Is anyone invested in VANGUARD - Roth IRA

[Guest BigBoi1881]

I was wondering if anyone has a Roth IRA with Vanguard. Im only 22yrs old and would like to get more information, So far I have put in $1,000 and was wondering if I picked the right fund.

VQNPX - Vanguard Growth and Income Fund Investor

[John G]

Lots of folks use Vanguard for their IRAs and Roths. They have very low expense ratios on their index funds. So far, they have not been tainted by the recent spat of mutual fund indiscretions about short term trading.

My advice would be to not worry a lot about your short term performance, the big picture is that you were wise to start early. Think of your first few years with an IRA as primarily a learning experience. Don't spend a lot of time pondering your $1,000 but spend 2 minutes looking over every statement they send you. Perhaps the next time you put in money you may want to consider a second fund at Vanguard. Time is an investors friend - ignor the short term ups/downs and stay with a regular plan of funding your IRA.

No one can tell you which Vanguard fund will perform the best over any given time period. That is the nature of markets and investing - the ebb and flow are in the short term very unpredictable.

You are backing "capitalism" by investing in the stock market for the long run. Things tend to move up because of the entrepeneurial freedom, movement of capital, low governmental control (compared to N Korea or Cuba), and personal incentives to build a better world... for profit.

You might want to subscribe to Kiplinger Personal Finance for about $10 per year to build a foundation of knowledge. That mag covers home ownership, credit, insurance, investing, mutual funds and a bunch of other stuff that a 20 something will find useful. Give it a try.

[dh003i]

Imo, there are only a couple of mutual fund families that you should consider putting your money into. These are fund families that have demonstrated good performance, integrity, relatively low expenses, and stability:

Fidelity

TIAA-CREF

T. Rowe Price

Vanguard

You are unlikely to be caught up in some kind of mutual-fund scandal if you invest in these companies.

When it comes to options, a wide breadth of services, and excellent web-support, you will be hard-pressed to beat Fidelity. It is like a wholesale store for mutual funds. If there's a type of investment your interested in, Fidelity probably has a mutual fund for it. Their Select Portfolios, for example, encompass specific sectors (e.g., Select Electronics has a large focus on superconductors, and tends to be superior in bull markets; Select Gold focuses on gold, and has traditionally been stagnant in bull-markets, and sky-rocketing in bear-markets).

When it comes to choosing between a moderate amount of good index funds, Vanguard can't be beat. I don't even know why other companies bother offering Index Funds, since Vanguard's index funds, to my knowledge, have always had the lowest expense ratios. Vanguard is going to be introducing some sector index funds, which will increase your options.

If your investing money in a Roth IRA, it should be for the long-term -- retirement. This is money that you shouldn't be touching for at least 40 years, if you're 22 now. Thus, you should completely ignore the short-term. It is interesting to note that investments you would normally call "risky" are actually safer in the long-run than those you would normally call "conservative". From Successful Investing with Fidelity Funds, by Jack Bowers, the risk-break-downs over a 12-year period, assuming you initially invested $1,000 and compensating for inflation. This data was tested over 50 years:

Aggressive Growth: 100% Small Stocks

Best case: $13,424

Average: $2,972

Worst Case: $1,080

Growth: 100% S&P 500

Best Case: $6,749

Average: $2,308

Worst Case: $748

Growth & Income: 60% S&P 500, 40% Int. Gov't Bonds

Best Case: $3,662

Average: $1,798

Worst Case: $819

Income-Oriented: 50% Int. Gov't Bond, 20% Corp LT Bond, 30% S&P 500

Best Case: $3,544

Average: $1,447

Worst Case: $782

Money Market:

Best Case: $1,516

Average: $1,039

Worst Case: $564

Traditionally, we say that the money market is a "safe investment'. However, over a 12-year period, investing in a small-stocks index would be safter. This is because of the effects of inflation.

For a rough guide, Bowers suggests the following investments for various time-horizons, assuming a moderate tolerance for risk:

12yr or more: Aggressive Growth

8yr: Growth

5yr: Growth & Income

3yr: Income-Oriented

1yr: Money Market

That is, if you're going not going to need your money for greater than 3 but less than 5 yrs, you should consider income-orientation. If it's 8 <= time horizon < 12 years, then you should consider growth.

The important thing is not to be scared off by short-term fluxuations, especially if you invest for the long haul. You should be prepared for drops in portfolio value of perhaps 50% in bear-markets. Rather than dreading this, consider it an opportunity to continue using dollar-cost averaging, and buying the same mutual fund at a cheaper price.

