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My Roth IRA plan - opinions?

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  • My Roth IRA plan - opinions?

    Hi,
    I'm 25 years old, and I'm planning on funding a Roth IRA for 2006 and 2007. I'm having a hard time figuring out which mutual fund to put the money in. I plan on putting 6k or 8k into it.

    Is it a bad idea to invest everything into international funds? Most of the funds I'm looking at are from Vanguard, and they have fees for all index funds under 10k, and fees for all funds under 5k....what do you think of my picks. I haven't figured out which one to get yet:


    -------- E-Trade ---------------
    E*TRADE INTERNATIONAL INDEX (ETINX)
    Minimum: $5,000
    0.25% or .09%?


    -------- Vanguard -------------
    Vanguard Total International Stock Index Fund (VGTSX)
    3k Minimum
    0.32%

    Vanguard Developed Markets Index Fund (VDMIX)
    Minimum: 3k
    0.27%

    Vanguard International Value Fund (VTRIX)
    Minimum: $3,000
    0.46%


    Vanguard Emerging Markets Stock Index Fund Investor Shares (VEIEX)
    Minimum: $3,000
    0.42%


    If you have others that you think are better than what I have...please advise!

    Thanks!

  • #2
    Being 100% in int'l stocks is way too much. Being 100% in any one thing is too much since you want diversification in your investments. If you're not sure what to invest in, a target date retirement fund would be a good place to start since they provide instant diversification. Vanguard, T Rowe Price and Fidelity offer good ones. If you're looking at Vanguard, here's their 2045 retirement fund Vanguard Target Retirement 2045 Fund

    You also want to get the ball rolling since the eligibility date to fund a Roth for 2006 is April 17th.
    The easiest thing of all is to deceive one's self; for what a man wishes, he generally believes to be true.
    - Demosthenes

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    • #3
      Originally posted by permitivity View Post
      Is it a bad idea to invest everything into international funds? Most of the funds I'm looking at are from Vanguard, and they have fees for all index funds under 10k, and fees for all funds under 5k....what do you think of my picks.
      Is it bad to put your whole Roth into an international fund? That depends on what other holdings you already have. If you have other investments outside of the Roth with more core holdings like large caps, small caps and are now using your Roth to diversify into internationals, that's probably just fine. If, however, you are just beginning your investment life, it isn't a great asset allocation to dump your first $8,000 into international stocks.

      Since you will be putting in at least $6,000, you could actually choose 2 funds to start. Perhaps Vanguard Total Stock Market Index and VGTSX. Yes, that would increase your fees to $20 this year, but you'd be better diversified.

      ETA: kv968's suggestion is a great one - go with the targeted retirement account, at least for now. You can stick with that long term or, if you choose, diversify on your own once you have more money in the account.
      Last edited by disneysteve; 04-01-2007, 04:51 PM.
      Steve

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      • #4
        Originally posted by permitivity View Post
        Hi,
        I'm 25 years old, and I'm planning on funding a Roth IRA for 2006 and 2007. I'm having a hard time figuring out which mutual fund to put the money in. I plan on putting 6k or 8k into it.

        Is it a bad idea to invest everything into international funds? Most of the funds I'm looking at are from Vanguard, and they have fees for all index funds under 10k, and fees for all funds under 5k....what do you think of my picks. I haven't figured out which one to get yet:


        -------- E-Trade ---------------
        E*TRADE INTERNATIONAL INDEX (ETINX)
        Minimum: $5,000
        0.25% or .09%?


        -------- Vanguard -------------
        Vanguard Total International Stock Index Fund (VGTSX)
        3k Minimum
        0.32%

        Vanguard Developed Markets Index Fund (VDMIX)
        Minimum: 3k
        0.27%

        Vanguard International Value Fund (VTRIX)
        Minimum: $3,000
        0.46%


        Vanguard Emerging Markets Stock Index Fund Investor Shares (VEIEX)
        Minimum: $3,000
        0.42%


        If you have others that you think are better than what I have...please advise!

        Thanks!
        It's OK to start with 100% of your retirement (IRA) investing in one thing when you start to avoid fees. Just make sure you can contribute each year, and within 3-7 years you will have what you need (to be diversified).

        Check my blog, for ideas.

        Here's a summary.

        You need to choose an asset allocation. Vanguard has tools to figure this out. It will tell you %stocks-%bonds, and % large cap, % small cap, % international and % bonds as well.

        My allocation is 100% equity (0% bonds), 75% domestic, 25% international, 45% large cap, 15% mid cap, 15% small cap, 15% international large cap and 10% international small cap.

