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buying and selling within Roth IRA


Guest rotherford

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Guest rotherford

Hi! I'm planning to acitively manage my Roth IRA from now on and I was wondering if there are any tax consequences for actively selling and buying stocks with an IRA account.

Right now I'm invested in a mutual fund in my Roth IRA that I want to sell and then I plan to buy some stocks with this money. To my understanding, as long as I don't contribute more than I'm allowed to or take early withdrawals, I think I can actively trade without any tax consequences. I just want to confirm this before doing so.

Thank you in advance for any response regarding this.

Rotherford

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My husband hase some individual stocks and mutual funds in his Roth IRA. (I manage his account)

There is no tax consequence when trading, but you have pay commisions on all that activity. The more activity, the more commissions..... (Taken out of the sweep-account thats connected to the brokerage account thats connected to the Roth account ..... directly reducing the max amount allowed for investing into the Roth)

Why not put your new contributions into individual stocks inside your Roth and leave them alone?

That still allowes you to gamble with individual stocks outside of an IRA without risking your retirement $$$

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IRA/Roth transactions:

1. holding period has no meaning - there is no distinction between long or short term capital gains

2. all sources of income or gain are treated the same - dividends, interest, capital apprectiation - again no distinction within an IRA/Roth

3. reporting to IRS - internal transactions are not report to the IRS, there are just not any tax issues on buy or sell transactions within an IRA/Roth

4. record keeping - the IRS has no interest (see #3), all record keeping should be based upon what you need to make good decisions and the measure your progress (highly recommended as you learn the most from the mistakes you make)

5. tax loses - unless you go through the complicated process of closing all of your retirement accounts (too complicated to explain here but covered elsewhere on this message board, it is very rarely a workable option) you never get to claim any tax losses from bad trades

6. frequency of trades - the IRS does not care.... but let me suggest that few frequent traders (not just day traders, but anyone trading with short term holds) are very successful. To trade frequently and be successful means that you have some kind of "edge" in guessing how markets will react to economic news. Your commissions will increase - but realistically, in an era of internet trading at low cost this is NOT the driving issue. Trading more frequently vastly increases the amount of time you need to analize and monitor. The day traders I know watch multiple monitors every hour the market is open, every day the market is open. There is an addiction element to this. It is harder to take vacations, harder to "shut down" and enjoy weekend R&R.

Some additional cautions: For probably 98% of the population, investment success comes from starting early, commiting to a "plan", staying fully invested and letting time and compounding work. You can be successful just using mutual funds. If you have minimal investment experience and start to actively trade in a IRA/Roth, you may fall into the trap of chasing yesterdays performance. You also need to pay more attention to your portfolio balance - not getting too concentrated in one niche where you are successful.

Post again if you have additional questions. Good luck with your choices.

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A Rant on Buying Individual Stocks vs Mutual Funds

Most of the time, I am a "stock picker". It may help folks to understand the difference between choosing the mutual fund or an individual stock route of investing if I disclose my analysis routine.

I generally have between 20 and 30 stocks in various accounts. I spend typically over 8 hours in research before I ever buy a stock, sometimes more than 40 hours of research time. Research means visiting the company website, reading all or parts of the annual report and 10Q, reading ALL of the business wire articles for more than the past year, reading similiar material from competing firms, visiting a few "fee" based message boards to look for posts on the company, and sometimes making a small spreadsheet of key components of the companies business. I probably look at about 50 companies each year, and at best I find 5 were I buy shares. Acquiring a position is often a multiple step process. I also spend about 20 hours a week tracking/reading about stocks I own. I see no shortcuts to this level of work. I should spend more time on the sell side of the equation, because I make more mistakes here. Investing takes gobs of time if you do it rigorously. Perhaps if you mostly have mutual funds and only a few stocks you can reduce the amount of time.

Sometimes people ask me about a stock that they own. I am often surprised by how little they know about the company.... recent earnings, who is the CEO, HDQ town, major competitors, recent product additions, profit margin, subsidiaries, etc. Folks often know more about their favorite TV show or their car then they know about their equities.

