Roth IRA - Need Help

[manasecret]

Someone here mentioned a while back about Roth IRAs (http://www.fairmark.com/rothira/roth101.htm). I think it was Vampyr (yeah a search confirms it).

Anyway, I would like to open a Roth IRA ASAP. I have been putting money aside for the minimum initial deposit that may be required. But I am having trouble deciding which or what type of provider to go with.

Vampyr or anyone else who knows about Roth IRAs, can you give me some tips on choosing a provider? Or do you have any specific recommendations?

Also, some of my general thoughts. At 24 years old I'm still young, so I know I should be thinking long term in my investments. Which means I should be thinking of investing mostly in stocks or stock indexes which are high-risk short-term but should pay off long-term. Is that a good strategy? Any tips on how much I should invest in high-risk vs. low-risk?

[Jason1]

Hmmm, well I am in an investment class right now so I should know this stuff. That being said, I'll probably only get a C in the class, its pretty tough. I dont know a lot about Roth IRA's, that being said, I would say dont worry too much about a high amount of risk...there's a rule that basically states that young people shouldnt worry about risk, because any bad years will be offset by good years, as long as you have enough time to let that happen, which you obviously do...now I wouldnt say the same thing about someone who is 50.

[Professor S]

If you're not planning on retiring in 5-10 years, go agressive. The economy works in cycles, and during down markets like this, aggressive buying gets you more for the money.

Basically, your buying equities that are "on sale" and are pretty much guaranteed to pay off in the future. Thats why I actually increased my contribution this year, because I get more the same money, and when the market gets better, I'll decrease my contribution back to normal levels. When it comes to investments, never pay retail :D

Also, keep in mind that inflation averages 3% a year. So if you opt for a safe Money Market or Stable Bond fund or the like that only gets betrween 2% and 4%, you'll like just be breaking even 30 years down the line and take out exactly what you put in with no profit. Meanwhile, aggressive (equity) investing averages about 8% return over 20-30 years, but had more risk in the short run, as we have seen.

Go agressive, and when you hit 50, start thinking about where your money is depending on when you'd like to retire, but always redistribute investments in a hot market, so you're sure you're making the most of your money when you sell off your equities for a money market or stable fund that pretty much guarantees return that just hedges inflation, but with no or little risk of loss. And make sure that whatever it is, its tax deferred.

[manasecret]

So, uh, Prof. S, could you dumb that down for me a bit? What exactly is an equity -- do you mean a stock? And in that last paragraph, what exactly do you mean by redistributing investments in a hot market? And how do I know if something is tax deferred? I thought all profits in a Roth IRA weren't taxed.

[Professor S]

So, uh, Prof. S, could you dumb that down for me a bit? What exactly is an equity -- do you mean a stock? And in that last paragraph, what exactly do you mean by redistributing investments in a hot market? And how do I know if something is tax deferred? I thought all profits in a Roth IRA weren't taxed.

1) Equities are stocks. Equities are the more risky in the short term, and have no guarantee of profit, even though they avereage about 8% a year in the long term. An equity fund is also an aggressive fund.

2) Not all investments like Roth IRA's and 401k's are based in stocks. All stable funds and money markets are based in bonds and other safer venues, they guarantee return on the investment, but the return is far lower. This is why they are great for those who will be retiring shortly as all they do is fight off inflation and you have no risk of loss.

3) By redistributing investments, I mean moving from more aggressive/high yield funds to guaranteed/low yield fund as you get closer to retirement. If you stay in an aggressive/equity based investment plan close to retirement, you are in danger of losing a lot of money and with retirement approaching, the likelihood is you'll not make that money back before you retire. When you decide to move you're money from aggressive to stable, you want to make sure the stick/equity markets are high, so that you are making the most of your investment before moving it into a guaranteed/low interest retirement account.

4) Remember the difference bewteen a paper and realized loss when you invest. I've lost about $10,000 in my 401k since the market started going nuts, but that loss is a PAPER LOSS. Meaning: My investment has been devalued on paper, but since I have not cashed out, I can still make that money back when the market corrects and advances in the future. If I were to freak out and bail now, that would be a REALIZED LOSS, and I have no chance of earning that money back.

5) Tax deferred means that you are NOT taxed on the money you put in, but you are taxed as you take it out. This is tax deferred. Its deferred until later, and you are only taxed on what you use, not the balance. My knowledge is more based in 401k's, so I'm not sure if Roth IRA's tax now or later.

Moral of the story is: This is a great time for young people to invest in agressive/equity funds, as you will be getting stocks at a devalued price and when they correct you will make out huge.

[manasecret]

1) Equities are stocks. Equities are the more risky in the short term, and have no guarantee of profit, even though they avereage about 8% a year in the long term. An equity fund is also an aggressive fund.