        The other posters here will have different allocations. There is NOT one correct answer. Make sure you can sleep at night with what you choose. The purpose of an allocation is to reduce risk. If a person was "80%-20%", yet had all 80% into VGSTX and all 20% into total bond market index, and another person was 100% equity, but divided into 30% VGSTX, 30% VEXMX? (US total market index) and 20% into Real estate index, I would say the second situation has less risk (even though the underlying investments themselves each have more risk).

        Within the allocation you have two components CORE and explore. Core is something you think will give long term performance and you will not sell, under the most dire of circumstance. (Hint- international is probably not core).

        The VGISX would be a OK core fund, but I would prefer it's US alternative. It owns 4700+ stocks, so it is highly diversified. The US equivalent has a long term track record of ~8-10% (I am thinking), so that should be a good place to start. International investing has additional risks (currency risk), so that is something to consider.

        Core could be 30%, 60% or something in between (for me it's 45%, which I split between 2 funds). Year 1 choose core fund. make sure the priority is meeting the fund minimum.

        Year 2, add a second component (first "explore" category) like international. If the 8k you can invest now meets the fund minimums for both, start in both now.

        Year 3-30 add funds as needed and maintain the allocation you established. As you learn more, your allocation will change. My allocation has been more black and white the last 2 years. The first 8 I invested I barely knew allocation and made some bad decisions because of this.
        Last edited by jIM_Ohio; 04-02-2007, 07:45 AM.

        Comment


        • #5
          I have two ideas that I think are good options (I would stick with Vanguard, no matter what):

          #1: Put 100% of the money into the Total Stock Market Index (or the 500 Index is a fine choice as well). Yes, you would pay some fees this year, but you would have great diversification, and you wouldn't be paying fees for long. Let's say you put $8,000 in here. Then next year, with the $5,000 contribution, you could put in $2,000 more in this and you wouldn't have to pay fees once you put the $2,000 in there. Then in 2008 with the remaining $3,000, you could put money into an International Stock Index Fund. This would not be my ideal percentage in each. I would strive for 85% to be in domestic, and 15% to be in international funds for now. I think getting anything other than stocks at this point is way too conservative.

          #2: Put $4,000 in the Total Stock Market Index & $4,000 in an International Stock Index Fund (probably the "Total" one). This would increase your fees for a few years over option #1, but you would have opened up both an international and domestic fund in one year. I would still move towards the 85%/15% mix.

          Do you have retirement money in anything other than a Roth IRA? Do you have a 401(k)/403(b)/457/pension/etc.?


          ------------------------------------------------------------------------------------------------
          I currently go with option #1... well almost anyways. I have put in the max allowed for my Roth IRA in 2005, 2006, & 2007 ($12,000 total). Currently, my Roth IRA has a balance of $13,000 something. I have everything in the Vanguard Total Stock Market Index Fund. However, in 2008, I plan on opening up either the Total International Stock Index Fund or the European Stock Index Fund with Vanguard, in order to try to reach my 85%/15% goal. However, I may not do this with my Roth IRA, as I am contemplating doing this with my 403(b) instead - I will be deciding on this in July of this year as this is when I open up my 403(b). I have a pension as well.

          Not that you asked.

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          • #6
            You know, if you were only going to dump some money in once/year and execute 1 or 2 trades per year, buying an ETF would be a smart way to go. Scottrade has a $7.00 per trade cost and ETF's usually have lower expense ratios than mutual funds (usually near .25%).

            If you were going to automatically invest once/month, then you want to stick with mutual funds because the trade costs will eat you up.

            The nice thing about ETF's is with as little as $8000, you could get diversified into 4 to 6 ETF's and not worry about minimums.

            By the way: An edit:

            Now is a good opportunity to think about what asset classes you plan to be spread accross over your investing career. Do you want REIT's, small caps, large caps, mid caps, value, commodities, currency plays, international, emerging markets, health care, energy, etc? What do you know about?

            You won't be able to pick all because then you run the risk of being "overdiversified" - I think sometimes you pick something you beleive in because as an investor, you are a part owner in that business.
            Last edited by Scanner; 04-02-2007, 10:10 AM.

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            • #7
              Good conversation here. I am well aware of the cheap vanguard fees, but currently am invested in Fidelity's lifecycle fund. My Roth doesn't have that much in it currently, so I'm not too concerned with buying mutual funds myself.

              Once the balance gets larger, then I will begin to buy into another mutual funds, and divest from the lifecycle fund.

              Does 0.79 expense ratio seem like a lot? I know there are cheaper options, but the 2050 fund was incepted last year, and lacks girth at the moment. The market cap is only 120 million. Perhaps I should stick around for a bit to see where it heads.

              Comment


              • #8
                Originally posted by jukebox9988 View Post
                Does 0.79 expense ratio seem like a lot?
                0.79 is not a high expense ratio for a managed target retirement fund.
                The easiest thing of all is to deceive one's self; for what a man wishes, he generally believes to be true.
                - Demosthenes

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