Need some direction

[jpg7n16]

What is the difference between the three roth ira choices you mentioned.

Sorry who/what is this directed at? The only mention of 3 choices I've seen was Jim's mention of Fidelity, Vanguard, and T. Rowe Price. The difference between those is they are different companies and have some slight differences in fund offerings. (ie. some have more funds than others, but all have more funds than you could ever need) They are all good choices, and any of them would be good to use. I use Fidelity.

What kind of books or reading material should I look at to learn more about how they work and how investing works in general.

Best investing book ever:
Amazon.com: The Intelligent Investor: The Definitive Book on Value Investing. A…

Another helpful book for you might be:
Amazon.com: Find the Right Mutual Fund: Morningstar Mutual Fund…

Morningstar also has a helpful series on stock investing:
Amazon.com: how to get started in stocks: Books


Or if you have about 90 minutes available and want to learn from the best investor ever, there is a free video on Google of Warren Buffett discussing stocks. I have watched this multiple times:
Warren Buffett MBA Talk

[jIM_Ohio]

I am only comparing the plan to others that I have seen from Halliburton, Schlumberger, and Dow. They are much bigger companies in much bigger industries than plastics. I thought a 100% match up to 5 pr 6 percent was normal. My bad on that one.

What is the difference between the three roth ira choices you mentioned. What kind of books or reading material should I look at to learn more about how they work and how investing works in general.

Thanks

Fidelity, Vanguard and T Rowe Price are all "full service" mutual fund companies. They each have their pros and cons. My guess is between the 3 of them they account for about 50% of mutual fund investors money (investors not needing advisors anyway), but I don't know that for a fact.

Vanguard- cheapest funds (usually) of the 3 based on expense rations. Con is they have high fund minimums on most funds (like $1000 or $5000 to get started). I have had a 401k with vanguard before. Moderate fund selection (maybe 20-50 mutual funds). Most of Vanguard's funds are index funds (if they have 50 funds, probably 25 of them track an index of some kind).

Fidelity- most expensive funds (of the 3- usually) based on expense ratios. Fund minimum is probably lower than Vanguard. Of the 3, fund selection at Fidelity is their strength. If Vanguard has 50 mutual funds to choose from, then Fidelity probably has 300. Most of fidelities funds are managed, they do have index funds which track the main indexes, but of the 300 funds, my guess is about 280 of them are managed. My wife's current 401k is administered thru Fidelity.

T Rowe price. Its the middle in mutual fund cost (cheaper than Fidelity, more expensive than Vanguard) based on expense ratios. T Rowe has the lowest fund minimums of the 3 ($50 per month). They are in the middle based on fund selection- more than Vanguard, less than Fidelity. They probably have the same index funds Fidelity has, but both are less than Vanguard's index fund selection. All my IRA money and all my wife's IRA money (about 150k) is with T Rowe Price. I used to have a 401k thru T Rowe as well.


You will not go wrong with any of the 3 selections. All 3 have lifecycle funds (where you choose retirement year and let them invest money for you). The bigger choice is indexed vs managed (I do managed, lots of others do index). If you index, do Vanguard, otherwise, choose any of the 3 based on the initial investment criteria which you qualify for.


The following factors influence returns the most (these are known as allocation):

1) % stocks vs % bonds vs % cash
for example I am 95% stocks and 5% bonds/cash in my accounts right now, this is the single biggest factor to establishing my returns in any given year and any market condition and should be the #1 factor unless you really screw something up big time.

2) % domestic vs % foreign
for example the value of the US dollar changes against the yen and the euro all the time (daily/hourly). There are trends, like under Bush II the US had a weak dollar, so foreign investments, regardless of how well they did, went up because the US dollar was weak and getting weaker.

I am 75% domestic and 25% foreign


3) the exact allocation of the investments
for example my 95% stocks are
40% large cap
15% mid cap
15% small cap
15% foreign large cap
10% foreign small cap or emerging markets

**note if you index, its possible depending on the amount of kool aid you drink, that the large-mid-small is already established for you (75%+ large, 15% mid and less than 10% small). I do not drink that kool aid... but others here might want you to listen to why they drink it. It's all good, but regardless of what flavor kool aid (index vs managed or managed vs indexed) what I posted here is true- allocation matters more than index vs managed. If you find someone which disagrees with this, tell me, I will sort thru it LOL.

