Roth IRA good place for High Turnover?

[Guest dunnamzw]

It seems to me that since we will not get taxed on money that is already in a Roth IRA, that it would make since to put the Roth money in a mutual fund that is really aggressive, like a Tech fund with high turnover percentages. Of couse this now seems like a null idea due to the drop in the Tech market. But overall, Gains, dividends, and turnover doesn't matter in a Roth . . . Right?

Of course one should always stay diversified.

I welcome any thoughts on this subject.

Zane

[John G]

You are mixing a couple of issues: portfolio turnover, tax reporting requirements, aggressive investing and mutual fund issues.

From a taxation perspective, you do not distinguish between cap gains, dividends or interest in a Roth. In addition, you have no transaction reporting requirements for the IRS in a Roth. You keep records based upon what you personally need to know how your investments are doing, what changes my be called for, and if your progress is "on plan" with your future retirement needs.

The above is true regardless of if you are investing directly in stocks or bonds, or using mutual funds.

Does you idea make sense? Well, you are right about the Roth is indifferent to transactions. You will not care about the timing of capital gains. Any fund with a lot of turnover is going have high operating expenses which is a major negative.

I would choose my investment approach based upon my long term objectives and the need for some balance. If you are young, you have a long time to ride out annual market flucuations. If you were planning to start withdrawing in two years, I would not take such a high risk route that you have suggested.

While you did say you were thinking of this route using mutual funds, let me address the issue of individual equities (aka stocks) that other readers might want to pursue. Yes, being a day trader with a Roth is administratively pretty easy.... your recordkeeping is minimal.... but this is absolutely a bad idea. Why? Because fewer than 20% of the short term traders make any money, and if you are reading this message board you are unlikely to be one of the very successful 20%. Been there, done that. While I held my own for a few years I sure saw lots of casualties that were downright ugly. The successful traders act with zero emotion, they don't get excited with their wins.... but the risk/exposure does seem to encourage a lot of Malox. And trading does soak up an imense amount of time.

From my personal experience, I will agree with Dirt Harry (Mr Eastwood to most) who has been quoted "a man must know his limitations". The average short term stock trader has disconnected from reality and acts more like someone at the track excited about making a big score with a horse in the next race. Short term trading is not glamorous, it is a day to day grind.

Most successful investors have a very long term view of their choices. You don't need to be swinging for a grand slam with every at bat. Collect a bunch of singles and doubles and let time be your friend.