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new to Roth IRA ... where to start


Guest pastrami

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Guest pastrami

I apologize for the simple questions, hopefully one of you guys can help me out.

I'm new to Roth IRA and after reading some of the material on your website, I'm very interested in starting a RothIRA acct.

My question is, does it matter where I start the account? Is there a place that is more preferrable than another? I have a 401k acct with fidelity benefits, should I check with them?

thanks in advance! p

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The biggest, most reliable, and best-rated mutual fund families are:

Fidelity

TIAA-CREF

T. Rowe Price

Vanguard

It simplifies things somewhat if you stick within the same fund family. Fidelity is a good choice for a one-stop financial keeper, because of the huge variety of what it offers. It also allows you to invest in other fund families through its fund family network. You can invest in many other non-Fidelity fund families through Fidelity without an additional fee from Fidelity.

You will want to consider the cost of maintaining a Roth IRA, mutual fund expense ratios and costs, long-term performance, competence and history of fund managers, and so-on and so-forth in deciding. Vanguard, though giving less choice thatn Fidelity, offers lower expenses (Fidelity's expenses are still low, by industry standards).

There are some benefits to having accounts in more than one fund family. For one thing, you get advice from both investment companies.

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  • 4 weeks later...
Guest pastrami

thanks for the reply - sorry for the late response, been totally swap with work.

If I do pick Fidelity, solely based on that fact that my 401k is there. Is there any particular mutual fund within Fiedelity that I should put my money in? Do I merely start a rothIRA acct. with Fidelity and they tell them I want all money money invested in a medium risk fund. Is that wise?

Also, I was not aware there were cost assosiated with maintaining a RothIRA, can you please elaborate? I've sent an email out to Fidelity asking the same question, but wanted to hear from this board.

thanks,

pastrami

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Regarding the cost of a Fidelity Roth IRA, I'm not sure. I think it was $30 a year for Roth IRA accounts under a certain value. However, according to a Fidelity representative who I talked to online:

Beginning in 2004, Fidelity will no longer be charging a maintenance fee for an IRA so that is something you will not need to be concerned with.

With regards to what Fidelity fund is best to invest in, it depends on several factors:

  • Your time horizon in years. Remember that for retirement, your time-horizon will not be one specific point, but rather a blend. E.g., if you're 35 now, and want to retire at 65, then your time horizon is a blend of 30 to 65 years (a 35-year period time-horizon) covering distributions to you from when you're 65 to 100. People are living longer these days; you should plan on, and aim for, living 100 year or more, not just health-wise and emotion-wise but also financial-wise.
  • How much money you can invest initially lump-sum and how much on a yearly basis
  • How much money you will need at the end of your time horizon and during distributions.
  • Your risk tolerance.

Retirement is not a "fixed purchase" like buying a car or a house. It is something that you will be taking distributions on for a long long long time, hopefully until you're 100 or older. You may want to take a look at this chart of optimal investments for those with a medium tolerance of risk over various time-periods. It is compensated for inflation; the best investment class for each time-horizon is shaded in black.

As for determining which specific Fidelity fund is best for you, Fidelity provides a convenient search-tool for it's funds. Follow these steps:

1. Go to Fidelity.com.

2. Click on Products.

3. Click on Mutual Funds.

4. Click on Start ujnder Research Funds on the right side of the page.

5. Click on Advanced Search.

6. Check Show Only Open Funds and Show Only Fidelity Funds.

7. Select the other desired parameters of your mutual fund. I would select stock funds with an expense ratio of less than 1.50% (there are many Fidelity funds that are barely over 1%, at 1.01% or so, which you don't want to exclude), Manager Tenure greater than 10 years, and 10 year growth greater than 10%.

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Guest pastrami

thanks for the informative post, I think I need to do more studying here. I initially had thought I can "start" a rothIRA and just dump money in there every year and forget about it.

I'll answer some of the concerns raised on your post, let me know if I should do this over PM; I was thinking maybe someone new like me could benefit from this post.

Your time horizon in years. Remember that for retirement, your time-horizon will not be one specific point ...

I'm 25 right now on a fairly steady job; then I would say my time horizon would be 70yrs.? Can you explain why, how this plays a part?

How much money you can invest initially lump-sum and how much on a yearly basis

Now I can offered, that max, $3000, I think I can safely say that I'm confortable with a yearly contribution of that much.

How much money you will need at the end of your time horizon and during distributions.

I have no idea ... =)

Your risk tolerance.

I think medium? I'm not really sure on this one, I figured a little more risky now and slowly taper of as I get older?

From the link you've provided below, it looks like a 100% S%P 500 would fit me ... but since I'm planning on investing and not taking any more out till much later, aggressive growth seems like the way to go?

edit:: I've talked to a fidelity rep. and it looks like I don't have an acct. with them, the 401k is apparently a seperate entity. Any suggestions, on where I can get some information on what type of mutual funds are right for me, if I enter in various parameters?

Please point me to the right direction if there are some good links for a very newbie like me =) thanks in adv.

