HELP!! I guess it is time for me to buy an IRA (Roth). Which do I buy

[Guest Jeffrey M]

I am new to this but I want to start investing...

I am a 32 yr old single male whom right now rents.

any suggestions on which to get into?

[John G]

Jeff, I am glad you asked. You have come to a good place for getting answers. But since the question is very broad, I will give you an overview.

I assume: you have never invested before, and maybe this is your first IRA. Age 32, single (ah the young life1)... renting only means you have not bought a place yet, so I am assuming you are saving for a future down payment.

Jeff: you probably want to keep things very simple and learn a little more about investing over time. Probably your best option is to pick a "mutual fund" instead of individual stocks. They come in about 8,000 flavors.... and you only need 1 for the first couple of years. I would suggest that you read last years March issue of Consumer Reports which boils down the list to about 100 well run funds. I believe they are all "no load" which means no front end or back end commissions. However, every fund has some general expenses... and the lower (like below 1%) the better.

I recommend a very widely based general stock fund, not some narrow special purpose fund (like computer software, or electronics). Use CR mag to find perhaps three of these and call the 800 number or find the firm on the web. Ask them for a "just getting started" package (general intro to IRAs, how to invest etc.) and also one or two prospectus on a broad based fund and an application form. You will get these in about a week. Act now, as you get near April 15 all these places are overwhelmed with requests.

I would also recommend the Roth IRA over the regular IRA since you are very young and decades later you will probably want to take the funds out tax free. The current max allowed investment is $2000 per year if you make atleast that much. You can actually make a smaller initial investment if that is too much (check custodians as min amount to open varies), but you also could right now put in $2000 for 1999 and $2000 for 2000!

Next year, just add to this existing account. You probably only need to think about opening a second fund when you assets grow to perhaps $10,000 or in about 3-4 years. Long term annual returns for a general stock mutual fund can run in the 10-14 percent range, but individual years do vary greatly and you can see a down year. At age 32, you should not care about any single year.... time is your friend, think 20, 30, 40 years. At 10% annual growth, your assets will double every 7 years.

There are options for tapping your Roth to buy a first house or pay for college. But that diminished the value of this great tax shelter.

Hope that helps. Good luck. (post another note or email me if you need more detail)

[This message has been edited by John G (edited 02-15-2000).]

[John G]

I should have said: you can get an IRA or ROTH IRA at a bank, brokerage, mutual fund, etc. Banks have very conservative options.

One question to ask all potential custodians of your funds is what annual fees they charge. Anything over $20 is too much. Some charge a fee, but may waive the fee if you ask and waive the fee when assets grow to 10K or so.

[John G]

Should look at the inbox more often. Consumer Reports March 2000 issue covers 110 mutual funds and has a decent overview article. Another good source for folks early in their career is Kiplinger Finance mag.

[Guest Bill Glueck, CIC]

One of the best places to establish a Roth IRA or any other type of qualified or non-qualified investment account is with a reputable on-line brokerage. I have a SEPP and conduit IRA established with Ameritrade. Shwab, E*Trade, My Discount Broker and a host of others offer the same type of service. With Ameritrade the plan documents are availabe free on-line in downloadable PDF form. You can establish your account for free. Stock trades generally cost $7; mutual fund trades cost $18. You can trade by phone or over the net. The best thing about using Ameritrade is that they offer more investment research tools than you could ever need. They have a Morningstar Fund finder application that searches thousands of funds (load & no-load) by sector, performance, capitalizaiton, etc... This system provides performance charts for customizable periods of time (1 month, 1 year, 3 years, etc...), displays funds top ten holdings, measures risk, provides an overview of funds' investment strategies, etc..., etc..., etc... Best of all the on-line brokerages calcualte net asset values and stock values every evening when the market closes and post values to individual accounts so that investors can track their portfolios performance as often as daily. My returns have sky-rocketed since using Ameritrade's on-line resources.

[John G]

Bill, you are right on target about the multiple benefits of a brokerage account. The down side of brokerage accounts: some have higher fees and higher minimum opening balances then just a no load mutual fund. If someone just wants to put $500 or even $1000 into an IRA each year, they may be better off with a direct connection to a no load mutual fund. For assets of $10,000 or more, a brokerage account will often have no fee... and you could open a couple of mutual funds.

Folks with less than $5000 in assets should probably not be using brokerages to own one or two stocks. Three reasons: (1) Not enough diversification. (2) Commissions become a significant % of trade. and (3) Time requirements to research make picks and track are often more than a 20 something wants to spend.

I have helped get a few people started that had very little to contribute to an IRA. They were very pleased to see their broad based or index mutual fund moving up. It got them hooked on investing and wanting to learn more. One has blossomed into a mini-capitalist!

The worse possible start would be for someone to go the brokerage route and buy 35 shares of some "hot" company only to see the price per share go down, ditch that stock and repeat the mistake with another "hot" stock. I knew someone who was doing this with a broker and paying $1.50 per share for trades.

I continue to be amazed that college graduates can spend hours deciding about a cell phone or vacation but make investment decisions with near zero thinking and relying upon "experts". Learning about investing is a lifelong assignment. It really takes many years to develop a good understanding. Since Wall St tuition is very expensive, I like to recommend that newcomers start out with a basic mutual fund.

[This message has been edited by John G (edited 02-16-2000).]