4) the index theory suggests that mutual fund expenses are #4 on the list. I agree high expenses is bad, but do not believe I should follow an index when #1-#2 and #3 all clearly trump the expenses as to what impacts returns.


My suggestion-
1) Focus on index vs managed funds (make that choice early on in process and read on that first)
2) what mutual fund house you invest with is not a huge issue with performance as long as the fees to invest are understood by you.
3) The allocation you choose will change with time (I will not be 95% equity my whole life). As you learn more, you will change allocation. It will impact returns, but realize % stocks-% bonds matters more than 40% large cap, 15% mid cap, 15% small cap or 60% large cap 10% small cap. There are lots of books which you can read which will give conflicting info on this and be information overload. Keep it simple.

Decide managed vs indexed
choose a % stocks-% bonds mix which shows how much risk you are willing to take
choose mutual funds which match that % you chose above

whether you use T Rowe Price or find another brokerage like schwab, the % stocks-% bonds is the most important factor to your actual returns.



How any company works "is about the same"

You send in money every paycheck to buy shares of a mutual fund (which has a price)
they pool your money with other investors
they buy stocks and bonds with that money
when you sell, you sell at the current price of the mutual fund. Sometimes that price is lower, the longer you wait, the higher that price will be (so you make money).


the index vs managed debate is dealing with how the mutual fund buys the stocks and bonds it buys.

An index is an "arbitrary" set of stocks (or bonds or other things to buy) which is an AVERAGE of that set of stocks. There are 1000s of indexes and new ones get created every day. The most common stock index is the S&P 500. This is an arbitrary group of 500 stocks. The performance of these 500 stocks is averaged together, so when the return of the index is given, that is the average performance of those 500 stocks for that (day-week-month-year-decade).

A managed fund has a person (fund manager) making the same "arbitrary" decisions on what stocks to buy or sell. They may also be making decision on what NOT to buy.

Every S&P 500 index fund holds the same 500 stocks. They hold all stocks in the index in the same percentages of the index (Microsoft and GE are bigger percentages than a smaller company like Kodak, Xerox, or Dana Corporation). I believe all 5 of those are in the S&P 500 (the list of the 500 stocks is published and changes 1X per year). The S&P 500 is a LARGE CAP stock index.

I own a managed Large cap fund (T Rowe Price equity income). It owns about 250 stocks, maybe 150 as the manager sees fit. Almost all of the stocks in equity income are in the S&P 500 (there might be 1-3 exceptions off the list of 150-250 stocks in the mutual fund).


Every mutual fund charges an expense ratio to shares of the mutual fund. The maximum percentage I like is 1% *(shown as a 1.00 expense ratio). Equity Income has about a .60 expense ratio. Its 5 letter ticker symbol is PRFDX. A popular S&P 500 fund is VFINX (Vanguard 500 index). The expense ratio for that fund (guessing) is about .1 (might be .08).

The fund companies can change that ratio to meet expenses, so they do change over time.

The ratio means this- if you own $10,000 worth of a mutual fund, and the ratio is .1, that means
$10 was taken from your account, and you have $9990 left invested. If the ratio is .6, that means they took $60 and $9940 is left invested.

You NEVER see these transactions in your account.
This is because "reported returns are always shown net of expenses". This is standard and ALL mutual funds must report this the same way (SEC controls this issue).

Meaning this
If the VFINX fund has a gain of 10.1%, it only shows as 10%, because the .1 is subtracted before returns are reported.
If the PRFDX fund has a gain of 10.1%, it shows at 9.5% because the .6 is subtracted before returns are reported.

So if you compare past returns of the mutual fund, the expenses are already taken into account on the table, and the same thing happens to your account- when they increase your account by 9.5% or 10%, the expenses were taken out before your account went up in value.



Most investors look for risk adjusted returns. This means for taking a risk, you want the reward of a higher return. How you measure risk and reward depends on the investment and your own personality.

For example, the reason I like PRFDX over VFINX is one year (2001 or 2002, I forget). This was right after the tech bubble burst (in 2000) and was the year enron's effect rippled thru the market. Enron was a large cap company, so any S&P 500 index fund owned that company. When enron went bankrupt, it took the index down with it (so index lost about 10% that year). However any managed fund which did not hold enron or have a high stake in energy companies did reasonably well (PRFDX had returns of about +8-+10% that same year). There will be other years like 2002... my intention is for my funds to take on less risk than the indexes they are most closely associated with.