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Your time horizon plays an important role because the longer it is, the more aggressive your investments can be with less long-term risk, as illustrated by the chart I linked to. For time-horizons of greater than 12 years, aggressive growth stocks (small-caps) provide the most growth at the lowest risk (due to the risk of inflation). If you're 25, then you're time horizon is 35-75 years (presuming you retire at 60 and die at 100, you will need your first distribution at 60 and your last at 100). Thus, in reality, you actually have 40 different time-horizons for each year of retirement (your first time horizon is 35 years when you're 60, your second 36 years when you're 61, and so-on and so-forth). Right now, that doesn't matter, because aggressive growth is your best option for time-frames greater than 12 years; however, it will start to matter when some of the time-horizons start to be less than 12 years away.

If you don't know your risk tolerance, here's a rough guide. If you're uncomfortable with sustaining losses, or have a strong pereference for a predictable income stream, you have a low risk tolerance. If you are willing to ride through the ups and downs of the market in order to build up funds at a faster rate, then you have a high risk tolerance. In between is medium, which is where most people are (if you still don't know, assume you are medium).

For individuals as far away from retirement as you and myself (I'm 22), you can afford to invest in more volatile investments that offer the possibility of much greater long-term returns (e.g., small-cap index, value small-cap index, growth small-cap index, aggressive growth fund). As retirement approaches (less than 12 years) you should start shifting some of your assets from more aggressive to less aggressive investments, as indicated by the chart. This will be a gradual gradiated process.

Btw, I'm of the opinion that your most aggressive investments should be in tax-advantaged plans, like a Roth IRA, Traditional IRA, or 401k, because they benefit the most from those tax-advantages; and that your more conservative investments should be outside of these tax-advantaged plans. You may also want to look into Health Savings Accounts. If you want some sources of information, here are some good websites:

If you want to get some books, here's some that I've found useful:

If you read the work of Orman and Edelman, you will notice that they conflict on a lot of points. This is what you will find as you read more and more. There are multiple ways to view any given situation (lateral thinking); you have to decide which one has the most merit for you, based off of (what should be) substantial knowledge. If you aren't interested in investing in stocks yourself, you can skip the books by Peter Lynch, Phillip Fisher, and Benjamin Graham, though they may still be useful.

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  • 3 weeks later...
Guest pastrami

Thanks for the great post dh003i - it was really helpful.

I think I will go ahead and start my acct. with fidelity and do more research on "where to put my money"

I've been doing some reading ... mainly on fool.com and ricedelman.com. It seems like the general consensus is that your 401k should be placed in a stock fund.

Where can I read more where in particular I can place my money; my 401k offers the following options --

From your post, I assume, 100% should be place under "Large Growth" given that I still have a time horizon > 12yrs.

I apologize if I jumped from RothIRA to 401k, is the same principla in terms of where to put your money right?

Thanks again for the help.

Stock Investments: Large Growth

AM CENTURY ULTRA

BGI NASDAQ 100 IDX T

FIDELITY CONTRAFUND

FIDELITY GROWTH CO

Stock Investments: Large Blend

FIDELITY GROW & INC

FIDELITY MAGELLAN

VANG INST INDEX PLUS

Stock Investments: Large Value

BGI RUSSELL 1000 VAL

Stock Investments: Mid-Cap Blend

VANG MIDCAP IDX INST

Stock Investments: Small Blend

FIDELITY LOW PR STK

Again,

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Sorry it took me so long...I would not limit myself to large growth companies (in fact, I'd be focusing more on small-caps). As retirement (and then inevitable death) starts to approach, I'd shift more and more of my assets from small-cap value and growth to mid-cap and large-cap value and growth, and then to bonds. However, as long as the time-horizon for the money you're investing is far off, your best results will most likely come from small-caps (note, "value" and "growth" are not mutually exclusive terms...the best individual stocks would be those that are both selling at a significant discount to their intrinsic value and offer enormous growth potential, backed by excellent leadership....however, there are most likely very few such companies).

I'd suggest just looking through the profiles of all of these and seeing which one best suits your needs. Take a look at things like expense ratio, front- and back-end load, and manager tenure. I would also suggest taking a look at Fidelity Select Electronics and Fidelity New Markets Income; Low Priced Stock is also an excellent fund, run by the same manager for many years. All are volatile, but if you're in it for the long haul, they should prove rewarding. For asset-type diverisfication, you may want to consider Fidelity Select Gold and Fidelity Real Estate Investment Portfolio (the performance of Real Estate has no relation to that of the stock market). Select Gold is approximately twice as volatile as the S&P 500, because it has two volatility factors: the stock, and the gold. Gold is an excellent hedge against against the inflation of government fiat money (the amount of gold being taken out of the money supply, and put into things like circuits and jewelery, is about the same as the amount of gold being mined). By investing in gold-companies, you also can experience some growth. Investments in gold companies are usually good bear-market performers, while so-so in the bull market. Real Estate is also good because it has no correlation to the stock-market.