There is not a single stock that I own that I could not stand up in front of a room of adults and talk for 10 minutes about their business, competitors, industry trends, etc. That is one of the standards I use for making decisions. If you can't talk for 5 minutes about a company, perhaps you should stick with mutual funds.

There are now some commercials on TV that show some guy running in a 10K stopping at a cafe to borrow a laptop and order 100 shares of a trendy sneaker company from an online broker. There is another commercial where a guy buys some jeans his daughter thinks are hot.

This is investing?

Nope, nada, not a chance.

End of rant.

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Guest rotherford

Thank you everybody for your input. As far as actively trading and selling, I didn't mean that I would be doing day trading. I've just decided to take more control over my ROTH account.

Anyway, with gold, silver, other precious metals and base metals, and energy (commodities in general) in such a bull market right now - and possibly continuing for another 10-15 years - picking the "right" company is irrelevant really. What I mean is that with a few choice mining stocks, whether they are solid gold or silver primary producers, or major mining companies like BHP, or

the uranium blue chip company Cameco, you are much more likely to make good money than with a lot of the companies in other sectors. So, in this scenario, having a balanced portfolio in tech, service, finance, and so forth is moot. Focusing on one sector, although not recommended as part of conventional wisdom, can be equally rewarding, if not more so, given the commodities bull market we are in now.

Sincerely,

Rotherford

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Billiton is a big resource company in Australia. I bought 2000 shares around 23 and have been pleased by the gain. It is also a fine story - a large mineral/coal company that sells to China and Japan (closest source to China for many commodities) and the stock is up about 60% in 1 year. Most people do not know this company, so Kudos to you for finding it.

I also overweight a few sectors when I make investments and may concentrate on a small number of firms. It has served me well for many years, but for most folks the dangers are too great, especially if they are playing last years momentum, have less experience or can't monitor there positions daily.

BUT..... your strategy for the future seems too simplistic to me.

My 35 years of investing experience tells me don't get to enamored with energy stocks and gold. They have been a great story for more than a year. Energy companies will also have good earnings for 2006, but I doubt they will continue on this hot streak for years. I particularly do not understand why you would think that commodities will be in a prolonged bull market like 10-15 years. The last century has shown that commodities often run through much shorter cycles. Frankly, out of favor sectors (financials are the first one I thought about) often return double digit returns after a prolonged drought.

It is still hard to get a feel for your investment experience.... but let me suggest that probably the single biggest reasons for investment disasters is that folks over-reach or fail to recognize their own limitations.

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Something I found interesting in a "for fee" investor discussin forum:

Andy Kessler, who was a successful hedge fund manager during the tech boom, had an idea which I found compelling....

He called it "Investing in the fog".....the concept relates to the following....if everyone can see clearly what is happening with any particular stock or market segment....then the stock is probably already fully valued....So if you're not willing to risk being in the fog, as it were, you're probably not going to make outsized returns....I think each of us has a certain tolerance for fog....

My take: investing is all about numbers but while you can attempt to be scientific with your analysis, there is still uncertainty, herd response and emotion. I try for good ideas to outnumber bad ones 65:35 and keep annual returns averaging in double digits. "Try" is the operable word.

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Guest rotherford

BHP is your answer. Look at its incredible performance from 2001 until now - a stock price from about $6 to almost $40 now. Five years of a solid steady rise. Why? You have to look at the global picture and all the macro factors driving this commodity bull. Although I respect the number of years of investing experience that you have (which so happens to equal my age), I strongly believe, from all the reading and research, not to mention my experience of living and working here in Asia for the past ten years, that this commodity bull is just in its infancy. And even though I am going to mostly focus on commodities now and in the near future, I do have mutual funds in emerging markets and hold some Korean stocks in other sectors. And within the commodities sector I do do my research and make sure the companies are ones I want to invest in. I’m sure your method of choosing companies is equally valid in the commodities sector. I just believe that placing my money in this sector is going to be much more rewarding – it has been already. That being said, if this commodity bull doesn't continue for the next 10 to 15 years, I'll make the necessary adjustments.

