Need help. Total Newbie.

[Guest ahighland]

Hi, I'm new here. I'm 18 and thinking of making a small investment sometime in the near future. It seems to me that time is one of your best friends in saving. Anyway, I just wanted to get something started because I will probably go to grad school as well and want to get an early start. I was thinking about Roth IRA's in particular. What is the minimum to open one? I wouldn't have much trouble adding to it, but because of my age and earning level it is somewhat hard to come up with a very large amount at once. Thanks.

[John G]

Moderator to responders: I have deleted all of the messages associated with this question because 90% was completely off topic. Focus on the question, please! Do not promote OT products, detour into lifestyle issues, or snipping. I regret that some good advice was deleted, but suggest that a fresh start is in order. The message stream I deleted was not a good example of what we can do here.

Ahighland: You can search this message board using key words or phrases like getting started, beginner, or newbie. You are wise to think about your future and to consider starting an investment program now, even with limited funds.

Examples related to your topic you would find include:

http://benefitslink.com/boards/index.php?s...t=0entry85197

http://benefitslink.com/boards/index.php?s...t=0entry62219

http://benefitslink.com/boards/index.php?s...t=0entry97194

http://benefitslink.com/boards/index.php?s...5233&hl=started

http://benefitslink.com/boards/index.php?s...5411&hl=started

http://benefitslink.com/boards/index.php?showtopic=24759

http://benefitslink.com/boards/index.php?showtopic=22096

http://benefitslink.com/boards/index.php?showtopic=24151

I did not test each of these to see if they work. Give it a try. All authors are invited to respond to the original question. But, please focus on "the customer", an 18 year old wanting to start investing with a Roth. Specifically, the original post asked about how to get started with a modest amount of funds, the "minimums" issue.

[dh003i]

ahighland,

I apologize for my previous non-topical response. I hope that this response is more useful to you.

You have something that many people don't on your side: about 4 years of time before you graduate from college, which works for you. You are right that time is your best friend.

The minimum to start a Roth IRA will be limited by the minimum that a particular fund allows you to invest in it. Usually, it is $1,000 or $2,000. Many mutual fund companies allow you to start out with very small amounts (e.g., weekly or monthly contributions) as long as by the end of the year, you're up to that minimum amount. For some good information, see this website from Fidelity*, then click on the Traditional / Roth IRA link. You can look through Which IRA Is Right For You and Frequently Asked Questions. You can also click on the other links, all of which contain information on IRAs. I would not recommend an Traditional IRA, since your income is low now, and will be higher later.

Because you anticipate it will be difficult for you to come up with large sums of money at once, I particularly recommend looking at Fidelity's Fidelity SimpleStart IRA.

You can also go to Vangaurd's Retirement Center: Vanguard IRAs and look at the links pertinent to Roth IRAs. However, because you think it will be difficult to come up with large sums at once, you may find it difficult to meet the initial $1,000 requirement of Vanguard's to open a Roth IRA. Vanguard's traditional advantage has been to be the lowest cost provider: their expense ratios are usually the best. However, Fidelity has recently challenged them in that regards, and now has expense ratios on its major index funds of 0.10%. However, this is only on Fidelity's Spartan Index Funds, which require investments of $10,000 or more. It probably will not be of any possible benefit to you for a while. Despite that, for several reasons, in your case, I would recommend Fidelity over Vanguard:

1. Fidelity does not charge a yearly fee for the maintenance of the Roth IRA. Vanguard does charge a maintenance fee ($10), if the balance of your Roth is less than $5,000. That fee is waived for people who have $50,000 or more in assets at Vanguard. Maybe I'm being too much of a miser on this, but it is an expense.

2. Vanguard requires a minimum initial investment of $1,000 to open up a Roth IRA. Fidelity allows you to build up your Roth IRA in $200 dollar increments. The latter should be beneficial to you, for two reasons: a. You don't expect to have large sums of money at once. b. It allows you to dollar cost average into your positions.

3. Fidelity now has lower expense ratios than Vanguard on its Spartan Index Funds ($10,000 or more). Fidelity's non-Spartan index funds do not have lower expense ratios than Vanguard, though they are close and competitive. Fidelity's 500 Index Fund has an expense ratio of 0.19%, Vanguard's of 0.18%. However, the difference is just 0.01%. On $10,000 of funds, that would be $1.

4. Though both companies offer considerable choice, Fidelity is choice-deluxe.

The maximum contribution limits to a RothIRA are as follows, and you should try your hardest to max out contributions. One year of opportunity forgone can never be regained:

2003-2004: $3,000

2005-2007: $4,000

2008: $5,000

After 2008, the limit will be adjusted for inflation in $500 increments.

A Roth IRA is an excellent choice for an investment vehicle. You can always take out dollar amounts up to your net contributions (without any penalties), if you are in an intractable situation. I would recommend you strive as diligently as you can to max out your Roth IRA contributions. Saving is a virtue.

Investment Advice:

Because you are very young, you have a long time-horizon. You should be focused on the long-term. I would thus advise you to invest aggressively, though not carelessly. This means you do not simply invest in the fund that's been returning the highest in the past year. When looking at specific mutual funds, here are some things you consider.

1. Manager experience. How long has the manager been with the fund? What portion of the fund's success did the manager preside over. A 10-year track record of success is always meaningful. However, it is most meaningful (for your purposes) if the present manager presided over it.

2. Expense ratio. You want funds that have lower expense ratios than the industry averages, ceteris paribus. Of course, all else is rarely equal, so you have to use your judgement. Around 1% or lower is great. You should be willing to pay for quality, but if you're paying a higher expense ratio, you should make sure that you think its worth it: Do you really think this fund manager is good enough to warrant a higher expense? With index funds, however, expense ratios are much more important. An index fund at Fidelity is the same as one at Vanguard, or anywhere else, except for the expense ratio.

3. Look at long-term track-records. Long-term track-records that span ups and downs are the most meaningful, especially if one manager presided over the fund for the entire time.

4. Understand what you're investing in. There's alot more to a fund than just its average returns and expense ratios. You have to understand the fund's investment strategy and what sectors it's invested in. Is it a value fund? A growth fund? Blend? Or a sector-specific funds?

5. Be patient. Funds may have significant down periods, or periods of underperformance. You should be willing to weather that.

6. More specific advice. I would recommend considering a position (10-20%) in hard assets (gold, silver, oil, water, etc; real-estate is in a bubble at the moment). No-one has ever gone broke investing in gold. That's because it has a 2,000 year history of being money. Hard assets cannot be enronized. However, most companies do not allow you to invest directly in hard assets in a Roth IRA. There are, however, mutual funds that invest in companies in these industries, and even partially directly in the hard-assets. There are also holding companies that simply buy hard assets and hold them. You may want to consider investing in these things outside of your Roth IRA, both for appreciation potential and protection from inflation.

Some more general advice:

There are two books that everyone should read: The Intelligent Investor by Benjamin Graham, and Common Stocks and Uncommon Profits by Phillip Fischer. I'd also suggest the classic 1933 edition of Security Analysis by Graham and Dodd.

* Note: I'm using Fidelity's website because that's the one I'm most familiar with.[