However, this is just a quick overview, which is most likely not tailored to your needs. If you want to determine what funds are best for you, I'd suggest you:

1. Go to Fidelity.com.

2. Click on Customer Service.

3. Click on Contact Us

4. Click on Chat With a Live Rep.

5. Select Investing with Fidelity, then click Begin Chat

6. Type in the requested information and click Connect. You can then talk to a live rep and get some advice that may be more personalized to you. (you can engage in real-time dialogue)

In regards to your Roth and 401k, the same rule still applies. These tax-advantaged plans will benefit greatly from large amounts of growth. If you're going to diversity among different funds, the Roth will benefit more than the 401k/403b from the very aggressive funds (e.g., Select Electronics, Low Priced Stock), so put those in your Roth, and the "less" aggressive funds (e.g., New Markets Income) in your 401k/403b. (note, these are all aggressive investments, nonetheless).

I should also warn you that you should be prepared for serious short-term volaitlity. Select Electronics has been an excellent mutual fund for those who have stayed with it for many years, and haven't tried to hop in and out. For example, in the quarter of Sept 30, 2001 (a 3-month period), the fund lost 27% of it's value. Would you be prepared for that kind of volaitlity? From 1994 to 2000, $10k would have grown to $153k...but then from 2000 until half-way through 2002, $153k would have shrank to around $20k. Subsequently, until the present, it grew back to around $66k. That's a lot of volatility. Something you should aks yourself when you invest in any fund is would you stick with the fund even it started on one of those sickening downturns now? Those who try fund hopping will usually end up buying into a fund right when it's at it's at it's high-point and about to plummet, and selling out of it before it recovers.

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  • 3 months later...
Guest pastrami

Sorry for resurrecting this thread again - but I finally got around to start my account with fidelity.

I've been digging around and they're search for funds option works great. I think I've narrowed it down somewhat to 3 different funds, let me know what your thoughts are. Again based on some of the feedback I got from the posts on this board, I should focus on being aggresive given my long horizon time (~45years).

1. Fidelity Small Cap Stock Fund (FSLCX)

2. Heartland Value (HRTVX)

3. Meridian Fund (MERDX)

Any comments?

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I hope you understand that no one can accurately tell you which of these three funds will perform better over any time period. Nor that any other fund will out perform these three.

All that said... these three are reasonable choices in that they are no load and have a slight bias towards growth which makes sense given your long hold period. All three have been around long enough to demonstrate some capabilities... although past performance does not directly indicate future performance.

The annual expense ratios on these three are 1.06 to 1.28% which is a little higher than I would prefer. Fidelity and HR also have fairly high turnover of their portfolios. These are small criticisms.

If you went to a mathematically managed index fund, you could reduce your annual expense to 0.17 to 0.40% range. By picking these funds, you are saying that active management will more than cover the 0.6 to 1.0% gap. Most actively managed funds can not year after year overcome that annual disadvantage.

Note that HRTVX and Fidelity overlap in their area - small companies.

Good luck with your decision.

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I have extracted some comments on mutual fund selection from a Motley Fool email I received today

Quantitative:

1. number of years a manager has been at the helm

2. the track record compiled during #1

3. tax efficiency the fund (note not an issue for IRAs)

4. expense ratios

5. risk and volatility metrics

Qualitative criteria:

1. fund's strategy (negative comments about top-down macro econ views) versus criteria for stock picking

2. against dramatic moves into and out of equities - market timing is almost always a loser's game

3. managers who make their picks based on an assessment of each company's

underlying fundamentals. Typically, that involves an emphasis on the balance sheet and a company's ability to generate plenty of free cash flow (FCF). A focus on successful product lines and ample market share is another key component, as is a deep-seated belief that, ultimately, it's earnings growth that drives a company's stock price.

4. in favor of patient penny-pincher managers

5. Keeping an open mind, many investment styles work....no dyed-in-the-wool value hound... not married to a traditional kick-the-tires kind of investment process

6. Discipline of stock pickers. A fund investor's most important job, after all, is to assemble a solid portfolio that provides exposure to the market's various market caps, industries, and styles.

I post this as food for thought when a novice thinks about the differences between actively managed funds and index funds. The above advice is pretty decent... and it points out a wide range of criteria for selecting an actively managed fund.

Motley Fool have advisory newsletters and alerts to sell. They also provide a lot of stuff for free. If you visit the Motley Fool website you will start to get emails. They are colorful writers and on generic advice tend to be spot on.

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Guest pastrami
I hope you understand that no one can accurately tell you which of these three funds will perform better over any time period. Nor that any other fund will out perform these three.

All that said... these three are reasonable choices in that they are no load and have a slight bias towards growth which makes sense given your long hold period. All three have been around long enough to demonstrate some capabilities... although past performance does not directly indicate future performance.

The annual expense ratios on these three are 1.06 to 1.28% which is a little higher than I would prefer. Fidelity and HR also have fairly high turnover of their portfolios. These are small criticisms.

If you went to a mathematically managed index fund, you could reduce your annual expense to 0.17 to 0.40% range. By picking these funds, you are saying that active management will more than cover the 0.6 to 1.0% gap. Most actively managed funds can not year after year overcome that annual disadvantage.

Note that HRTVX and Fidelity overlap in their area - small companies.

Good luck with your decision.

Great! thanks for all the input!

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