[Guest BigBoi1881]

both of your replies are very informative, and I appreciate your time & concern in replying to my post. I have a few addition questions to ask that I was hoping someone might be able to answer for me..

- The maximum I can put into my Roth IRA is $3000/yr, is there a way to invest more?

- What are the advantages/disadvantages of having a second fund at Vanguard (does that mean I can have 2 Roth IRA's - if not- what other funds should I look into)?

- Down the line am I able to change my Roth IRA fund to a more aggressive fund or vice versa?

Thanks again, Im glad I found this site I will be spending alot of time reading all the posts.

[John G]

A few comments on the other advice above:

Someone who is 22 years old and just learning about investing should not be seriously looking into sector funds! Newbies to investing are often looking for the magic bullet, the approach that gives them the maximum performance. There is not such bullet. There is a reason why the SEC requires a statement that past "performance is not indicative of future results" - because it is true. Sure, it might be interesting to know more about the range of options and really neat to pick a great performer - but a 22 year old newbie does not have the experience to make educated choices about narrowly cast funds. There is no reason to try and chase top performance: (1) because you can't tell in advance what type of fund will perform best and (2) you don't need "top" performance to reach your goals.

You are very likely to amass multiple millions of dollars in your retirement accounts if you start at age 22 and set aside the max each year and invest in the overall market in some form. DH is correct to suggest that because of your age you may bias your investments towards growth or even aggressive growth. But, you can get execellant results with a broadly based mutual fund and perhaps that suits your risk tolerance. IRAs are under your control, so it is your choice.

Your questions:

- The maximum I can put into my Roth IRA is $3000/yr, is there a way to invest more?

Yes, and no. Right now Roth IRAs are capped at $3,000 if you earn that much. The max will be increasing again soon, and there are some legislative proposals for other investment vehicles and other limits... so the max number may change.

You should also look into any retirement programs offered by your employer such as 401k, thrift plan, pension/profit sharing, ESOP, or 403b (the most common types). These plans have various tax shelter properties and some may have a matching component from your employer. As long as your employer offers a range of investments that you consider reasonable, this is often a great way to build additional assets. Beware of any plan that forces you to only buy company stock - these are less common than years ago, but tell that to the folks at Enron who had their jobs and their fortunes tied to the firm.

- What are the advantages/disadvantages of having a second fund at Vanguard (does that mean I can have 2 Roth IRA's - if not- what other funds should I look into)?

Advantages - slightly more diversification, another fund to watch and potentially learn about. Disadvantages - more paperwork and effort required, possibly more fees. My view: do it only for the learning part if it only costs you time.

- Down the line am I able to change my Roth IRA fund to a more aggressive fund or vice versa?

Sure. Mutual funds most often come in "families" that include money market, growth, dividend, bond, index, international and sector funds. Switching between funds can be done by phone or internet. By switching, I mean changes after a long run, not jumping back and forth to maximizing performance (which usually gives the opposite result).

[dh003i]

BigBoi1881,

You should not be looking at sector-specific funds as a new investor. I believe that Vanguard hadn't even offered them for some time, under the view that they are speculative. Aside from that, new investors are unlikely to be able to withstand the extremely turbulent nature of sector funds. For example, as my link shows, the Select Electronics fund, which has been considerably more volatile than the Nasdaq, lost approximately 77% of it's value from August 2000 to August 2002. I only mentioned sector-specific funds as an example of the vast array of choices that Fidelity offers (it is unlikely that many 401(k) or 403(b) plans will even give you the option of investing sector-specifically).

When you are considering a fund, there are several things you should consider. You should always invest with the presumption that the next Great Depression is about to start tomorrow. You should be comfortable with the possibility that over the short-term, your portfolio may lose a significant portion of its value. When looking at a specific fund, you should feel comfortable with the worst performance it has turned in over a year or quarter (extrapolated to a year).

If you are investing in a 100% Small Stocks Index fund, you should feel comfortable accepting a worst-case scenario of losing 49.6% of the value of your portfolio. That's the worst showing the Small-Cap stocks have ever had (probably during the Great Depression). Over 5 years, the worst-case scenario was a loss of 61% of the value of your portfolio. .

If you are investing in the S&P 500, you should be willing to accept a worst-case scenario over 1 year of losing 45.5% of your portfolio value. And so-on and so-forth.

