changing funds within Roth IRA?

[Guest mrbutterpie]

Hi all - I have found an investment plan that appeals to me, but I want to make sure I am doing this right, any help is appreciated.

I have a Roth IRA through Vanguard that is 100% invested in the Vanguard International Growth Fund. I was wondering if there are any consequences to changing the fund to a GNMA Bond Fund or other similar Vanguard funds during periods I wish to have more security with my money.

My chief concerns are: are there any tax consequences to changing the fund, and do I have to report these changes as sales to the IRS, even though my account still would always remain a Roth IRA with the Vanguard company, regardless of the fund it's invested in.

PS - I understand Vanguard doesn't like these kinds of changes to occur too frequently, and there are penalties associated with the VIGF being redeemed too early, but I'm cognizant of these.

Thanks!

[papogi]

No tax or reporting consequences. As you noted, there might be certain exchange limitations imposed by the custodian in an effort to reduce administration expenses due to too much "trading."

[John G]

Also no record keeping responsibilities beyond what you need to track your own portfolio.

I wonder about the methodology you will use to make switch decisions. If you are just getting started, you might be better off in the long run to keep your assets in equities (stocks). Do not assume that bonds funds have no risks. First, NAV can go down when interest rates change. A second kind of risk is that the bond fund performance does not measure up against inflation.

I am not a big fan of 100% of your assets in a specialty fund (international, sector, region/country, industry, etc.) as you increase your risks with minimal upside. You did not mention your age, when you plan to retire, or your performance goals. If you add some info in a subsequent post, I can give you better feedback.

[Guest mrbutterpie]

Thanks Papogi

John G - Thanks as well.

My methodology will be pretty simple, just being more conservative in times of higher inflation and rising rates, combined with sentiment indicators.

What I'm trying to do is provide myself with a long term (about 30 years - I'm 36 by the way, planning to retire somewhere in mid-60's) investment strategy that will pay out the most over a long period of time. I have thought about stock index funds, but I'm worried about an environment in which the US market is just going to hover around where it is for a long time to come.

I'm pretty confortable with risk, so accepting the volatility of the VIGF is ok with me. Also, I'm looking for simplicity, I don't really want to deal with too many funds in my portfolio.

I do worry about the risk in bond funds, but most of these moves will (hopefully) be short term if I feel the need to do it in the near future. As I get older, I'll gradually move more money into bonds/money markets.

I am curious what you mean by "minimal upside" in your post.

Thanks again.

[John G]

Most of the differences in performance comes from what asset class (money market, bonds or equities) that you choose rather than variations across years or among sub sets of an asset class.

The main asset class of equities includes many sub sets like growth companies, dividend paying, sector (tech, health care, resource) and regions (Euro, asia or individual countries).

It is very hard to determine which sub groups will do better than average. Lots of folks try, few are consistently successful. You may enjoy the analysis and decision making... but do not expect to be above average on any consistent basis.

When you narrowly bet on a niche within equities (such as international) you reduce diversification and expose yourself to increased volatility. While you may look at historic data and see a large percent difference in performance - finding that gap in real time with real money on a consistent basis is very hard. You might only eke out a fraction of a percent.

It is easier to see the difference between different asset classes. Over the long haul, equities have out performed bonds. Bonds have out performed money market accounts. The gap between bonds and equities is more in the 2 to 3 percent range.

So... why shift back and forth from equities to bonds when you have a 30+ year horizon. And, then spend lots of time trying to out guess the markets for a fraction of a percent within the equity class?

One final point. I said 30+ years because you don't stop investing on the day you retire. You will propably live more years in retirement than you spent working. I normally recommend that most folks in their 60s and 70s keep the majority of their funds in equities. An even greater percent for those with substantial assets and pension/IRA income.

[Guest JFG]

Your goal should be diversification of your Roth assets. And don't forget to diversify

what you have your 401k.

All you have to do is remember the TV images of the participants in the Enron

401k showing quarterly statements with 60+ years of their earnings in the Enron 401k.

With 100% of their assets in Enron stock. And the value went from several

million dollars to zero.

Don't try to time your entrance and exit in asset classes. I recall a study recently

showing if you were out of the market only a few weeks over a 20 year period that

you misssed most of the moves in the market.

Here's a strategy that works for me. Decide your risk tolerance. Lets say for

example, you invest in 6 funds-from the riskest-your Vanguard Global would

be greater risk than Vanguard GEMA. Say you decide to have 25% of your assets

in two bond funds and the balance in 4 other funds one being Vanguard Global.

Each quarter as you invest additional funds do the 75%-25% calculation. If stocks

went up money would be invested in bonds. If stocks went down you would be

investing in the bond funds. This contrary approach will pay off big over your investing

history.

Good luck.

[John G]

Don't try to time your entrance and exit in asset classes. I recall a study recently

showing if you were out of the market only a few weeks over a 20 year period that

you misssed most of the moves in the market.

This is one of the great misleading myths of stock investing. Take all the weeks over a 20 year period and sorted them in terms of percent change in the stock market. Now look what would happen if you "missed" the top 20 weeks.... or top 10% of the days using days as the basis. Of course you would miss out on a lot. But, those top weeks did not occur back to back. The exagerated impact of this myth represents results if you got out of stocks just before each short burst up. Great example, valid issue, but very misleading about the actual impact of not being in the market for brief periods. I think this is a favorite myth of the brokerage business.

Myth busted? Maybe, but there is an element of truth that gets lost in the myth.

The real issue is not "missing" the top weeks or days, but the problem in predicting when you should be IN or OUT. I have about 25+ years of experience with investing. I have never met anyone who regularly predicts swings or turning points in stocks, interest rates, bonds or the economy. There are just too many variables, too many unpredictable events. Katrina and WTC terrorism are just some of the unpredictable events of the last 5 years. You can add elections, war, political upheavals and just the ebb and flow of any market economy. Sure lots of folks claim to have great track records... but not often documented by anyone else.

What is true on the macro level is also true at the sector/industry level and among companies in a specific industry. Yeah, Billy Miller at Legg Mason is exceptional. So was Peter Lynch for a decade or two. Warren Buffet seemed to have the golden touch for a long time. And I know of one friend who probably batts around .650 on stock picks - which is very exceptional... when he talks, I really do listen. But that is just a few folks who consistently picked winners over an extended period of time.

I have concluded that for most folks, the percent you assign various assets pools accounts for the bulk of the differences between most portfolios. Folks with high equity (aka stocks) percents tend to have the best returns over the long haul. Those with a significant portion in bonds are a couple of percent lower. Those with cash/CDs a little lower still. Within the high percent of stocks, those with a slight bias towards grow have over many periods (but not recently as with value and commodity based firms) done a little better.

Another aspect of this myth is that it assumes that the individuals goal is to "Beat the Market". If a couple starts early, saves a good chunk of their income, and makes reasonable investments - they should get very good results, perhaps multiple millions for retirement. Investing is a game of walks, singles, bunts to advance the runner, and occasionally an in the gap double. Folks that are constantly swinging for the fences - taking big risks on long shot investments - tend to strike out a lot. Maybe the problem here is that everything in our society seems to be happening faster all the time, yet investing is more like watching paint dry.

When you invest in a company or a stock mutual fund, you a making a wager on capitalism. Over a long period of time, companies tend to grow and increase their profits. Incentives for hard work, ability to take advantage of your inventions, problem solvers, innovators... out number the Enrons and Worldcoms.

Rant off.

Look for long run success in investing - time is your friend. Expect modest risk taking to pay off because the stocks are underpinned by the success of capitalism. No guarentees, just a long track record of probabilities.