Question RE: ROTH IRA 07

**parafly** · 03-26-2008, 07:32 AM

Check out Vanguard Target Retirement Fund 2045 (VTIVX). The risk tolerance automatically adjusts for you depending on your age.

**disneysteve** · 03-26-2008, 08:48 AM

Originally posted by savemachine View Post

should I be more conservative regarding my retirement funds?

NO. You should be aggressive in your retirement funds. You have about 40 years before retirement. You've got plenty of time to ride out ups and downs in the market before you will be touching this money.

**savemachine** · 03-26-2008, 08:50 AM

Thanks guys. So from the way I look at it, the ETFs route is more agressive than the Vanguard route since the ETFs are all stocks.

Are those pretty good funds to pick or should I be exploring other options?

**Broken Arrow** · 03-26-2008, 10:08 AM

Technically, ETFs are closed-end mutual funds that are actively traded on the stock exchange. Vanguard's ETFs are based on index funds, but it can also be actively managed. ETFs can be as diverse and varied as traditional mutual funds, so it isn't inherently more or less aggressive. Again, the only technical difference is that it trades like a stock.

For such a long horizon, and when starting out with such a small balance (no offense), ETFs at this point doesn't make any sense....

I second parafly's suggestion as a starting point. As you progress along and find your investment style, you can then tweak your portfolio as you see fit.

**disneysteve** · 03-26-2008, 10:27 AM

I would also vote against ETFs in this case. Part of the appeal of ETFs is that they tend to be more tax-efficient than mutual funds since, unlike funds which throw off capital gains every year, ETFs might only generate a gain when you sell the shares (there are exceptions to this). The problem is that you are investing in a tax-free account so it really doesn't matter to you if there are annual gains or not. You won't be paying taxes on the money anyway.

The other factor is investment costs. Every time you buy shares of an ETF, there is a transaction fee. Assuming you will be adding to this money periodically throughout your working career, those fees will add up. ETFs are best for lump sum investments. Now if you plan to make your annual Roth contribution all at once, an ETF might not be so bad. But if you plan to invest monthly, for example, it wouldn't be so good.

**noppenbd** · 03-26-2008, 10:45 AM

If you don't like the Vanguard Target Retirement funds, you can still invest in Vanguard index mutual funds, which are similar to the index ETFs you mentioned. VGSTX is a total international stock index fund, and VTSMX is a total US stock market index fund. You could also include some small caps with NAESX. I would suggest 10% in bonds as well, VBMFX is a total bond index fund. Even though you are young, I think it is wise to have a little hedging to keep you from freaking out during market drops. If you have nerves of steel you could forgo the bonds but you have to resist the urge to "change horses in midstream".

The main difference between ETFs and index mutual funds is not the contents of the funds, but the structure of the fund. ETFs tend to have slightly lower management fees but will charge a commission, while many mutual funds are no-commission, but charge slightly higher management fees than the ETF equivalent. For instance VTI's expense ratio is .07%, while VTSMX charges .15%. On a $10000 balance, the difference is only $8 a year, which could be easily overwhelmed by commissions if you are investing on a biweekly or monthly basis. As you get into the several hundreds of thousands in your account the ETF becomes more cost-effective.

EDIT: If you are just starting out you may not be able to meet the minimums on the funds I mentioned. In that case the ETFs would be ok, or you could just buy VTSMX the first year, and VGSTX the second, and so on.

**Broken Arrow** · 03-26-2008, 11:00 AM

Yes, to add to what Steve said, ETFs are really meant for short to mid term investing, to over-weigh your portfolio. This assumes that you already have a well-diversified portfolio in place and you just want to make some extra bets on the side.

For example, on top of your regular, well-diversified portfolio, you may feel a financial sector fund is a good buy for the next one to three years. After that, you might feel that REIT is a good buy. Maybe Healthcare the years after that. So on and so forth. If you're constantly changing your position, trying to catch market trends, then ETFs will make sense.

There are other ways to invest in ETFs, but just because you can do it, that doesn't automatically make it a good idea. Again, I would stick with a Target Retirement Fund until you have a better idea of what you want to do next.

**Broken Arrow** · 03-26-2008, 11:06 AM

Originally posted by noppenbd View Post

The main difference between ETFs and index mutual funds is not the contents of the funds, but the structure of the fund. ETFs tend to have slightly lower management fees but will charge a commission, while many mutual funds are no-commission, but charge slightly higher management fees than the ETF equivalent. For instance VTI's expense ratio is .07%, while VTSMX charges .15%. On a $10000 balance, the difference is only $8 a year, which could be easily overwhelmed by commissions if you are investing on a biweekly or monthly basis. As you get into the several hundreds of thousands in your account the ETF becomes more cost-effective.

EDIT: If you are just starting out you may not be able to meet the minimums on the funds I mentioned. In that case the ETFs would be ok, or you could just buy VTSMX the first year, and VGSTX the second, and so on.

This could be true, although to be nitpicky

, VTSMX can be had at 0.07% ER if you qualify for Admiral share. Starting out, the Original Poster won't qualify, but with $4k, he will at least meet Vanguard's $3k minimum to open a fund. So, again, I recommend starting out with Target Retirement.

To be fair, I also recommend to check out other investment companies out there. Vanguard isn't the only one who offers a Target Retirement type product, and all of them have their pros and cons....

**noppenbd** · 03-26-2008, 11:21 AM

You're right Broken Arrow. I admit, Admiral Shares aren't quite on my radar just yet

...

**Broken Arrow** · 03-26-2008, 11:25 AM

Mine neither.

**Slug** · 03-26-2008, 11:39 AM

I'll be the contrarian and say go with the ETF's. The caveat is you need to buy and hold. That way the upfront transaction cost will be more than offset by the lower expense ratio over the long-term. If you're planning on selling anytime in the next few years, my vote goes for the mutual funds.

PS In my Roth, I hold both ETF's and mutual funds. The main point is you're getting in the game, and that's a good thing.

**noppenbd** · 03-26-2008, 11:49 AM

Either way, stick with the following principles and you will be ok:

1) Choose low-cost investments (IMO)
2) Know your tolerance for risk
3) Choose an asset allocation that matches #2
4) Rebalance yearly to keep your portfolio in line with #3
5) Adjust #3 as you age and #2 changes

**disneysteve** · 03-26-2008, 11:50 AM

Originally posted by noppenbd View Post

You're right Broken Arrow. I admit, Admiral Shares aren't quite on my radar just yet

...

Be patient. It takes some time, but really not all that long, especially with IRA limits rising each year. At $5,000/year, you'd be eligible for Admiral shares in 10 years. Add in investment growth and you hit it even sooner. And starting in 2009, the IRA limit will be indexed for inflation in $500 increments. Someone maxing their IRA could hit 50K/Admiral share level in just 7 or 8 years.

**Broken Arrow** · 03-26-2008, 11:52 AM

Originally posted by noppenbd View Post

Either way, stick with the following principles and you will be ok:

1) Choose low-cost investments (IMO)
2) Know your tolerance for risk
3) Choose an asset allocation that matches #2
4) Rebalance yearly to keep your portfolio in line with #3
5) Adjust #3 as you age and #2 changes

This is excellent advice.... and all that can be done for you with the Target Retirement Fund.

Question RE: ROTH IRA 07