Roth IRA Allocation

[OneDollarAtATime]

Sorry this is the language that for some reason I find confusing about brokerage accounts and minimums with vanguard.
If I wanted to open a roth ira with vanguard for $5k lump sum deposit and only hold those 3-4 ETFs I mentioned in the initial post, could I do that?
Do I have to open a seperate "brokerage account" first?

[Petunia 100]

Sorry this is the language that for some reason I find confusing about brokerage accounts and minimums with vanguard.
If I wanted to open a roth ira with vanguard for $5k lump sum deposit and only hold those 3-4 ETFs I mentioned in the initial post, could I do that?Do I have to open a seperate "brokerage account" first?

Yes, you can do it.

First, you're going to open a Roth IRA. The type of account will be a brokerage account. You will contribute 5k. Your 5k will initially be deposited into Prime Money Market Fund. Once your account is set up and funded, you can then purchase any securities you please. ETFs, stocks, bonds, CDs, mutual funds. Anything which any broker sells, you can buy. When each trade executes, Vanguard will pull cash from your Prime Money Market to pay for the securities you choose, as well as any commissions. If you choose Vanguard ETFs, there will be no commissions.

It can be a little confusing, especially when so many new terms are coming at you at once. But you will digest the jargon in no time.

ETA: If you call the Vanguard customer service number and tell them you want to open a Roth IRA and you want to buy ETFs, they will walk you through the paperwork. They do it every day and it is part of their job, so don't be afraid to ask for help. Once the initial paperwork is done, managing your account online is a snap.

[kv968]

Also, if for some reason you can't put the whole $5k in by the end of the year, you have until April 15th 2013 to still contribute for 2012.

[kv968]

I like "age in bonds," even in this market. Statistically, you don't gain much by going even more into equities than you are right now, and you disproportionately increase your risk compared to any expected increase in return. There are a few quite brilliant people who recommend never having under 25% equities, and never having over 75% equities, so always keep your equities between 75% (when young) and 25% (when old) of your portfolio.

So at least for me, I like your asset allocation.

Mine is nearly identical - 30% bonds, 20% international, 50% US. All in index funds. (I'm 32, my husband is 33.)

Actually I think there's more "risk" in the bond market than is perceived. IMO bonds just aren't that steadfast "safehaven" they used be at this point. They will, or may, lessen the volatility of a portfolio but if you're young enough and willing to ride the swings I think you're better off in this market with an almost all equity portfolio for the foreseeable future.

Sure no one knows what the stock market may do, but you can almost see what the bond market will...nothing. If you look at the Vanguard's total bond index it's yielding 1.58% with a duration of 5 yrs. So if interest rise just one percent you lose about 2 1/2 year worth of interest. Intermediate isn't any better with a 1.69% yield and a duration of 6.4 yrs. To me there's just not enough compensation for the risk. The yield alone on either of them isn't enough to keep up with inflation. And if rates do even fall yet another full percentage point and the total bond index is yielding 0.58%, all you'll make is ~5% on the fund. We're reaching the end of 30 years worth of interest rates going lower because there isn't much more room to go.

I know it's argued that bonds aren't there to "make money" but more or less preserve it or reduce volatility and I agree I they do. However at these rates, they may not end up doing either very well if at all. They may damper a portfolio from violent market swings but like I said, if you've got enough time (which the OP does) and are willing to ride it out and rebalance (not sure if the OP is) I think you'd make out much better holding a lot if not all in equities.

I just look at it this way...the Fed is telling me subtley by their low interest rate environment to invest my money in the market and that's exactly what I'm doing. I'm around 20 years away from retirement and I hold only about 8-10% in bonds for just a little of that "stability". I don't fight the Fed and I don't fight the market.

I'm not saying that everyone, or anyone for that matter, should take on the same philosophy but also don't just unthinkingly go with the knee-jerk reaction that bonds are "safe" either.

[smk]

I am going to add a new perspective to this discussion. If you were managing a life insurance company, you would have long term liabilities very much like an individual investor. Many life comapnies are not allowed to have more than 10% in equities. The put the majority of their assets in bonds and run the duration (maturity matching) of their bonds to be well within 1 year of their liabilities.

Defined contribution pension funds (also long term liabilities), however, typically put 60-70% of their portfolio in equities, depending upon the age of their workforce. I was just told by a finance professor that in about 5 years there will probably be no pension funds left in this country. Seems their asset allocation strategy hasn't been working so good. Professor Zvi Bodie explained that risks in stocks do not decline over time as many people think, but they go up, thus the pension industry's problem. You also need to consider that the typical assumptions on returns underestimate the actual risks in stocks very badly.

I am going to suggest you get a financial planning calculator - I would suggest ESPlanner as cost effective, easy to use and quite a bit ahead of the pack. You use your investments to pay your bills down the road, so see how their performance will match up agains those bills. The risk you will see is how much your yearly spending will change in various scenarios. You don't need a survey to figure out if you are comfortable with those changes.

Another thing I would mention is that you can look at paying down your student loans in the same way you look at investing. If your loan is at 10% and your investments return 5%, paying down the student loan is your best investment.

Last comment is on IRA's in general. You need to figure your current tax rate, project the tax rate at withdrawal and also consider which type of asset you will put in the account. Sometimes it is better to put all of your bonds in there and sometimes only stocks.

Anyway, this is probably a different outlook that most people you might run into. That doesn't mean it is wrong. You have to look at the logic...