How to pick mutual funds for Roth IRA?

[lillygator]

I am researching on T Rowe and they have 100 no load mutual funds, mutual funds, mutual funds from other companies, and individual securities such as stocks and bonds.


what's the difference?

Is this something secure?

[hacik.istanbul@yahoo.ca]

You need to look into mutual funds that have a good long term return of performance usually ten years or more. Expect returns of about 8-10% on good balanced no load funds. These investments are designed to grow over time so that there will be some fluctuations in the interim. If you can't handle any risk at all, then stick with bonds at about 3% return. Good Luck!!
Hacik Istanbul

[scfr]

lillygator - These are really good questions. It's very important to understand what you are investing in before you put down your hard earned money.

It sounds like you could benefit from a basic primer on mutual funds. I Googled "mutual funds" and found out that about.com offers a free 10-day Email introductory course on mutual funds that sounds interesting. Here is the web link:

Mutual Funds 101 - 10 Day Course

Assuming this is your very first investment, then I would recommend starting out with a mutual fund. Individual securities are just fine, but typically they are added after a base of mutual funds has been built.

As far as whether or not they are secure, they are not guaranteed like a FDIC-insured bank account is. That does not mean, however, that you should avoid them. It's important to take some risk. I am more risk-averse than many of the people on this board, and I own mutual funds. (My IRAs are with Vanguard, which together with T-Rowe Price and Fidelity is one of the "big 3" fund families).

Congratulations on taking a big step in your financial journey. Take your time and read up on mutual funds until you feel comfortable that you know what you are getting in to ... Once you feel comfortable, go ahead and take the plunge!

[disneysteve]

I am researching on T Rowe and they have 100 no load mutual funds, mutual funds, mutual funds from other companies, and individual securities such as stocks and bonds.


what's the difference?

Is this something secure?

A stock is an ownership share of an individual company.

A bond is a debt obligation of an individual company or government entity.

A mutual fund is a pooled investment where your money is combined with that of other investors to buy shares of multiple companies (if it is a stock fund) or multiple bonds (if it is a bond fund) or some other type of investment (precious metals, real estate, etc.).

Before you do anything, you need to determine an asset allocation. How much of your money do you want in stocks, how much in bonds, how much in commodities? How much domestic? How much international?

Once you've determined that, it is time to select funds to meet those needs. I recommend sticking to no load funds with low expense ratios.

You can learn about funds at the websites of the fund companies, at Morningstar, in Money and Kiplinger's magazines (or their websites) and lots of other places. And here, of course.

[jIM_Ohio]

Use the financial calculators on the T Rowe web site. Before choosing mutual funds you have some work to do.

1) you need to establish your risk tolerance. This is usually expressed in terms of % stocks-% bonds (100% equity; 80-20 is 80% equity, 20% bonds; 60-40 is 60% equity, 40% bonds etc...)

2) then you need to decide how much risk to take with each position.

If 80% equity (for example) you need to define domestic vs foreign. For example 50% domestic and 30% foreign.


Then you need to assign domestic large cap, mid cap, small cap, growth, value and possibly sector allocations.

For example 50% domestic allocated to
25% large cap (growth and value)
10% mid cap (growth and value)
10% small cap (growth and value)
5% sector (like tech, financial, health care or similar)

For example 30% foreign equity position to
20% large cap foreign/ established markets
5% small cap foreign
5% emerging markets (foreign)

Then allocate the 20% bonds
10% domestic government
5% foreign government
1% high yield
1% emerging markets
1% real estate
1% foreign currency
1% ultra short term bonds

Once you decide the allocation, step 4) is choosing the mutual funds which fit the allocation.

FYI- my allocation is:

97% equity, 3% bonds
72% domestic/25% foreign

42% Large Cap (T Rowe Price Equity Income PRFDX)
15% Mid cap (T Rowe Price Mid Cap growth RPMGX and T Rowe Price diversified mid cap growth PRDMX)
15% small cap (T Rowe Price New Horizons PRNHX, T Rowe Small Cap Value -don't know ticker, and T Rowe diversified small cap growth RPDSX)

My foreign position is 15% large cap (T Rowe International Growth and Income TRIGX) and 10% small cap (T Rowe International discovery PRIDX).

My 3% bonds is in T Rowe Spectrum income (RPSIX) which owns many kinds of foreign and domestic bond funds.

[lillygator]

wow! This is confusing!

[maat55]

Dave Ramsey breaks it down this way:

25% in Growth funds
25% in Growth & Income
25% in Aggressive Growth
25% in International funds

[jIM_Ohio]

wow! This is confusing!

It might seem like a lot at first, but it simplifies most downstream choices (like fund selection) once you have the basics understood.

If you do the questionaire on the T Rowe Price web site it would do something similar to what I presented in my first post on this thread.

Take 30 minutes and answer the new investor questionaire- it is designed to help you choose funds based on risk tolerance.

[Skooby]

You can always go with a target retirement fund. That's what I did...I'm with T Rowe Price and I invest in their 2040 retirement fund.

[snafu]

I see Mutual Funds as ideal for the small investor who hasn't a huge sum to begin a portfolio. You can buy units in the fund you choose for as little as $ 50. per month on their systematic payment plan. By doing that you buy more units when the stocks market is lower and less units when the stock market is higher. it is called dollar cost averaging and helps to lower the risk and your blood pressure if you are risk adverse.

[Broken Arrow]

You can always go with a target retirement fund. That's what I did...I'm with T Rowe Price and I invest in their 2040 retirement fund.

I whole-heartedly second this.

[glock35ipsc]

I'll third that (?)! I have our Roth IRA's through Vanguard in the Target Retirement 2035 Fund, and my wife's is in the Target Retirement 2040 Fund. Set it and forget it.

[zetta]

The following books might be a good place to start:
Mutual Funds for Dummies
Morningstar Guide to Mutual Funds