Which fund for my Roth IRA?

[billchrz]

I am looking to open a Roth IRA for retirement and need help determining which fund(s) to invest in. Here is what I have going on:

31 years old and married
Salary 85k (78k base +overtime)
401k

• 5% my contribution + 9% company contribution
• 22k total (80% Schwab Target 2050 + 20% company stock)

T Rowe Price Spectrum Income (RPSIX) used as a mortgage paydown fund
1k in individual stocks through Sharebuilder

I was thinking of just putting the money into the T Rowe Price Target 2040 fund but wasn't sure that this was the best thing to do since I already have a Target fund for my Schwab 401k.

Also, my wife stopped working in March of this year but did make more than 5k. I know I can open a Roth for her this year but if she doesn't work in 2009 can we still contribute to it? Should we have a different fund in her Roth than in mine?

Thanks!

[disneysteve]

You can fund a Roth for your wife regardless of whether or not she works or how much she earns. She doesn't have to earn 5K (or anything) for you to put 5K in the Roth on her behalf.

I see nothing wrong with having the same Target fund in both the 401k and the Roth account. The target funds are already diversified. If you start picking other funds, you throw off the overall asset allocation established by having a Target fund. Unless you decide you would like to overweight a particular sector, if you are happy with the breakdown in the target fund, stick with it.

The only other thing I'd mention is to try and balance things so that company stock doesn't make up more than 10% of your total portfolio (not just % of the 401k but % of everything).

[Broken Arrow]

Steve nailed it, and I feel it's important enough to emphasize the recommendation to cut down the % of your company stock....

The conventional wisdom is to never have more than 5% of your own company stock, but it could be fine to have more depending on the company and how confident you feel about it.... Anything more than 10%, and I would feel uncomfortable about the portfolio's diversification....

[disneysteve]

I just want to clarify what BA and I are saying about company stock.

You have 20% of your 401k in company stock. What you need to take a look at is what percentage of your overall portfolio that represents. If the 401k was your only savings, that would be too much company stock. Since you also have the T. Rowe and Sharebuilder accounts and will soon have 2 Roth accounts, the company stock will represent something less than 20% of your total investments.

Ultimately, as we said, certainly no more than 10% in your company stock and many prefer not exceeding 5%. That can be difficult sometimes if the company matches with stock but you just need to balance your other investments accordingly and sell shares when you are able.

[jIM_Ohio]

20% company stock is not a bad thing if you think your company will grow faster than 8-12% annually.

A concentrated position like that could really boost savings.

But a concentrated position like that also increases your risks. Make sure you are rewarded (with higher returns) than the risks taken. If the company stock return is less than the 2040 fund return (for last 5 years) drop the company stock entirely.

[billchrz]

Thanks for all the help

I work for a mid sized pharma company and the stock has been performing very well. The ticker is NVO (I hope I didn't break any rules posting that)

[Broken Arrow]

Novo Nordisk? Wow! I just looked it up, and it sure looks great. Is this an option where you are able to purchase it cheaper?

Either way-- and this is only one guy looking at the ticker-- but my opinion is that it probably wouldn't hurt to hold a higher than normal percentage of this stock.

General speaking, investing is much like driving a car. First and foremost, we all must learn to invest safely, and diversification is an important part of that safe investing strategy.

Once we learn that, there are ways to invest beyond that to achieve different results, most notably for performance. However, to do that requires some... effort on our part. Otherwise, we risk crashing our own portfolio.

So, how much of your own company stock you want to hold depends on how much you would like to get your hands dirty with your own portfolio. If you like spending time tinkering with it, then I would probably hold a high percentage. If not, then I would hold a lower percentage and... roll the rest of the money into a healthcare ETF for example. It'll still be pharma, but is much more diversified....

Plenty of people have done just fine, going through their entire lives knowing nothing else but driving safely. Leave the fancy performance and stunt driving for those who are interested. And in that sense, investing is no different. Again, how far you go just depends on what kind of driver you really are.

But yes, this also has to be taken in context of all of your retirement accounts.

[noppenbd]

The reason I would be against holding so much company stock is that you already have a lot of your finances riding on the company because your income depends on it. So adding an additional level of risk by putting a large part of your retirement on the stock is really putting a lot of eggs in one basket. I would notch it down to 5-10% of your total portfolio.

[LuxLiving]

I concur w/noppenbd! ...which is the same advice most financial experts would give you as well.

[billchrz]

Thanks

Thanks everyone. I am going to open up a Target Retirement 2040 fund from T Rowe Price when I get home tonight.

I'll stop future allocations of company stock into my 401k until it is about 5% of my TOTAL retirement portfolio then I will maintain a 5% contribution rate.