For some reason the meaning of 'equity' in my mind doesn't associate with stocks. But if that is the accepted nomenclature, then ok. By equity fund, do you mean a mutual fund that is based in stocks?

2) Not all investments like Roth IRA's and 401k's are based in stocks. All stable funds and money markets are based in bonds and other safer venues, they guarantee return on the investment, but the return is far lower. This is why they are great for those who will be retiring shortly as all they do is fight off inflation and you have no risk of loss.So the idea for someone young like me (24) would be to put the majority of my money into stocks. Do you count stock market index funds as equity? From what I've read, index funds give me the opportunity of investing in aggressive equities without worrying about two things, 1. Having to know a lot about the stocks I'm choosing, and 2. The fact that any individual stock I choose may go under. Do you agree with buying index funds?

If you don't mind disclosing, what percentage do you personally have in equity over the more stable bonds?

3) By redistributing investments, I mean moving from more aggressive/high yield funds to guaranteed/low yield fund as you get closer to retirement. If you stay in an aggressive/equity based investment plan close to retirement, you are in danger of losing a lot of money and with retirement approaching, the likelihood is you'll not make that money back before you retire. When you decide to move you're money from aggressive to stable, you want to make sure the stick/equity markets are high, so that you are making the most of your investment before moving it into a guaranteed/low interest retirement account.Okay, so you mean a few decades from now when I'm closer to retirement I should move my money to more conservative funds, but only when the market is doing well. For example, if I was the age of 50 now and was looking to retire in the next few years, right now with the market the way it is would not be a good time to move my investments over.

4) Remember the difference bewteen a paper and realized loss when you invest. I've lost about $10,000 in my 401k since the market started going nuts, but that loss is a PAPER LOSS. Meaning: My investment has been devalued on paper, but since I have not cashed out, I can still make that money back when the market corrects and advances in the future. If I were to freak out and bail now, that would be a REALIZED LOSS, and I have no chance of earning that money back.Are you worried at all? Do you think the market will return to its initial highs again?

5) Tax deferred means that you are NOT taxed on the money you put in, but you are taxed as you take it out. This is tax deferred. Its deferred until later, and you are only taxed on what you use, not the balance. My knowledge is more based in 401k's, so I'm not sure if Roth IRA's tax now or later. Ah, ok. Roth IRAs work the opposite way. You can only put taxed earned income into the Roth IRA, but any earned money in the Roth is tax-free, even when you cash out in retirement. Also, since the money you put in was already taxed, you can take out your contributions at any time with no penalty. (However, taking out earnings early does incur a penalty along with paying taxes on the income.) You can also take out I think $10,000 of earnings penalty-free to pay for your first house, and similarly for your kids' college tuition.

Moral of the story is: This is a great time for young people to invest in agressive/equity funds, as you will be getting stocks at a devalued price and when they correct you will make out huge.So what does your portfolio generally look like? Do you like to choose and pick specific stocks or do you stick to equity funds?

[Angrist]

From what I learned in my business management class, there's equity-financing and there's credit-financing. Credit means you're investing with money you have yourself. When using equity, you're loaning the money.
That's all I (think I) know, correct me if I'm wrong.

[Professor S]

For some reason the meaning of 'equity' in my mind doesn't associate with stocks. But if that is the accepted nomenclature, then ok. By equity fund, do you mean a mutual fund that is based in stocks?

Stick funds are called equities, becauase you are purchasing equity in the companies by purchasing stocks.

Normally different houses have funds that are diversified, but diversified within the stock market, and each fund may do better or worse than one another. I can't speak on what funds within equities are better than another.

[/quote]So the idea for someone young like me (24) would be to put the majority of my money into stocks. Do you count stock market index funds as equity? From what I've read, index funds give me the opportunity of investing in aggressive equities without worrying about two things, 1. Having to know a lot about the stocks I'm choosing, and 2. The fact that any individual stock I choose may go under. Do you agree with buying index funds?[/quote]

An index fund is one that is VERY diversified in the stock market. Basically, in an index fund you buy a little of every stock on the market, so you go as the market goes, percentage for percentage.

Personally, I don't like them because they are just as risky as other more carefully managed equity funds, and they bring 2% less on the whole, averaging only about 6% a year in the long term last time I checked.

If you don't mind disclosing, what percentage do you personally have in equity over the more stable bonds?

I don't invest ay all in stable funds. All my money goes straight into aggressive, because the odds that I will ever realize the loss we are experiencing right now are very low due to my age (31) since I'm not planning to retire until 60 or so.

Okay, so you mean a few decades from now when I'm closer to retirement I should move my money to more conservative funds, but only when the market is doing well. For example, if I was the age of 50 now and was looking to retire in the next few years, right now with the market the way it is would not be a good time to move my investments over.

