Newbie quest on Roth IRA

[Guest BluMensa]

I don't know if this make sense but I would like to know are there any significant diffrence on the type of Roth IRA that you would invest in a company Such as the "target funds" and regular funds? Thanks.

[John G]

I don't understand your question - perhaps you can rephrase it.

I am not sure what you mean by type of Roth. The "Roth" is a IRS/Congressionally defined retirement investment program. Having elected a "Roth" (as opposed to a regular or conventional IRA), your next step is to find a custodian that will hold your contributions. Custodians can be banks, mutual funds, brokerages, etc.

The choice of a custodian tends to set the range of investment choices. If you choose a mutual fund, your primary choices will be funds in their "family". If you choose a brokerage, you can buy a range of stocks or bonds.... plus many allow you to invest in a subset of mutual funds.

A "Target Fund" often refers to a mutual fund set up to manage your investment to your retirement date and beyond. For all practical purposes - something like a 2045 Fund is just a marketing gimic. These funds promise to adjust the mix of investments, moving from more aggressive to more conversative over time. You can do the same thing yourself. Somebody in the mutual fund industry came up with the clever idea of pitching to novice investors that they could just plunk down their money and make one choice. Although we have little track record on Target funds, they were extremely popular. We live in an era of cloning, and no clever idea goes uncopied. There are now hundreds of Target Funds. Some of them may be good, but it sure looks to me like most of these have higher fees and other expenses. The worse layer expenses of the primary fund owning parts of other funds.... fees on fees.

My main problem with this Target approach is that folks get the impression that you don't have to read documents, evaluate choices, make decision and monitor results. Too many people spend more hours watching reality TV then the hours (minutes?) devoted to their investments. Sure, you don't want to spend 100 hours making investment decisions. I am arguing for 1 hour a week reading about financial issues... mutual funds, tax issues, the economy, your fund statements, etc.

If you are a beginner, you probably should stick to one or two mutual fund choices, which should cover your next 3 to 5 years of Roth contributions. Guidelines: you want a broad based fund, focused mostly on stocks, with zero or low annual fee, and with an annual expense ratio significantly below average. Nothing exotic - eliminate a one country fund, one industrial sector fund. DO NOT just pick last years best performing fund - they rarely repeat as investing strategies run in cycles (value vs growth, big companies vs small cap, etc.). You don't need to find the single best fund, one reasonable performer will do just fine. After you get some years of experience, you may revise your strategy or change to choices.

[Guest BluMensa]

Thank You Jonh G for the in-depth information. This is so new to me and a lot of the question i will ask, might not make sense but thank you for your time.

1.

The choice of a custodian tends to set the range of investment choices. If you choose a mutual fund, your primary choices will be funds in their "family"

Is this consider company such as: Vanguard or Fidelity?

2.

If you choose a brokerage, you can buy a range of stocks or bonds.... plus many allow you to invest in a subset of mutual funds.

Can you list a few for me?

3. From your perspective for beginner, is it better to invest in stocks or mutual funds with the Roth IRA?

4. If said, I put $4k in a mutual or stocks, and the market is not doing great, my share will loose value ($4k)?

I did the search and a lot of your informations are so helpful..thank you

[John G]

Replies to Questions 1-4:

1. Yes, those are two big mutual fund families. Also T Rowe Price, Scudder, Janus, Invesco, etc. - you can see a long list in the mutual fund section of most newspapers. I suggest you stick with NO LOAD funds, these are funds that do not charge front or backend commisssions.

2. The number of brokerages is huge. Examples: Schwab, Fidelity (also a fund family), Etrade, Scottrade, TD Waterhouse, Brown & Co., Muriel Siebert, etc. I have mostly listed the newer brokerages that have discounted trading commissions on stocks and also offer mutual funds. You can find more names using Google or scanning Worth, Money or Kiplinger Financial.

3. I recommend mutual funds - because you get diversification, it takes less research time, they require less time to monitor, etc. It is hard to own 10+ different stocks until your assets grow beyond 30 to even 50 thousand dollars. Mutual funds - seek stock based fund, choose NO LOAD, select a fund with annual expenses below average, a history of reasonable performance, broadly based (no sector or single industry funds, no regional or country specific funds initially)

4. Stock markets move up and down. Yes you can see a decline in value in a year, back to back years and very rarely 3 years in a row (twice in last century).... but up years out number bad years by about 5 to 1 and the best years are up a lot more than the bad years are down. Over the long run (many decades) the stock market has given better returns than bonds, CDs or money market funds.