What I want is downside risk- so with my large cap fund I am taking less risk than the index itself, and my returns will be very close to the index (just under it), but in general my fund which owns only about half the index is taking on less risk than the whole index itself.

If you take a risk, you want to make sure you are rewarded for it, and there is NEVER anything which is risk free. If someone says something is risk free, ask yourself, what risk are they not telling you about, or not taking into account.

Long post, if you read this far, take a pee break then post a reply.

[dparz30]

I read it through once. I plan on coming to it back later and reading it over after doing more research on the net so that I can follow it a little better. This is some great stuff, exactly the type of information and direction I need to learn more about this type of stuff. I've been in my engineering bubble at school for so long that I never took the time to understand how all this works. I can't thank you both enough for your posts of high quality information.

[jIM_Ohio]

I read it through once. I plan on coming to it back later and reading it over after doing more research on the net so that I can follow it a little better. This is some great stuff, exactly the type of information and direction I need to learn more about this type of stuff. I've been in my engineering bubble at school for so long that I never took the time to understand how all this works. I can't thank you both enough for your posts of high quality information.

If you search this site for posts by me, within last 3 months I have posted this a few times. I do not have access to my source on this PC, but it is linked in other threads

I am an engineer too
Much of this is about risk-reward, averages and deviations, and being able to interpret some basic vocabulary and apply it to the math we know (and love?).

Allocation is your mix of assets (stocks and bonds).

100% equity- average returns of 11% and a deviation of about 18%. This means (to me) that -7% happens as often as +29% (11-18=-7 and 11+18=29). So 66% of years (or whatever 1 std deviation is on bell curve) returns fall between -7% and +29%. Returns very rarely are 11%, but they average to 11%. There is about 90 years of data on this, and in last 15 years (since I have been investing) the long term returns of 100% equity is 11%. Even with high returns in 1999 and low returns in 2008, the average is still 11%.

That -7% to 29% range is VOLATILITY. Think of it like a prof drawing a sine wave while he's stoned on pot then high on speed 2 seconds later. Things move up and down. General trend is up, but its not smooth- 2008 had me lose 40% and 2009 gained 30% of that back. 2008 was about a 2.5 std deviation move (-40% was more than 2 std deviations away from average). 1997 had 50%+ returns- more than 2 deviations on the other side of the average. If you have time it evens out, and in general, time removes volatility to some degree.

80% equity and 20% bonds is about a 10.5% average return and about a deviation of 15 or 16. Range here is -5.5% to 26.5%.

Two ways to look at that
for a small position in bonds, the deviation dropped by about 12% (18 to 16 is 2/18=1/9=11 or 12%)
or for a small position in bonds, it hurt returns without dropping volatility significantly (this is my thinking)

60% equity and 40% bonds is about an 8% average return with a deviation around 10-12 I believe. Means -4% happens as often as +20%.

40% equity and 60% bonds is about an average of 6.5% with a deviation of about 6. This is the first portfolio where return is HIGHER than deviation- means volatility is under control, and it has positive returns 66% of the time.


Once you get the basics down (allocation and indexing vs managed) most of the investing efforts focus on when to change allocation. I plan to stay 95% equity (maximize returns) until my portfolio is close to retirement- then drop it to 40-60 fast when in a bull market for stocks around 8-12 years before retirement.

There is lots of data to back that conclusion.

Focus on allocation and depending on what you read, the knowledge of statistics might be quite helpful.

[dparz30]

Right now I am looking at these...

Personal Strategy Growth – TRSGX (remove) , Science & Technology – PRSCX (remove) , Small-Cap Value – PRSVX (remove) , Equity Income – PRFDX (remove) , Retirement 2050 – TRRMX (remove) , Emerging Markets Stk – PRMSX (remove)

Are there any of those I should avoid? Should I go with $1000 in 5 different ones, or should I do $2500 in two, or all in one? Or does that matter that much in the long run?

[tdls17]

Do a combo. Wipe out your loans that charge the highest interest rate first and knock them out in descending order. You can also take advantage of today's market. You make money in the long run by buying low and these days investing in a good no-load mutual fund will also provide you with diversification advantages..

Tim