Bingo, n that case you should push retirement back a few years until the market is hot, and then cash out when the time is right so you realize the entirety of your investment.

Are you worried at all? Do you think the market will return to its initial highs again?

Of course I'm worried, but not much. Even during the great depression the markets bounced back, and on a percentage basis over the last 40 years the booms have been astronomical while the recessions have been small in comparison. To give an example, we have lost almost 50% of the stock market's value, but thats from a 300% or so high from the last down market. Boom times are also far longer than recessions over the last 40 or so years.

I remember back when 9/11 happened, people said the DOW would never be above 10,000 again. Like all financial naysayers in history, they were wrong.

[/quote]So what does your portfolio generally look like? Do you like to choose and pick specific stocks or do you stick to equity funds?[/QUOTE]

I never pick stocks, I let the pros do that. I pick over funds, and only aggessive/equity funds and I make sure I have a good investment house. Right now I have John Hancock running my portfolio, and they have averaged higher than most houses when the market was good.

While I have gleaned some info over the years, please talk to a professional about your plans, as I have dedicated my investing at the moment in my 401k and in Real Estate (my house), and I am a layman in both categories.

[Professor S]

From what I learned in my business management class, there's equity-financing and there's credit-financing. Credit means you're investing with money you have yourself. When using equity, you're loaning the money.
That's all I (think I) know, correct me if I'm wrong.

Equity is a term that is thrown around a lot in business, so it very well mean something else in another area. Basically, in my experience, equity means ownership or part ownership investment.

[manasecret]

I took the plunge with Vanguard. I read much advice from many different sources that said getting started with a Roth ASAP is the most important thing. Waiting around trying to find the perfect provider or perfect funds just keeps me from investing now, which is bad mainly because of how compound interest works.

So I opened a Roth IRA with Vanguard and bought their STAR fund, which had the smallest minimum investment. I will move that over to more aggressive funds when I get more cash in.

Now my question is where all the money comes from with compound interest. I mean, I know how compound interest works. You put in a certain starting amount of money (the principal), say $1000. Then any interest that you earn on the principal , say 5% over one month which would be $50, gets compounded into the principal for the next period. So for the next period, you would be gaining 5% interest on $1050 and not $1000. And then the next month you would earn 5% on 1102.50, and at the end of one year you would be earning 5% on $1795.86, and at the end of 10 years it would be worth $348,912. And in that way, the initial investment grows exponentially.

So I understand that; I know how it works. (And I know that 5% growth per month is ludicrous.) But where does all that exponential growth money come from? I know if I took out a loan and was charged compound interest on the loan, they get all the exponential growth money out of my pocket. But when I invest in a mutual fund, whose pocket does all that money come out of?

Stick funds are called equities, becauase you are purchasing equity in the companies by purchasing stocks.

Normally different houses have funds that are diversified, but diversified within the stock market, and each fund may do better or worse than one another. I can't speak on what funds within equities are better than another.

An index fund is one that is VERY diversified in the stock market. Basically, in an index fund you buy a little of every stock on the market, so you go as the market goes, percentage for percentage.

Personally, I don't like them because they are just as risky as other more carefully managed equity funds, and they bring 2% less on the whole, averaging only about 6% a year in the long term last time I checked.

Hmm I guess I'll have to more research to figure out what the best funds are. I guess the idea of index funds is getting the semi-aggressive growth without having to worry about which funds to choose.

I don't invest ay all in stable funds. All my money goes straight into aggressive, because the odds that I will ever realize the loss we are experiencing right now are very low due to my age (31) since I'm not planning to retire until 60 or so.None? Hmm, I guess with a 401k you can't take out any of the money (even the money you put in) without penalty, right? Which would make a Roth a bit different. In case I ever need to pull some of the contributions out, I guess it might make sense to invest some in stable funds. The advice I've read points to putting some percentage in stable funds.

Bingo, n that case you should push retirement back a few years until the market is hot, and then cash out when the time is right so you realize the entirety of your investment.

Of course I'm worried, but not much. Even during the great depression the markets bounced back, and on a percentage basis over the last 40 years the booms have been astronomical while the recessions have been small in comparison. To give an example, we have lost almost 50% of the stock market's value, but thats from a 300% or so high from the last down market. Boom times are also far longer than recessions over the last 40 or so years.

I remember back when 9/11 happened, people said the DOW would never be above 10,000 again. Like all financial naysayers in history, they were wrong.Well that's reassuring.

I never pick stocks, I let the pros do that. I pick over funds, and only aggessive/equity funds and I make sure I have a good investment house. Right now I have John Hancock running my portfolio, and they have averaged higher than most houses when the market was good.And when the market was bad? :)

While I have gleaned some info over the years, please talk to a professional about your plans, as I have dedicated my investing at the moment in my 401k and in Real Estate (my house), and I am a layman in both categories.I'm not sure where or who to turn to when finding a professional.

