Just opened a Roth IRA, not sure what to invest in

[Journal Writer]

Originally Posted by jukebox9988

Tax advantages are present with IRAs, but they serve as retirement savings. It's not a good idea to lose money on trading in your IRAs. Why not trade with your other holdings? Since the IRA is long-term, it should be invested for the long-term. That means no unnecessary trading. Only investments with horizons of at least 3 years.

It would be a shame to decrease your IRA balances because you made some short term mistakes. Just my 2 cents.

Maybe "trade" was the wrong word to use. I buy stocks and sell covered calls in my IRA. I didn't start this until I had more than 10 years of "trading" experience in my regular brokerage account. My time horizon is usually 2-6 months before a stock is called away after multiple call writing, but I only buy stocks I wouldn't mind holding for years. When I do make a mistake, like with DNA right now, my call premiums usually keep me from taking a loss in the long run. The rest of my "juiced up" portfolio makes up for it and I tend to beat the S&P most years.

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My Trader’s Journal

[aquaswim47]

Originally Posted by jukebox9988

Only investments with horizons of at least 3 years.

When I think of investment horizon, I don't think of how long I will keep the investment; it could be hours, days, months, quarters, years, or decades. Instead, I think of if and when I'm going to need the money. If I'm going to need the money in 3 years, I invest it conservatively in something like FASIX or 80% AGG and 20% VTI. However, if I don't need it for 20 years, I might invest it in SSO and DDM which uses futures contracts, swaps, and options. That's irregardless of how long I'm going to keep the investment.

If you're thinking about having to pay for your first, second, and last month's rent when you finish college, or a down-payment on a house and you don't have an emergency fund, the most aggressive you should be is in a balanced fund (5 year investment). While the market is likely to do extremely well, what happens if the market falls 20%? Can you accept a 20% decline in the market? Would you buy more? Would you have more money to buy more or would you have to borrow? Would you sell? Is it possible that it could come right before you need the money? Another option is a value stock fund composed of 80% stocks, 20% bonds.

In general, however, if you have a good job, you shouldn't touch bonds. You should however create an 8 month to one year emergency fund. While you're building your emergency fund, your investments should be more conservative than they are with one. Lets say your expenses are $3,000 per month. Than you should have at least $24,000 in a 6% savings account or in short to intermediate term bonds (5 years or less). Once you have that, you should be in 100-200% stocks like in SSO and DDM. You also should have some international and small cap exposure. You also could consider owning something that mirrored the Dow Jones Industrial Average (DIA) and not own any bonds. That would be 8-year money in my opinion. You will get good dividends. However, any money segregated for retirement shall be invested aggressively, very aggressively.

[ocimad2152]

Ha, I forgot I made this post, and I'm surprised I got all these replies. I appreciate it and just read all of them.

To update, I've learned a lot about how the stock market works, what mutual funds are all about, lots of general money lessons too.

Anyway about the IRA

I was told by an uncle of mine who has done very well investing in the past that my IRA should be a collection of 3-4 very aggressive funds. I was looking all over for funds, info about how to diversify, rebalance, etc. It was overwhelming and just like I would be too nervous to pick my own stocks, I was too nervous to pick my own funds. I did some looking around, and T Rowe Price's 2030+ target retirement funds beat the S&P 500 every year, management fees included. As far as these target funds go, they seem to be the best available right now. Does anybody have a better suggestion? I understand I could be more aggressive, but I'm not comfortable making my own choices yet. These funds seem decent, they automatically diversify and rebalance, adjust for your retirement horizon, etc.

He also told me everything shouldn't be going into my Roth right now. He said I need a short term account too, to save up for a down payment on a house in a few years. He didn't really mention how aggressive I should be with that. Would a savings account with ING direct (4.5% interest rate) be too conservative? Considering the way the market is right now especially, I don't know how safe I feel trusting money I'll need in 3-4 years to an index fund. What would you guys recommend for my shorter horizon account? If there's one thing you answer here I'd appreciate it being this.

Just so you guys have an idea of my current finances:

Roth IRA: $1975

Checking account: $1500 I've earned this summer (Had to do an unpaid internship, finances are low), I'm about to split this between my Roth and a new short term account, leave a tiny bit for fun money at school, maybe buy a textbook or two

Misc: $5,000 bond I'll have available in the spring from my grandparents. I'm going to need to buy a car, no way around it, I'm planning on using a good chunk of this money for the down payment, not all 5000, and financing the rest. I'm looking to spend around $10,000 on a civic or corolla type car that will last me forever.

