit financially from recommending certain products or assets.

Shop for someone "who's compensated in a way that doesn't lead to a conflict of interest between you and the advisers," says Scott. "That would be basically a fee-based adviser."

Also look for credentials, such as certified financial planner, certified public accountant or registered investment adviser.

In some cases, a little extra help might be closer than you think. Some employers actually offer financial planning services. But in general only half of the employees take advantage of the opportunity, according to John Hancock's 2004 survey.

"Financial planning gives them a target or reference point on how to invest and how to hang in during difficult time periods," says Gates. "People should periodically review their asset mix and determine if they're at their target. If they'd gone through financial planning they'd be able to come up with that."

Many financial institutions also have IRA calculators on their Web site that can help you figure out how much money you'll need for retirement. You can also tap sites that, for a fee, will help you decide which funds suit your financial goals and risk tolerance. Just like hiring a financial professional, though, it pays to know who's behind the curtain so that you can consider that along with the advice you receive.

As the idea of individual retirement savings has taken off the last few years, the number of Web sites with helpful information for investors has grown, too, says Gates. "It's just a question of getting people to understand the information."