Best Investments for 4000

Presumably, this question stems from the current annual limit on IRA (Individual Retirement Accounts) contributions in the U.S. Presently, this limit is at $4,000 for both 2006 and 2007. Contributions made for tax year 2006, must be done prior to April 15, 2007.

Unfortunately, this question cannot be addressed in a vacuum. To answer this question you must understand four things:

1. Your goals and objectives (what is the money for).
2. Your time-horizon (when do you need the money).
3. Your risk-tolerance (can you afford to lose money over the short-term).
4. How this investment fits into your overall investment portfolio.

To keep this article short, I will not address those four above issues here. For more information on this, you can read the article below:

However, assuming this investment is for an IRA and thus is to be used for retirement, which is presumably many, many years down the road, I would suggest an equity mutual fund. Because $4,000 is not really enough money to achieve proper diversification on your own, especially when you consider the transaction costs of attempting to do so, mutual funds are really the best vehicle for you. Again, for more information on diversification, checkout the link above to the other article.

Be sure that the mutual fund has no loads (i.e. commissions to the broker) and that its annual expense ratio is below average for the asset class it is in. This can be determined by visiting Morningstar is an objective third-party mutual fund research company that can provide you with a lot of good information about mutual funds.

If you have more than 15 years before you need the money, I would suggest investing in an emerging market equity mutual fund. If you have only about 7-10 years I would suggest a U.S. Large Cap mutual fund. And if you have less than seven years I would suggest an intermediate term corporate bond mutual fund.

Another alternative are the mutual funds that invest your money assuming you retire at a certain age. These mutual funds are designed to provide you with a changing allocation over time as you approach a certain year. These funds usually have names like, 2030 fund or 2015 fund and so on and they coincide with a specific time period (i.e. your time horizon). The advantage of these funds is that you don’t have to be active in changing your allocation yourself as you approach the end of your investment time-horizon. Also, they provide a lot of good diversification by investing across multiple asset classes.

Keep in mind, if the money is in an IRA that it is tax-deferred, therefore it is counterproductive to choose municipal bonds or other tax-free investments inside an IRA.