Investing young...

[Guest Apoc]

I am 17 and want to start a Roth IRA. I’m working and want to invest $3000 into the Roth IRA. I plan on contributing $3000 - $4000 each year. I’m not going touch my money till I’m 60 unless I need to for a house. I’m in it for the long term. What Bonds or Stocks do you suggest I invest in? If I want a stock Roth IRA would DOW INDUSTRIALS be a good choice?? Or would NAZDAQ be a good choice? Please give me your opinion on a safe but good in tress rate stock. Thanks any information is appreciated deeply.

[John G]

Congratulations on your forward thinking! You have the beginnings of a plan that will let your build a very large "nest egg", perhaps in millions of dollars.

But, at the start you do not want to buy individual stocks or bonds. Here is why.

1. Most beginners don't know enough about making single stock/bond choices.

2. You always want some diversification in your retirement portfolio and that is not easy to do when you have a modest amount in your account. For example, a common view is that you need at least 8 completely different stocks to begin to attain some degree of diversification.

3. Even with internet based trading, your commission expense with a small portfolio would be high. It would also be hard to purchase 100 share lots and hold 8+ different stocks. The research time would also be high.

4. You can accomplish diversification with a minimum amount of research time and easy management/tracking by choosing mutual funds - especially NO LOAD funds that have below average annual expenses.

A reasonable plan that would work for the first perhaps five years would be to select a general index fund that represents either the S&P500, Wilshire 5000 or other "total market". You will get NO LOAD (no sales charge on the front end or back end), very low annual expenses, diversification and easy tracking/management. After 5 years, you may be nearing 20,000 in assets and can consider other kinds of mutual funds. Some folks stay with mutual funds their entire lives as that often gets the job done. But, if after you reach the 100k mark... and you can start to add individual stocks to your portfolio.

The single mutual fund would hold 100s of stocks - so you would have a major element of diversification. While you are getting your education and starting your career, you could save on the amount of time spent on your Roth IRA.

PS: I suspect that talking about investments and Roths is a deal killer on dates! But wait until you go back to the high school reunion in 10/20 years!