roth ira money market account

[Guest sdirtbag]

I rolled over my roth ira account that was invested in mutal funds, that was losing money. To a roth ira money market account at a bank with a $15.00

per year fee. It doesnt have much of a return but I dont lose money now.

Iam very conservative also. Iam I wrong in doing so?

[John G]

You did not provide much information about yourself or your circumstances. What is your age? When do you expect to retire? What is your investment experience and knowledge? What type of mutual fund did you have? Do you get easily upset with market flucuations?

Let's talk a little about investing.

The reason you invest is because you want to grow your assets to meet your retirement goals and to ensure that your purchasing value is not eroded by inflation. Investing is the gas pedal. The brakes are your attitude towards risk, which is mistakenly assumed to be just the risk of your investment declining in value. Some investments have very low risk loss of principal risk. Government bonds held to maturity have typically low risk. CDs at a bank are insured against loss of principal and are very low risk. You chose money market funds. The risk is that they just won't get the job done. Money markets right now are barely able to even give a positive yield and therefore you are "losing money", that is your purchasing power right now is shrinking due to inflation.

The problem with low risk investments is that you may fail to reach your retirement goals. This is where stocks and mutual funds can be important. Stocks over long periods of time have generally given bigger returns than safe investments. Mutual funds come in many flavors, but often hold a mix of different kinds of stocks or a stock/bond mix. In any given year, stock investments can go up or down. But, for every down year, there are between 4 and 6 up years. AND, the best up years are much better than the worse down years. It takes a lot of data and a good chart to understand this point... I get my high school Junior Achievement students to crunch the numbers and tally all the years since 1925.

When you have a long time before you need your investments to provide an income, the general theory is that you should be biased towards stock investing. If you need the money to pay bills starting next year, then you bias your assets towards options like CDs and bonds with more predictable results.

Another factor to consider is your tolerance for risk. If you can't sleep nights because you don't understand your investments then you need to learn more about investing. If you understand your investments and still are edgy and nervous then perhaps you are taking to high a risk. Someone who is knowledgeable about investments and has a long planning horizon tries very hard to be unemotional about negative years and stays the course. Why? Because no one is very good at figuring out when "up" starts and when "down" begins. The last 10 months have seen astonishing increases in stock values - and back in October of 2002 I don't remember anyone telling the public that this was the time to start buying. {see this message: <a href='http://www.benefitslink.com/boards/index.php?act=ST&f=18&t=20751}'>http://www.benefitslink.com/boards/index.p...T&f=18&t=20751}</a>

Well, thats another story.....

Your question was are you wrong to have your assets in a money market fund. I can not answer that question without knowing more about you. Your choice could very well be a bad idea, but you did not provide enough information to give you a good answer.

Post again and I will reply.

[mbozek]

There is no advantage to putting your retirement funds in a mm fund that is paying about .50% interest less fees if you have a long term investment horizion. If you have more than 5 years before retirement you would be better off if the money is in an index fund that tracks the broad market such as an S & P Index fund sponsored by vangurd or another low cost carrier. Vanguard's fund charges only .17% a year. The strategy for retirement plans is long term growth by minimizing risk. MM funds avoid risk but have no growth potential. Most gains in equities are made in relatively short periods which occur at random times so being out of the market will reduce your future gains. Since the gains in a roth IRA will never be subject to income tax you should put your assets in those investments that will provide the greatest return over the long term of 30 years or more. You should consult a financial planner to determine your goals for retirement and the proper investment strategy.

[John G]

Most gains in equities are made in relatively short periods which occur at random times so being out of the market will reduce your future gains.

Mbozek , well said. I agree completely.

[dh003i]

Well, I don't know about your time-horizon, but if you're putting money in a Roth IRA, presumably your time-horizon is retirement. You didn't tell us how old you are, so I really don't know what that is.

But, some viable time-frames include 10, 20, and 30 years.

From your statements, I presume you are very risk-averse. This may just be your personality, or it may be that the stock-drop has scared you, and you're scared because you don't understand your investments. You should know that in 90% of all 10-year time-frames, stocks have outperformed all other investment vehicles, including bonds, money-markets, CD's, etc. The only 10-year period during which the stock-market has ever lost money is during the Great Depression (which wouldn't have lasted so long if the government had allowed the market to naturally correct for the inflation).

With that in mind, if you have a long-time horizon (I'd say at least 10 years), then stocks will probably be your best choice. I'd recommend some kind of index-fund, because you obviously are uncomfortable with risks, and index-funds take out some variability. You may want to consider a total-market index fund, S&P 500 index fund, value-index fund, or growth-index fund. If there are offerings available, you may also want to look at a consumer-goods index fund and a capital-goods index fund (consumer goods are goods purhcased directly by the consumer, capital goods are purchased by companies). Growth stocks and capital-goods companies tend to do well during a boom; value-stocks and consumer-goods companies tend to do well during a bust.

When investing in these kinds of things, you may want to employ dollar cost averaging on the smallest period you can (DCA is as strategy where you invest a given amount each day, week, month, or even year). You may also want to give though to an emotionally gut-wrenching strategy, which would be investing slightly more as the market goes down, slightly less as it goes up. It is usually precisely when the market is going up the most, and optimism is at it's highest (when the economists start saying, "we're in a new economic era of no busts"), that you should be the most worried.

