|
Posted by Piggy on June 10, 2007, 6:19 am
i have 4K with which i want to immediately start up a roth IRA. i just
turned 34 and have no retirement savings. i was thinking of starting
the roth at vanguard, but i have heard that it is not wise to invest
in mutual funds but rather to invest in ETFs (and i really dont know
what these are?). is this because with mutual funds you are just
tracking the market and not going for the greatest rate of return?
does anyone have advice for me as far as where i should start up my
roth?
|
|
Posted by Sandra Loosemore on June 10, 2007, 9:57 am
> i have 4K with which i want to immediately start up a roth IRA. i just
> turned 34 and have no retirement savings. i was thinking of starting
> the roth at vanguard, but i have heard that it is not wise to invest
> in mutual funds but rather to invest in ETFs (and i really dont know
> what these are?). is this because with mutual funds you are just
> tracking the market and not going for the greatest rate of return?
> does anyone have advice for me as far as where i should start up my
> roth?
First of all, a good rule of thumb is never to invest in things you
don't understand. Since not investing for retirement is a dumb idea,
too, that means you ought to do some background reading about different
kinds of investments before you open an account anywhere. I recommend
morningstar.com, which has some excellent tutorial material.
Second, to address some of your questions. There are two basic
strategies to mutual fund management, indexing and active management.
Indexing is "tracking the market". ETFs are just a specialized kind
of index funds that you buy on the open market like stocks, instead of
through the company offering the fund. The main benefit of index
funds is that they usually have very low expenses, since the manager
doesn't have to do anything except buy whatever stocks are in the
index. In a non-tax-sheltered investment account (so this isn't a
concern for a Roth), the less frequent stock trading in an index fund
also results in more favorable tax treatment for your returns.
In actively-managed funds, OTOH, the manager (hopefully) does research
into lots of different companies and chooses the ones with the best
prospects to be profitable, instead of just socking money into
whatever companies are in the index, good or bad. Because research is
expensive, actively-managed funds tend to charge higher expenses than
index funds. An index fund might charge 0.2-0.5% per year, while an
actively-managed fund might charge 1% or more. And, on top of that,
you might end up with a clueless manager who makes lousy investment
decisions and whose fund ends up significantly underperforming the
market in the long term. So, before investing in an actively-managed
fund, you should do some research yourself to decide whether the
manager has a clue. Read the fund manager's recent quarterly market
commentary reports as well as the fund prospectus, for instance.
Now, about where to start up your Roth account. Vanguard offers a
good selection of both index and actively-managed funds, but they have
the reputation of being unfriendly towards small investors in terms of
account maintenance fees, investment minimums, etc. I would look into
that carefully. Another alternative is to open your Roth account at a
brokerage "supermarket" like E-Trade, T.D. Waterhouse, etc. If you
want Vanguard funds at these places, you'll have to pay a transaction
fee for each purchase (at E-Trade it's $19.99), but they have funds
from many other families available without a fee ("NTF"). Personally,
I find this makes more sense for me since I own mutual funds from
several companies and it's much easier to have my accounts all in one
place than a separate account with each fund company.
If you don't know where to start with choosing specific funds, I
strongly suggest you either stick with a "target retirement" fund
(like the ones from T. Rowe Price, TRRDX or whatever), a balanced fund
(OAKBX is my favorite, but you must open an account directly with Oakmark
to get into this fund), or a large-cap fund (VTSMX, VCVLX, SLASX, TWEIX,
OAKMX, etc) that you can use as the "core" of your eventual portfolio.
$4000 isn't enough to diversify into a whole slew of specialized
funds yet.
-Sandra the cynic
|
|
Posted by Elle on June 11, 2007, 10:05 am
> ETFs are just a specialized kind
> of index funds that you buy on the open market like
> stocks, instead of
> through the company offering the fund.
Some ETFs are index funds. Some are not. Same for mutual
funds (some are indexed; some are not). Expense ratios and
other fees associated with both should be checked.
|
|
Posted by joetaxpayer on June 11, 2007, 10:55 am
Elle wrote:
>
>>ETFs are just a specialized kind
>>of index funds that you buy on the open market like
>>stocks, instead of
>>through the company offering the fund.
>
>
> Some ETFs are index funds. Some are not. Same for mutual
> funds (some are indexed; some are not). Expense ratios and
> other fees associated with both should be checked.
Also, some of the subtle differences regarding cap gain distributions do
not apply to a tax-deffered account. The diversification that would be
discussed here for $20K-$40K is also less of an issue.
Just buy VFINX (the Vanguard 500 index mutual fund)with 0.18% expense or
$4000 worth of SPY with 0.10% annual expense (plus that first commission).
After this purchase, read the suggested books, plan for your future with
specific end goals as a target. Take the year until your next deposit to
learn.
JOE
|
|
Posted by joeu2004 on June 12, 2007, 8:09 am
> > i have 4K with which i want to immediately start up a roth IRA.
> > [...] i have heard that it is not wise to invest in mutual funds
> > but rather to invest in ETFs (and i really dont know
> > what these are?). [....]
>
> First of all, a good rule of thumb is never to invest in things you
> don't understand. [...] you ought to do some background reading
> about different kinds of investments before you open an account
I would like to second the first part of that advice: do not invest
in
anything until you have a basic understanding of all of your options,
or get help from a qualified financial advisor.
I take exception with second part of that advice: "do some
background reading __before__ you open an account".
I think you can go ahead and open a Roth IRA __now__ and
invest in a money market fund.
That is a safe investment (no loss of principal). It will allow you
to start growing your investment while you learn and decide on
a long-term course of action.
For a Roth IRA, I would choose a "taxable" MMF, which typically
has a higher yield than a tax-exempt MMF. Since Roth IRA
earnings are never taxed, there is no benefit to a tax-exempt
MMF.
Don't worry too much about which brokerage to start with.
Select a well-known brokerage that offers a variety of alternatives
to choose from later. I am familiar with Schwab and Fidelity; they
are good choices, IMHO. Perhaps Vanguard and others are, too.
You can always do a direct transfer later, if you choose an
investment that is only offered by another brokerage. Again,
because Roth IRA earnings are tax-free, there is little "penalty"
for liquidating investments in order to transfer them.
|
| Similar Threads | Posted | | How to start a charitable foundation in USA | October 19, 2006, 4:59 am |
| roth ira | April 30, 2008, 5:06 am |
| roth ira | November 20, 2008, 3:31 pm |
| Tradtional IRA/SEP to Roth | November 6, 2006, 5:14 pm |
| Roth 401K? | January 2, 2007, 5:04 am |
| Roth 401k vs. Roth IRA vs. 401k | January 8, 2007, 5:00 am |
| New Fidelity Roth IRA | February 8, 2007, 4:55 am |
| Roth IRA vs. Simple IRA | February 25, 2007, 12:07 pm |
| Questions about Roth IRA | March 4, 2007, 6:58 am |
| roth IRA withdrawal | March 31, 2007, 12:20 pm |
|
|
Yahoo! 
Google 
Windows Live 
del.icio.us 
digg 
Netscape 
XML Sitemap