The important thing to note is that over very long periods of time, more aggressive investments are actually less risky than less aggressive investments. Quoting from Successful Investing with Fidelity Funds

For the very long term it pays to be aggressive. In the 50-year test period small stocks never lagged inflation or cash investments over a horizon of 12 years or more. If you can stand the year-to-year fluctuations, the long-term risk of holding small stocks is very low. Cash, on the other hand, is actually more "risky" than stocks over long periods of time. The worst-case figure shows how a cash approach lagged inflation in the 1970s. A portfolio in 30-day T-bills would have lost almost half of its purchaisng power during the 12 most inflationary years of the last half century

The table that the author provides is very useful for getting a gauge of the worst and best-case scenarios to expect. I've replicated it on my website.

After-Inflation Growth of $1000 For Five Asset Allocation Classes, Tested Over 50 Years

The shaded cells indicate the asset allocation the author suggests for the indicated time-frame.

Regarding the $3,000 dollars cap on Roth IRA investments, no there's no way that you can invest more in a Roth IRA currently. The limit is scheduled to increase, however. Furthermore, the Lifetime Savings Accounts and Retirement Savings Accounts being pushed by the President would allow you to put away $7,500 in a Retirement Savings Account (would function like a Roth IRA, but available to all) and $7,500 in a Lifetime Savings account (would function like a Roth IRA, but available to all at any time, without taxes or penalty on withdrawal at any time). You can write your Congressman and Senators to support this legislation, and other legislation that offers similar tax-savings vehicles (like the Health Savings and Security Accounts). In the meantime, you should max out your employers contributiosn to your 401(k). If available, you may want to consider an MSA. If not, you may want to take a hard look at FSA's (not as good).

Regarding the ability to change funds, you can pretty much change funds within the same fund-family whenever you want, though penalties imposed by the fund family (e.g., Vanguard, Fidelity) may apply if you bandwagon. You should decide what kind of asset allocation you want to invest in for retirement, given estimate time-horizon to retirement, risk-tolerance, and need for growth. If you're going to retire in 12 years or more (which should be the case, as you're 22), I'd recommend an aggressive asset allocation, because time-frames this long, aggressive investments are actually less risky than less aggressive ones. For example, over the worst 12-year period, Small Stocks gain $80 on a $1,000 dollar investment. Over the wrost 12-year period, the S&P 500 lost $252. Of course, the scenarios I show don't extrapolate beyond 12 years, but it's reasonable to believe that the worst-case scenarios will continue being better for aggressive investments.

Of course, if you can't stomach the volatility over 1 year, it's pointless to talk about the benefits (in terms of reduced risk, and increased possibility for profit) over many years. It's easy to look at data showing small stocks losing 50% of their value over 1 year in the worst case, but holding steady over 12 years in the worst case. It's an entirely different (not so easy) thing to actually lose 50% of your investment over 1 year.

In any case, you have to decide what your asset allocation is going to be. You should be comfortable with the worst-case scenarios in all time-frames, and willing to continue investing in it (dollar cost averaging into it) over the worst periods, because those are actually the best time to invest (you buy more shares at a cheaper price).

Once you decide upon an asset allocation, you should stick to it unless your situation changes (e.g., obviously, when you start approaching your retirement year, you may want to rebalance your investments). You should review your funds' performance periodically, and should pretty much ignore short-term fluctuations. I would suggest doing an annual review of your mutual funds, and deciding if you want to stay invested in them. If you choose not to, you should not adjust your asset allocations. For example, if you're 50% small-caps, 50% bonds, and you're unhappy with your small-cap mutual fund, you should not switch from a small-cap mutual fund to a large-cap. You should switch from the small-cap your in to another that you're more comfortable with.

Things to consider should be expense ratio, minimum initial investment, any penalties upon sale of fund, fund performance relative to the applicable index, manager tenure, mutual fund family, and how much you trust the manager. When you invest in a managed mutual fund, you are essentially investing in the manager's ability (or lack thereof) to outperform his index by more than the expense ratio over the desired time-frame. If you don't have confidence that the manager can do that, you should invest in an index fund.

One nice thing about index-funds is that you don't have to worry about managers, since there are no managers who make any decisions. If you want an index fund, Vanguard should be your first stopping place. Only invest elsewhere if Vanguard doesn't have the index fund you want (e.g,. if you want a Nasdaq Index fund, you'll have to go elsewhere). If you choose to invest in index funds, you may have less need to periodically evaluate them, since there's less to evaluate (you're literally investing in an asset class, be it large cap value or small cap growth).