It’s Roth IRA front-loading season, if you’re into that sort of thing, which I very much am. So let’s talk about Roths, baby. Though dollar-cost averaging throughout the year is still a perfectly fine, albeit slightly less optimal strategy. Most years, the market goes up. If you have the means, go ahead and take care of the Roth right out of the gates. Either way, the important thing is to take advantage of the $6,000 tax-deferred investment at some point throughout the year. Once that money is allocated to the Roth? That’s another question entirely.

What kind of risks should you take with the investments in your Roth IRA? Do you play it safe with something like a Target Date fund (usually a 60/40 or 70/30 mix of stocks and bonds) or do you chase returns in riskier funds or speculative individual stocks? The answer for me, per usual, is a little bit of both.

My Roth IRA asset allocation

In my Roth, 95% of my money is in VTSAX, Vanguard’s Total Stock Market index fund. A Target Date fund is another popular choice, but the bond returns have not justified a significant investment from me. I’d rather take the bumpy ride with a 100% stock allocation, knowing that in the long run these returns will be supercharged compared to those of a Target Date.

As for the 5% leftover? That’s reserved for my yield-chasing investments, which have so far down nothing but hinder my returns. Within my Roth, I took a tiny bite out of AMC in the meme stock mania, sold at a 50% loss, and watched those crazy kids coax another 10x return out of everyone’s favorite movie theater just a few months later. Strike 1.

Then, as I’ve overshared, I succumbed to some toppy activity in the growth stock market and hopped aboard the sinking ARK. Nearing a 50% draw down on that much larger bite as well. Strike 2. As a general rule, by the time I invest in something hot, it’s time for you to offload your position.

The saving grace, for me, is that 95%. I view any money invested into VTSAX as untouchable. I bought ARK funds in place of a previously held (and still stagnant) international stock fund, so I haven’t missed out on outsized returns. I’ve simply experienced outsized losses.

Does the risk outweigh the reward in your Roth?

At my most speculative of moods, I tell myself that the most I can lose on any investment is a mere 100%. Meanwhile, the most I can gain is an infinite multiple ranging from 10x to 100x my initial capital. That’s all well and good until you lose 100% of an investment. A 100% gain and a 100% loss are not created equal. Up that to a 1,000% gain and it still feels less good than a 100% loss feels bad.

Even when I hit on a speculative play, as would have been the case with AMC if not for these paper hands of mine, I lack the patience to see through these “investments” because I often don’t believe in them to begin with. At the first sign of trouble—or rather at the last sign of trouble, thus perfectly timing the bottom—I bail. So that 10x never materializes, and I have one more reason to materialize unnecessary stress out of thin air.

The trouble with riskier bets in a Roth is that the money available to you is limited to the annual Roth IRA limit. Just as selling a winner in a Roth frees you from taxes, selling at a loss comes with no tax benefits. All that said, I am still in favor of playing around on the edges of the Roth. My returns have suffered in the meantime, but the prospect of hitting on a big winner is too much for my degenerate nature to pass up. Without capital gains reaping 40% of your winnings as they would in a taxable brokerage account, those Roth IRA winners are that much more valuable.

The biggest risk is not investing

Whether or not you front-load or dollar-cost average, and whether or not you take a few bigger swings within this tax advantaged vessel, the important thing remains: invest, invest, invest. After ensuring that you contribute enough to receive any company match your employer offers, a Roth IRA is the next best place to grow your money. If $6,000 sounds like a lot, dollar-cost average a smaller monthly contribution of $50-100 and slowly increase those amounts as you’re able. If $6,000 sounds like nothing, start working on maxing out that 401k (now $20,500 in 2022), then move on to a taxable brokerage account.

And a reminder for new IRA savers: don’t forget you need to actually invest the money within your Roth. The Roth IRA is the vehicle driving you away from capital gains taxes, but without stocks or bonds to drive that vehicle, your cash stays parked in the equivalent of a savings account and doesn’t benefit from the stock market’s historically great performance.  

With the DOW and S&P near all-time highs, the broader market certainly feels frothy and due for a double-digit correction. But then, it’s felt that way for the last several years, only to return 20% annually. Whether the market is up or down, keep plugging away at that Roth. Get in while the getting’s good—because over the long run, the getting will always be good. For most people, the biggest risk with a Roth IRA is to not invest in one at all.