BHP is also incredible because it is sitting on huge amounts of uranium through its acquisition of WMC Resources. Australia is set to become the biggest supplier of uranium in the future and BHP and Rio Tinto are very well positioned to take advantage of this. Here in Korea, where I have called home for the past ten years, 40% of the electricity is supplied by nuclear reactors and the government is planning to scale this up to 60%. Uranium is dirt cheap now, even though it is at a record high for this century. For the amount of energy that it can provide, it's simply mind-boggling. A pound of the stuff is around $35 now, but it can provide the amount of energy that millions of pounds of coal does, or hundreds of barrels of oil does. China is planning to add a number of nuclear reactors in the next ten to fifteen years and it has been talking with Australia about buying uranium. Supply can’t meet demand now. If “peak oil” is here or just around the corner, I'd rather put my money on uranium than wind or solar power. And because peak oil is a harsh reality that we should probably acknowledge, it only pays to pay attention to all the effects that it has already brought and will continue to bring in the world economy at large. Which brings me to this...which is a simple, yet compelling argument: if oil is the "lifeblood" of our world economy, then it only follows that as the price of oil increases, so does the price of most everything else. If it costs more to mine, and supply can't meet demand, then it only follows that the price of metals will increase. I know you've probably been bombarded by info about China and India. But, commodities become pretty compelling when you consider their industrial drive and appetite for commodities. At present, only like 20 million of China's 1.2 billion are even middle class.

Of course, the counter argument of a global slowdown could be made. In that case, I think I'd rather have much of my money in commodities still. Or perhaps Budweiser. :-)

As I write, the US is going after "cheap" oil in the Middle East (costing billions of dollars in military expenditures) using hard power and creating enemies right and left, while China is busy securing deals with its neighbors and African nations with soft power and making potential allies and economic partners. I don't think Russia and China, among other nations, were very pleased to be squeezed out of oil deals in Iraq. This ties in with another perspective: commodities are hard assets. And as everyone knows, all wars have been about resources. Is that going to be any different in the future? In a sense, all nations are at war with each other every second - economically and politically. Whether we like it or not, the US is not going to be the big kid on the block anymore. All of these so-called emerging markets happened to emerge way before the US market was even a twinkle in Europeans’ eyes, and with industrialization and modernization at their helm, the shift of power will follow to Asia eventually. It could happen sooner than we think if countries here in Asia really start to pull together and try to get past bad blood – ie. mostly Japan’s warmongering in the past. Cooperation and integration are key – there are talks about having an Asian currency along the lines of the Euro. Korea is trying to position itself as a hub within NE Asia and increase trade links within Asia even more. China, Japan, and Korea all have trade surpluses and strong currencies – but these strengths can also be weaknesses if not balanced properly. I think the dollar will continue to get weaker down the road – could happen even quicker if Iran succeeds in selling its oil for PetroEuros. Russia, a major oil supplier to Euro, wants this is as well. Why would Russia want to sell its oil in dollars to Europe? So, my guess is that you are going to see Russia and China step up to the plate for Iran. The funny thing is that during the Cold War, with two great superpowers playing off each other and aligning countries behind them, the world was a more politically stable place (there were other factors as well of course). But, you have a lone superpower, the US, and other nations jockeying for power, influence, and resources. And with all of this instability, central banks and people will try to buy even more gold and silver. Both are cheap right now by historical valuations. And it seems that both are in the beginning stage of a bull cycle again. I don’t think the average investor knows this yet – its been slow and mostly invisible so far. They went through a huge bear market through most of the 80s and 90s and but from 2001 both have been increasing steadily and strongly. I've done my research and strongly believe that both metals are only going higher and higher. When will they top? Who knows? But, by leveraging this ride through some good mining stocks, the ride might be wild at times. One, in particular, Yamana Gold (AUY) has done well for me.