[Acebot44]

Mana, I'll be setting up a Roth IRA in the near future as well, and was also looking at Vanguard and Fidelity. What has your experience been thus far? Any tips?

[Professor S]

Glad you brought this back! To update, I stayed in aggressive funds through it all and I've made back all of my losses plus 8k! Right now my investrments are averaging 18%!!!

[manasecret]

I'm glad you brought this back, too.

From my experience with them, I'd highly recommend Vanguard. Their online interface is very helpful with lots of tools and charts and the like -- to me these are mandatory for an investment site and they should be the highest quality. I think Vanguard does very well here.

But, more importantly, my returns: I invested $2300 in cash. The investment is now worth $2975. It's been about a year for most of that investment, so I got about a 13-14% annual return. That's a very good return. Of course, I bought when the market was low, so just about any fund would have done well.

The only regret is that I didn't have enough money to get into more aggressive funds.

I have still only invested in the STAR Fund with Vanguard, which is their beginner fund with the cheapest buy-in ($1000). STAR has a non-aggressive asset mix for my age -- 61% stocks and 39% bonds. I should be at something like 90% stocks and 10% bonds. If I had, I'm sure I would have gotten something like a 20% annual return instead of the 13-14% return I got (but I'm not complaining). But the buy-ins are $3000 or more.

Vanguard has plenty of funds to go around, including more aggressive ones and more defensive ones, and ones for just about any kind of area you want to invest in (tech, international, etc.). If you Google for good funds you'll find some highly recommended ones from Vanguard.

I feel Vanguard is a safe investment firm and have funds with good returns, but I only have the limited experience described here with them so take that for what it's worth.

P.S. I would have invested a lot more since then, but I've decided to focus on paying off debts. Which, having a girlfriend, is really slow... I've also been focusing on getting a 6 month emergency savings account before doing anything else, since I feel my company is on rocky ground. However, as I said before, a good thing about the Roth IRA versus the regular IRA, if I am really desperate, I can always cash out the investment I made ($2300 in my case) with no penalty. (Of course, this assumes that my investment's worth doesn't drop below $2300.) Cashing out kind of ruins the point of the IRA, but it does give me a little peace of mind in case my life turns to shit.

[Bond]

Vanguard is a good bet. Very solid company.

In addition to a Roth IRA, you should look at investing in some Select Sector SPDRs. http://www.sectorspdr.com/

[Professor S]

Vanguard is a good bet. Very solid company.

In addition to a Roth IRA, you should look at investing in some Select Sector SPDRs. http://www.sectorspdr.com/

Can you offer a short description of what these are?

[Acebot44]

So I decided to go with Fidelity as the initial buy in only needed to be $200. Have $500 in the Fidelity Freedom 2050 which is 88% Stocks (24% Foreign), 9% Bonds, and 2% Cash, so pretty aggressive.

The way the 2050 fund works is that it is transformed the closer we get to the year 2050, moving from a more aggressive growth oriented stance to a value focused portfolio as my chosen retirement date gets nearer.

Fidelity isnt as highly regarded as Vanguard and some other investment firms, but I think the experience I will gain by getting involved early will be valuable none the less.

[Bond]

Can you offer a short description of what these are?
The SPDRs basically segment the S&P 500 into industries (Financial, Energy, Utilities, etc). I view it as a much safer investment than investing in a single stock, as the funds simply represent a sector of the economy - it's a passive approach to investing.

In any case, when the market tanked I invested in both the Energy and Utilities SPDRs. I won't say how much I invested, but the return so far has been around 25% plus dividends. Not too shabby.

[manasecret]

Fidelity isnt as highly regarded as Vanguard and some other investment firms, but I think the experience I will gain by getting involved early will be valuable none the less.

Completely agree. I think the most important thing for anyone is to get started right now. An extra year of your money compounding can add tens of thousands of dollars or more to your retirement.

My other regret is that my parents didn't start me a Roth when I was born, or as soon as they were available. Or that I didn't know about them soon enough to start one myself when I was a teen.

[Professor S]

The SPDRs basically segment the S&P 500 into industries (Financial, Energy, Utilities, etc). I view it as a much safer investment than investing in a single stock, as the funds simply represent a sector of the economy - it's a passive approach to investing.

In any case, when the market tanked I invested in both the Energy and Utilities SPDRs. I won't say how much I invested, but the return so far has been around 25% plus dividends. Not too shabby.

No shit. PM me those SPDR's, please. :D

[Vifaddy09]

My first real job had a 401k that I invested in. The company went through some difficulties, laid me and a bunch of other people off, changed strategies, did a reverse stock buyback, and fixed themselves. My account went from 4k to about 13k in a couple of years.

Id like to roll this whole thing over into a Roth IRA if possible.

How would one go about doing this?