Any and all suggestions are welcome. I'm soaking up every bit of financial/life advice I can from people right now. Even if it's not relevant to my questions I'll take it.

[aquaswim47]

Originally Posted by ocimad2152

Ha, I forgot I made this post, and I'm surprised I got all these replies. I appreciate it and just read all of them.

To update, I've learned a lot about how the stock market works, what mutual funds are all about, lots of general money lessons too.

That's why we're here. We want you to excel in teaching yourself how to invest. It has to come from you since it's your money. No matter what advice you receive, it is you that must learn the investment environment and be willing to take the risk as it is your money.

This correction is great. I would be buying now; the repricing of risk helps people understand risk tolerance. I am happy to see you have more than 20% in cash reserves shall the market fall further so you can buy more (of course conservative funds that match your 3 year time horizon like FASIX for instance).

Originally Posted by ocimad2152

Anyway about the IRA

I was told by an uncle of mine who has done very well investing in the past that my IRA should be a collection of 3-4 very aggressive funds. I was looking all over for funds, info about how to diversify, rebalance, etc. It was overwhelming and just like I would be too nervous to pick my own stocks, I was too nervous to pick my own funds. I did some looking around, and T Rowe Price's 2030+ target retirement funds beat the S&P 500 every year, management fees included. As far as these target funds go, they seem to be the best available right now. Does anybody have a better suggestion? I understand I could be more aggressive, but I'm not comfortable making my own choices yet. These funds seem decent, they automatically diversify and rebalance, adjust for your retirement horizon, etc.

I don't agree with that 100%. Because you are considering on buying a home within a few years, I'd be more conservative and have two balanced funds and two aggressive funds (assuming that you have an adequate E-Fund). That would give you 80% stocks for your discretionary portfolio. As I read on, it looks like your E-Fund is insufficient so I'd limit my stock exposure. Of course, I have a 3 for risk tolerance so my advice is more conservative. In a 20-25 year period, I don't think there's any investment that is better than stocks.

Now in terms of a workplace retirement plan (i.e., 401k plan), having 100% in stocks is advisable provided that the fees for such plan aren't much higher than in the IRA account. A 401k is a very illiquid instrument while a Roth IRA is extremely liquid provided the investments are somewhat conservative. If you work later for an employer who offers a match, be sure to always take advantage of it.

Utah's 529 college savings plan option 8 is a great way to invest your down-payment on a home. I know that I should be suggesting that it is in cash (such as CDs, MMAs, savings, or T-Bills) but an investment like FASIX is conservative and for a one year time horizon will likely result in principal preservation. With a 3 year investment horizon to college, they invest 30% in stocks, with a 4-6 year horizon, 40% is invested in stocks, and 6-8 years, 50% is invested in stocks. I think that's a pretty good guideline but it's not full-proof. That might lose you money. If you have a downpayment a year away, I suggest savings, T-Bills (within a Roth account to get the tax break), MMAs, and CDs. When you earn money (or interest) in a Roth, you need to leave that money in until retirement. If you take out earnings, you are subject to ordinary income taxes + a 10% penalty on those earnings until age 59.5 or for a first time home purchase, up to I think, $10,000 is tax free as long as it has been in the Roth for at least 5 years. The 5 year rule also applies to someone who puts the money in the Roth after 54.5 years. Make sure to double check that with the Taxpayer Advocacy Service.

I tend to not like target retirement accounts because you don't have someone who specializes. I like ValueLine Funds, Fidelity Funds, Vanguard Funds, and Zecco to purchase ETFs for non-retirement accounts. The $10 maintenance fee effectively adds 0.5% to the expense ratio as you have $2,000 in your T Rowe Price account. For instance, if your fund has a 0.8% expense ratio, a fund with an expense ratio of 1.1% with no maintenance fee would be cheaper this year by 0.2% than the fund with a 0.8% expense ratio with a $10 maintenance fee ($10/$2,000 = 0.5%). You can do better!

Originally Posted by ocimad2152

He also told me everything shouldn't be going into my Roth right now. He said I need a short term account too, to save up for a down payment on a house in a few years. He didn't really mention how aggressive I should be with that. Would a savings account with ING direct (4.5% interest rate) be too conservative? Considering the way the market is right now especially, I don't know how safe I feel trusting money I'll need in 3-4 years to an index fund. What would you guys recommend for my shorter horizon account? If there's one thing you answer here I'd appreciate it being this.