However, this cycle is not going to go downward for any great length of time anytime soon. Right now, supply can’t meet demand, and there haven’t been any major discoveries of new gold deposits. Silver is set to rise even more than gold for various reasons – industrial applications, monetary value in India, etc... And copper will do well as well. I like one company in particular – Northern Orion Resources (NTO), because of its huge upside potential.

One thing I will never forget is when Korea had to take a bailout loan of about 50 billion dollars from the IMF. I remember the scenes of people lining up to sell gold – gold figurines, jewelry, bars, etc. – back to the government to help out with this. For me, this underscored two important things. One, how strongly patriotic many Asian nations are. Nationalism is much stronger in countries like Korea, where 99% of the people are tied together ethnically and share thousands of years of history. This strong nationalism is reflected in so many ways, and even points toward the great successes that NE nations have pulled off economically. Their “will to greatness” is not to be treated lightly.

So, they are busy securing deals and locking in channels to needed commodities. The second point - how gold has always been used as money or as a store of value. When our son turned one not too long ago, relatives and acquaintances gave him gold rings and bracelets. Traditional gifts. Well, the stock market has done really well here in the past few years – last year it was one of the best performers in the world (I think Egypt did the best). Even now, the stock market in general is undervalued by 20% compared to its peers in the West. So, because the stock market was doing so well, gold’s rise went mostly unnoticed here. That is, until a few weeks ago when the stock market corrected itself. Then there were some articles about gold and gold certificate accounts that you can open up at a major bank here. Gold has climbed well against the won, too, even though it is one of the stronger currencies. Gold accounts at banks. Japan has them as well. My point here is that, I think, investors in the States and other Western countries, in general, have looked down upon gold as an investment vehicle. Credit can be given to the extended bear market that it suffered. However, as a hedge against inflation, I think it ranks highly.

As a side note - many of the best performing mutual funds in the past five years have focused on energy and commodities. Take a look at Vanguard's Precious Metals and Minerals VGPMX - two of their biggest holdings are BHP and RTP, no small coincidence. It's five year annualized return is at 36%. Some of the best emerging markets mutual funds in the last five years have been heavily weighted in energy and metals.

Andy Kessler’s idea is compelling in the right situations. During the tech boom, when it really started to explode, when everybody, including the average Joe, started throwing money at anything tech or Internet, it was too late…most of the stocks were already fully valued or way over valued. Perhaps the same thing will happen 10 years later or even sooner when everybody realizes that commodities like precious metals, base metals, and uranium are hot. Just think, when everybody knows about it and the stock prices are skyrocketing, that’s probably the best time to exit. What I’m saying is that this commodities bull is largely invisible right now. Also, perhaps the valuation of mining and energy stocks should be treated differently, given that you are talking about hard assets that are in extremely high demand and in short supply.

Anyway, the ramble has been fun, but, if you care to dig a little deeper, you might see some of the things I’ve talked about. I have much more to say, but I’ll let you yourself convince yourself otherwise or not.

Rotherford

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I still think your focus on commodities and energy is way too simplistic. Think cycles - and they rarely last more than a few years. Sure China is growing, but much the same was said about the dominance of Japan when you were still in high school and Japan's stock market and economy turned skunk - and more or less still is.

You mentioned mutual fund performance over past 5 years... I think if you go back and look, the "bang" happened in the last two years. There were few commodity markets were attractive places to invest for almost 12 years prior to this recent surge. Be careful about projecting for a decade what you have witnessed for two years. [i used to work in corp. planning for an energy company and you just did not good money in energy for the entire 90s.]

You may want to check www.Valueforum.com a fee based message board with a lot of folks that track energy stocks, commodities, high dividend stocks, etc. They have over 1,000 members.... been around 2+ years and have 100 very good home grown analysts. Somewhat related is a once a year Investfest (in Florida this year) meeting - this group has been around for three years. Last year's meeting in Pigeon Forge TN had about 80 attendees for a three day event. Only 1 professional presenter - about 1/2 the room were multi-millionaires, and maybe one was a billionaire. Investfest is a yahoo message group.

