Starting a Roth IRC - Which funds to choose?

[Guest jstn]

Hey Everyone,

I'm 22 and about to open a ROTH IRA. I've decided on Vanguard as my broker, but I am uncertain which mutual funds to run with. I noticed one fund named "MA Tax-Exempt" which caught my eye since I am from MA. Beyond on that, do I want small cap, mid, or large? I am starting with $1000 now and plan on contributing the maximum until I retire.

Also, is it possible to open more than one IRA?

Thanks everyone!

- Justin

[John G]

Roths are already a tax exempt format - so never, never, never invest in tax exempt funds. I would imagine that Vanguard would tell you this if you spoke to someone, but who knows if their automated internet systems would catch this.

Can you open more than one IRA? I think you are asking can you have more than one mutual fund at Vanguard under you IRA - the answer to this is YES. However, you could also have IRAs or Roth at Fidelity or T Rowe as well. There are no IRS limitations, just practical ones related to how much paperwork you want to track and the extra annual fees you might incur.

Choice? You are just getting started and are very young. For many years, you will only need a single mutual fund. I would choose a general purpose stock fund, one with zero or a very small bond/cash component. You don't need to hit a home run each month to get a very good long term result. You certainly do NOT want to keep switching your money around chasing last years hot performing fund. I would stick with a single general purpose fund until your total assets are greater than 20,000. At that time, you may want to consider having two funds.

Bear in mind, there are some folks that have had essentially all of their retirement assets in just one fund for decades. Funds are by their nature a diversified investment. A general stock fund will hold anywhere from 20 to 800 stocks (even more if it is a total market index fund) that represent many different industries or sectors.

You would like to see your stock fund (aka equity fund) grow on average about 10 percent a year, which means that your assets will double in slightly over 7 years.

Starting age 22, putting 4k into a Roth for 43 years... wife does the same.... if you average a 10% return, you will have amassed nearly 5 million by the time you are age 65. Tax free!

[Guest jstn]

Hey John,

Thanks for your remarks. I did some research and I'm looking at the VEIEX fund. It looks like a well diversified, international, stock based fund. I think I'll start my account with this fund and see how it goes for a few years. Then add some domestic funds later on.

Thanks again John,

- Justin

[Guest jstn]

Funny how things change _over night_. Vanguard upped the minimum investment for the fund I was looking at from $1,000 to $3,000. Who else offers minimum investments of $1,000 these days?

- Justin

[John G]

Do note that there are often differences between the minimum for: regular taxable accounts, ROTH/IRAs and any account where you pledge to direct deposit a minimum amount (say $200) each month.

I would NOT use an international fund as my first account. These tend to be more volatile and have higher expenses (I did not check the annual percent at Vanguard, but international or sector anything tends to have higher expenses). Look at other Vanguard selections - you can always shift dollars between funds later.