If, after looking at the merits of stocks and mutual funds, you decide it isn't for you, then you should probably consider bonds. Bonds are a much less volatile investment, and you are much less likely to lose money over the short-term. There is a wide range of bonds in terms of quality-rating and return, ranging from junk bonds to government bonds. Junk bonds and foreign bonds will have the highest return, but will have the highest probability of renigging (not paying you back, due to bankruptcy). Individual investors probably should be weary of these, since they require special care in picking. I don't recommend bond-funds, since they turn an otherwise stable investment into an unstable one, and add an expense ratio.

[John G]

"Bonds are a much less volatile investment, and you are much less likely to lose money over the short-term."

You can lose money in bonds over the short term when interest rates climb. Or perhaps a better way to say this is that the value of the bonds you hold will decline when interest rates climb. Bond values move in the opposite direction of interest rates. When I say "bond values", I am referring to the value determined by open market transactions rather than the face value when the bonds mature. Think of that recently refinanced mortgage you may hold with a 5% rate for 30 years. If interest rates move up 2% in the coming year, do you think the bank will be able to sell you mortgage at full value to another bank? Sure they can sell it, but only at a significant discount because the 5% rate will not be attractive. The same holds true for bonds.

If you buy a bond when issued and hold to maturity, you eventually get the face value of the bond plus the interest, as long as the entity does not default. This is the simplest way to think of bonds.

Bonds can be bought on the open market in "mid-life". The price you pay is a function of many variables including the remaining life of the bond, the coupon or interest rate, perceived risks of default and competing market rates. Conversely, you can sell bonds in mid-life, but the price you will receive will be determined by market forces. Note, if you hold to maturity, you get the face value of the bond which may be higher or lower then the price you paid.

General obligation bonds of governments are assumed to be safest catagory since the taxaction authority of the government can be used to pay off the debt. Revenue bonds (often for bridges, tunnels, airports, etc.) are a little more risky since they depend entirely on the revenues raised by the facility. For example, after September 11 there were some issues regarding how the bonds for the WTC would be treated because the complex was destroyed. Corporate bonds are slightly more risky as they are based upon the revenue and profitability of the corporation. Defaults are not very common but can occur in all catagories. The nuclear power plant bonds in the Pacific Northwest (WOOPS Bonds) were the last major quasi governmental default I can remember in the USA. For a time in the 1990s, the airport bonds based upon the new Denver airport were threatened when the baggage handling equipment did not work. {At one point you could buy these airport bonds for about 70 cents on a dollar... when the technology finally worked, the bond values climbed back.}

Bond type income can also be obtained through a mutual fund. Yes, there are small annual expense fees. However, there are some offsetting positives: a bond fund gives you greater diversification, can be purchased at a variable dollar amount, has flexibility of entry/exit, can be purchased at lower dollar amounts then the increments in most bonds, can be margined and is administratively simple.

Roths and Time Horizons

The time horizon with Roth investing is often more than just the years until retirement. When SSN was created, folks retired and were expected to live just a few years. When someone retires today at 55 or 65, they may be living 20, 30 or even 40 more years. Someone who is just 5 years away from retirement may want their income stream to run for a few decades. It may be very reasonable for a significant portion of your portfolio when you retire is in stocks.

[dh003i]

John makes some good points, which I did not mention. The market-value of your bond does decline as interest rates move up (because you need to offer it a discount to make it competitive with the higher-yielding bonds). You should consider if you'll be better off dropping your old bond and getting a new one at a better interest rate. In some cases you will, in others you won't. I think it's important for each individual investor to be "ok" with the fact that there are some people out there making more money than they are. You should want to make as much money (in the long-term average) as you need for your goals, and shouldn't worry much about what other people are making.

The bond-fund advantages John mentions are also worth considering. If those advantages are more important to you than the advantage of the stability of a bond, then you may want to consider a bond-fund. Interest rates are the important thing to consider when talking about bonds. You're best off when you invest in a bond when interest rates are high, and if interest rates subsequently drop (make sure there are no call options). In the unhampered free market, interest rates are solely a function of consumer time-preference, which will vary. If consumers have a very high time prefernece (e.g., they want money *now*), then interest rates will be higher; if they have lower time-preferences, then interest rates will be lower. In the current situation, the government intervenes and tampers with interest rates, which unfortunately complicates things.

What I think you should do is definately get out of a money-market fund. Even I-Bonds would be better than a money-market fund, but you still should be getting something with better yield than that. When your money is in a money-market, you are actually losing money to inflation (or rather, to the government, which benefits from inflation).

What I'd suggest you do is find out as much as you can about various investment options, and see what you feel comfortable with. You should also be at peace with the business-cycle. Every so many years, there is going to be a depression (I don't use euphemisms, so I call it a depression, not a recession). There is no doubt about it. So long as there is inflation, there will be such business cycles, thus depressions. You should definately ignore those who babble about how we're entering a new era of uninterrupted boom. The more the market price rises -- and the more cocky the market's confidence gets -- the more justified you are in worrying. And the more the market goes down, the more everyone else is pessimistic and scared, the more confidence you should have.