Roth IRAs

[The Critic]

So, I just started a Roth IRA account with Vanguard at the suggestion of my dad.

He told me to invest 5k into the "Vanguard Total Stock Market Index Fund Investor Shares" (VTSMX). Not sure what they are, exactly. Dad told me to use Vanguard since he could "link" me to his Vanguard Flagship account.

Any advice from the BITOG experts on Roth IRAs? Or what to invest in? Or any thoughts on the "VTSMX" that I just invested in?

Thanks!

 

[Gary Allan]

Being an investment idiot, I think Roth's will prove to be the last bastion of hope to gain in some last man standing manner. The tax situation by the time you retire will require a star gate address to contain it in some spacial grid in traditional 3 dimensions.

 

[javacontour]

As I did my taxes, I was wishing my late F-I-L had a ROTH IRA instead of a conventional one. Big tax bite to us inheriting a traditional IRA.

 

[Sayjac]

First, not an expert. But, I've invested with/in Vanguard mutual funds for over two decades. Low fees/expense ratios. First fund I ever bought was the Total Stock Market Fund. It's a core holding fund designed to, as the name implies, track the whole stock market. Not glitzy, boring, and designed for the long term.

Roth is a good way to start saving for retirement, anything invested and earned inside the IRA is tax free on withdrawal at retirement age.

Want to learn more about all their funds, including Total Stk Mrkt go to http://www.vanguard.com/ and start browsing. Good website with lots of good information.

 

[javacontour]

Originally Posted By: The Critic
So, I just started a Roth IRA account with Vanguard at the suggestion of my dad.

He told me to invest 5k into the "Vanguard Total Stock Market Index Fund Investor Shares" (VTSMX). Not sure what they are, exactly. Dad told me to use Vanguard since he could "link" me to his Vanguard Flagship account.

Any advice from the BITOG experts on Roth IRAs? Or what to invest in? Or any thoughts on the "VTSMX" that I just invested in?

Thanks!



Regarding the fund itself. It's an index fund. There is not much for the fund manager to manage or to mess up.

http://www.google.com/finance?q=VTSMX

It invests in a very large basket of stocks, so any one industry will not destroy the portfolio like more specialized mutual funds.

It will track some index. I buy S&P 500 index funds, what your dad suggested is just a different index.

The key is not just dumping $5K in there and forgetting it, but keep dumping money in there now. So while it's good to get started, make dollar cost averaging work for you by periodically adding to your investment.

Don't get scared if the market goes down. Think of it as the fund going on sale. Like sales of motor oil, it's often wise to stock up when the price is down.

Now the entire market can go to zero. So an index fund is not without risk. However, if the whole market goes to zero, we have problems than can't be fixed by you having made a different investment choice.

I think your dad gave you some decent advice.

You might look at other index funds, or put some of that $5K into other things in the fund family, if you want to have a little more upside(and downside) potential.

I have about 1/3rd of my funds in international mutual funds, 40% or so in S&P 500, and the rest in value funds, precious metals, etc. So I'm not in just one thing.

And I kept buying when everyone was panicing 18-24 months ago.

I'm WAY up over where I was 2-3 years ago. Way up!

Now it can still go down, so I don't get too excited. But I didn't finalize any losses by selling in the fall of 2008. I bought more shares and watched the market come back.

 

[cos]

Critic,

The Vanguard Total Stock Market Index Fund is an excellent index fund and a great place to begin investing.

 

[WishIhadatruck]

Vanguard index funds are good because they are very low cost. Index funds are good because the fund manager can't mess it up. I think you need $5k in a vanguard fund to avoid yearly fees. I'm just going by memory so check on that. If that is the case it makes sense to just pick one fund until you hit $10k. I personally picked 1/3 1/3 1/3 in the 500 index fund, small cap index fund and, I think, the Euro index fund. It is good to have 1/4-1/3 of your investment in international stocks. I think your dad got you off to a good start.

 

[Mr Nice]

Do you also have a 401(K) ?

At my old company I was allow to contribute 30% of my gross pay, I left the company but I am still putting away 30% every paycheck towards retirement.

I doubt you will see Social Security 40 years from now.

 

[eljefino]

You're doing good. Now is the time to buy. Vanguard is good at not swallowing all your fee money and sending it to wall st. It is vain to think you can beat the market unless you stay on top of it full time.

There are lots of oil companies etc in the S&P 500 so it's a good way to hedge against speculators and "the man" sticking it to you.

 

[ClarkB]

Good choice with Vanguard. As others have said it's a boring fund but it will make you money.

