Should You Take More Risk in Your Roth Accounts Than Your Other Investments?

This episode of the Power of Zero show explores whether you should be taking more risks in your Roth accounts than in your other investments.

Host David McKnight kicks things off by stating that if you have Roth IRAs or Roth 401(k)s in your portfolio, you should be allocating 100% of these dollars to a stock allocation.

That’s because these are your most tax-efficient investments and they’ll remain tax-free right up until your death – and even 10 years beyond.

Remember: you want the biggest returns in your portfolio to take place in a tax-free environment.

David explains which of your assets you should be allocating towards bonds.

David isn’t a huge fan of bonds because of three words: fixed index annuities.

He uses a study by the University of Chicago’s Dr. Roger Ibbotson to illustrate his preference for fixed index annuities over bonds.

Ibbotson’s research showed that the stock FIA portfolio did not just increase, but it did so with less risk, while also protecting the investor to some extent from irrational investment behavior that erodes returns over time.

David is all in favor of allocating your Roth IRAs to your most aggressive investments, as he thinks you should want your tax-free accounts to house your most explosive investments.

While conventional wisdom advises people to allocate the rest of their assets to bonds, David believes in a better alternative: incorporating a fixed index annuity into your overall strategy.

By doing so you’ll increase your return, lower your risk, lower the standard deviation of your entire portfolio, and give yourself a better outcome over time.

David concludes by pointing out that you don’t have to love annuities for this strategy to work – you just have to love the idea of increasing the likelihood that your money will last as long as you do.

 

 

Mentioned in this episode:

David’s national bestselling book: The Guru Gap: How America’s Financial Gurus Are Leading You Astray, and How to Get Back on Track

DavidMcKnight.com

DavidMcKnightBooks.com

PowerOfZero.com (free video series)

@mcknightandco on Twitter 

@davidcmcknight on Instagram

David McKnight on YouTube

Get David's Tax-free Tool Kit at taxfreetoolkit.com

University of Chicago

Dr. Roger Ibbotson