I must stop you right there. The market is always risky. It can collapse at any time. However, historically speaking, you want your money in stocks if you have at least a 20 year investment horizon. Just look at the Nikkei from 1989 to 2004. Inflation adjusted, it declined over 90% and over 80% not including inflation. The market was more risky at 14,000 than it is currently; it's just that people weren't aware of that very fact. Corrections are healthy as they let people like yourself understand your risk tolerance a little better. How would you feel if the DOW dropped to 11,500? 10,000? I'm now a bull (used to be a bear at 14,000), but I ask you these questions to help you think about risk and your own risk tolerance.

Getting to your uncle's intent, he meant completely safe instruments (like CDs, savings, MMAs, and T-Bills). However, since you don't have this downpayment within a year, you can take some risk (but not much). I'd put half in a high-yield savings account and half in an instrument called FASIX (a 20% stock fund) or VASIX (approximately 25-30% stocks). That will effectively invest that money in 10% stocks. I suggest either doing a 20% down-payment or if available an 80-15-5 mortgage in which you come up with a 5% down payment and have a 15% second mortgage. That product might not be available so a 20% downpayment or paying PMI might be your only options. That's why I think you should cap your stock investments between 50-60% for your entire portfolio as your emergency fund needs will increase as you move closer to that downpayment and because much of what you have is an E-Fund. In other words, you need at least $3K for an E-Fund. Besides, you might enjoy renting as you are more able to move around as soon as you're done a lease. That's only a suggestion. Of course the market could really rally in the next 5 years so you don't want to miss out on that.

In terms of a savings account, I'd go look at www.bankrate.com; FNBO Direct is paying 6% but only until September 28. Also, it takes three business days to get your money. Emigrant Direct is another good name. INGDirect is excellent for direct deposits as it is very simple to use. I think ING and Emigrant are great.

Lastly, index funds require at least a 12 year investment horizon. They are inherently risky and involve full investment; in other words, they carry market risk. During 2000-2002, many individuals lost over 50% of their investment in index funds as the S&P 500 index slipped 47% and the Nasdaq Composite slipped over 70% from its all-time intraday high that exceeded 5,000. They are certainly not for a 3-4 year horizon. FASIX and VASIX are investments that are suitable for that short horizon as are short and intermediate term bond funds (like FTHRX for example).

Originally Posted by ocimad2152

Just so you guys have an idea of my current finances:

Roth IRA: $1975

Checking account: $1500 I've earned this summer (Had to do an unpaid internship, finances are low), I'm about to split this between my Roth and a new short term account, leave a tiny bit for fun money at school, maybe buy a textbook or two

Misc: $5,000 bond I'll have available in the spring from my grandparents. I'm going to need to buy a car, no way around it, I'm planning on using a good chunk of this money for the down payment, not all 5000, and financing the rest. I'm looking to spend around $10,000 on a civic or corolla type car that will last me forever.

Any and all suggestions are welcome. I'm soaking up every bit of financial/life advice I can from people right now. Even if it's not relevant to my questions I'll take it.

The amount of money that I put towards the downpayment depends on what interest rate your loan is. If your interest rate exceeds 7.5%, it might be advisable to not have as much of a loan. You may want to consider a credit union to get financing (if that happens to be cheaper).

So you have $8,475 but only $1,500 in an E-Fund. That E-Fund needs to double or you cannot have any aggressive funds in your portfolio. One suggested move would be to put $1,975 of your Roth into a 20-25% stock fund and $1,000 in a balanced fund. That would give you around 30% in equity exposure. An aggressive investment with $1,975 and conservatively saving $1,000 gives you 70% stocks, 30% cash (way too risky for an E-Fund).

[foossyWaf]

Hello! Please help me often try to enter the forum,shows that the password is not good. Me need help Thank you! Sam __________________________________________________ _______ invest money,fast money

[England]

I have a question to ask you aquaswim. Now you mention Bull, and that sparked something, some one else said to me. He mentioned Bull Bear and Pig. What exactly does that mean? I'm guessing the Pig stands for someone being greedy, not knowing what he's doing and blowing money left and right into bad companies, trying to make as much money as possible, only to lose more than he invested, correct? As far as market crashing goes, I always tend to look forward to certain markets crashing. The reason for this, it gives me an opportunity to buy their stocks at a very nice price, then wait patiently as they rebound...if the rebound. I'm still in the beginning phase of learning stocks.

[aquaswim47]

Yes, being piggish is when you are excessively bullish on a stock while it is rising in price. You're on the right track. Good luck.

[cattaskkism]

Thank for the help me.
Now I have no problems

Edvin

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