Quite possibly the best book I ever read on investing was Burton Malkiel's "A Random Walk Down Wall Street." First published in '73 it's now in it's seventh or eighth printing so it is not your average book about investing. It's both very informative and remarkably funny for a book on money, if you like to read I'd suggest trying it out. It was through his advice that I choose to invest with Vanguard, specifically the S&P 500 index fund and made something like 43% last year.

Clark

 

[Warstud]

I think your late to the party...I would transfer that money to a money market fund until a better buying opportunity comes along.

 

[stockrex]

Roth is a good idea but most funds will eat into Ur earnings.

 

[PandaBear]

I don't know the justification of investing in a 401k before you have a full time good paying job at the college age. The intention to save for the future is admirable, but consider your current cost of living (tuition, expense for relocation afterward, marriage, kids, etc, all before retirement), and the amount of tax you are likely to pay at now vs retirement, you won't get much out of a Roth IRA.

The money is probably more useful as a down payment to a car loan or home mortgage than for retirement, since you are likely going to use it way earlier than later. Now if you are trying to time the market low right now, that's another story, but that will lock you in for a long time before you can cash out the earning.

I wouldn't do it if I were you, but my assumption is that your retirement income is going to be higher than your current in college part time income, so your tax rate will be higher later than now.

 

[CivicFan]

PandaBear, that's a solid post (even if [or, maybe, since] it goes against the conventional advice from the financial pundits).

 

[tom slick]

You're young, why such a safe investment when you're going to be saving for the next 50+ years?

As far as investing now vs. later, at least he could pull out his principal in a couple of years when he needs some dough.

 

[javacontour]

Perhaps, but time is your friend when it comes to compounding returns.

If one can get a 10% return, and stash away $300/month, you have over $1million in 30 years. More than double that in 40 years.

That's just investing the same $3600/year. If you bump up your contributions based on inflation, you'll have even more.

If you start at 40 instead of 20 and invest until you are 60, you have to put aside a lot more to reach the same goal.

So the earlier you start, on average, the less you have to contribute over your lifetime.

I'm in my 40's and my daily gains (or losses since the market can be characterized as sideways right now) are about equal to my bi-monthly contribution. So the power of compounding is just now starting to pay off for me more than my periodic contributions.

The sooner you start, the sooner you establish the habit and the less overall money you have to contribute.

So one can forgo some of those things mentioned by Panda Bear in the short term, so you have more money later to spend on those while maintaining your same rate of investment.

 

[ClarkB]

Originally Posted By: stockrex
Roth is a good idea but most funds will eat into Ur earnings.


Considering that the fund he invested in has an expense ratio of .18% (not 18% but 0.18%) and if he signed up for the e-delivery there are no extra charges I think he's doing pretty good.

If he had invested his money 1 year ago he would basking in the joy of a 52% return; had he invested on January 1st, he would have made 7.8% YTD. Not too shabby. I think you made a very good choice, 10 years down the road I really doubt you'll regret the decision.

Clark

 

[Sayjac]

Agree, it's hard to beat Vanguard Funds when it comes to expense ratio. Index funds generally have low expenses anyway because of the lack of necessary active mangement. But Vanguard generally tends to have the lowest fees of mutual fund companies.

The other retirement investment is a traditional IRA, where contributions are pretax. They effectively reduce your current tax. But as mentioned, they are taxed upon withdrawal. They also have a lower earnings levels to qualify for the max conributions.

Personal opinion, Total Stock Market was a good place to start with your Roth IRA. As you get older and more sophisticated about your investments, you can choose other mutual funds or other investments to further diversify your retirement fund.

 

[2002 Maxima SE]

Originally Posted By: tom slick
You're young, why such a safe investment when you're going to be saving for the next 50+ years?

As far as investing now vs. later, at least he could pull out his principal in a couple of years when he needs some dough.


I was taught a good lesson in saving when I got my first job. Start out contributing the max amount that gets you the company matching (used to be 5% but now is more like 3%). Every time you get a raise...increase your contribution by that much. After a few years, I was at the max I could contribute in a year.

Why save so much when young? Well, my industry is dying and the jobs are not available to me anymore like they were 10 years ago. If I'm lucky, I'll be able to work for 10 more years. Thanks to my savings, I don't have to work. I want to work, but I won't have too. That's not too say we'll be loaded...we'll have enough, but had I blown money on cars and trips it wouldn't be there.

 

[tom slick]

My point wasn't "why save, you are young" it was "why have such a safe investment strategy, you are young". Have a little risk in your portfolio, at such a young age you can afford to lose a little or win.

Index funds are great and fairly safe, everyone should have a little of them in their portfolio. On the other hand they should be tempered with a little spice.