Good luck with your investments. Don't post investment suggestions here - its the wrong forum. Examples are always welcome, but we don't want folks to think this site has silver bullets.

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Guest rotherford

"Think cycles - and they rarely last more than a few years." Well, I'm not sure you've really done your homework - or maybe you have forgotten about some cycles in the past. If anyone cares to look, you can find out that silver and gold had a 9 year bull cycle in the 1970s. 9 years.

My focus on commodities and energy may be too simplistic for you to understand, but it is working well for me and I think it will continue to do so. The problem is that your analysis is way too simplistic and you're not really looking at the bigger pictures. China is no Japan. You're comparing apples and oranges. And the world we are living in right now is not the same as it was in the 80s and 90s. You forgot India as well. South Korea, too. And maybe you shouldn't leave out Russia and Brazil. Anyway, I could rant on, but it would be a waste of energy. If you keep your eyes open and do your own research and keep a balanced approach, then you might see things differently.

And you're wrong about mutual fund performance - it has been over 2 years - try 3 or 4 for many.

There are no silver bullets, and individual investors are free to make up their own minds. I only mentioned

a few stocks that have done well - without any intention of pumping them or making others buy them. I talked about them just for reference. People can make up their own minds about them.

Anyway, thanks for suggesting the ValueForum message board.

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Two bad attributes for any investor are: (1) making presumptions about what you don't know, and (2) over estimating your level of knowledge. In combination they can create a lot of pain. It gets worse if you lock on to selective historic data to justify your beliefs.

You assume that I know very little about commodities. Not true. My work experience spanned energy and raw extractive materials for about two decades including the coal, oil, natural gas, copper, forest products, cement and aluminum. My co-worker for a decade was a cane, soy, beet, and corn futures trader. I really don't need my eyes "opened". My comments on this message board are directed at both the person who posted the question and the perhaps 20x more who read are general readers. This thread has gone far off course for that second group.

I don't see much point in getting excited about a precious metals boom in the 1970s related to the Hunts and the earlier Middle East crises. That was over two decades ago. We have had perhaps four recessions since then, at least three interest rate cycles, 3+ housing booms, three seminal communications events, breakout events in computers, serious changes in international trade patterns, the mapping of the human genome, cloning, and that internet thing. And while most of these events unfolded, gold and silver went sideways. The world is full of interesting prospects for investing. I would not suggest a narrow focus.

I told you about VF because it is more likely to have posts on extractive minerals. If you explore the VF website you will find that the most successful of these investors are constantly challenging their market view and investment conclusions. The more active members often post their entire portfolio positions monthly, which gives a more honest picture of performance than after-the-fact claims. VF, like the marketplace, is a competition of ideas. Unlike Yahooland, VF requires a high level of personal decorum. Performance claims and factual statements are subject to scutiney - 1,000 members can challenge what has been said and often do. There is minimal touting, minimal fluff... there is a lot of shared access to documents and analyst writings that you generally don't find in most websites. VF is one of about a dozen "low fee" sites that attempt to elevate the level of discussion about investments.

I can tell from your prior comments that you have a high level of confidence in an upward path for commodities/energy. Being enthusiastic about a sector is fine, especially if it encourages research time. But, markets are just not as predictable as you have implied in your about comments about commodities. Hardly anything is a great idea for many years - in part because success attracts more money, business expansion and eventually in resource areas.... over supply. It is the nature of markets to overshoot and undershoot, and both problems cause market "corrections". For three years running, crude oil tankers (Frontline, VLCC, etc.) were a great investments... treaties written after European oil spill created a tanker shortage, too many single hulls getting scrapped, new shipping routes to India and China increased demand, the US economy increased demand. But, in the fourth year of a boom, tanker stocks stalled and started to slide backwards. While many new tankers were brought on line, the reason for the decline was "loss of momentum" - that is enthusiastic investors started to leave when they could not be guarenteed every bigger earnings announcements. Markets are complex and you should not expect them to be predictable.

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