How to start IRA

[Guest bjs2025]

The title says it all. I am 24 and just began a roth IRA with Schwab. I would like to submit funds this week but I just don't really know how to get started. I like to manage these types of things on my own so I kind of just like to learn a little bit of what is recommended for me and then go from there. I am young and obviously don't want to be extremely aggressive with what I invest at this point. Schwab told me that they do have consultants that they can set you up with over the phone to kind of get me started and I was wondering if this is a good idea to listen to their advice or not.

Basically my question is, what would be the best types of options for me just starting out? I have heard that mutual funds are something to look into and to diversify your investments. Can someone here point me in the right direction (I'm not necessarily looking for anything specific, just ideas of what the heck I should do) as far as how to invest? Is this consultation with Schwab a good idea? If you could please talk to me in the most laymen terms possible it is appreciated, I'm not dumb, just new at this I guess. Thankyou all very much for any advice you can give me.

[masteff]

So step 1 is to complete the account application and submit your money. You may have the choice to specify where to invest the money or you can simply let it get put into the money market option. Letting it go into the money market at first can be a good thing because a) it gets your money into the Roth IRA and b) it gives you have a few more days to decide how to invest (which you appear to need); to put it another way, you're moving forward w/out having to make all the decisions at once.

That leaves where to invest. Until you have significant assets, mutual funds are an excellent choice. So how do you pick? Morningstar "Star Rating" is helpful: don't look at anything below 3 stars and preferrably 4 stars. Personally, I like index funds to start (first $100K+); maybe 1/2 S&P and 1/2 NASDAQ. Moving forward in time, you'll want to pick up some international indexes as well (see this article to understand why international is potentially beneficial for your portfolio in the long run https://guidance.fidelity.com/viewpoints/wh...s-are-important ).

Your last two steps are: learn and review. Motley Fool has loads of good articles on investing. Also the various investment firms and mutual fund firms have good articles (like the one I linked above). And once every 3-5 years (or whenever you have a major event in your life, like changing jobs or getting married), you should review your portfolio and the particular funds you're in and make sure they're still good. While you might still want to be an particular type of fund, you might discover that the ABC fund changed managers and is underperforming so you might move to XYZ fund which has the same investment strategy but doing a better job of it.

As for the consultants at Schwab, I'm presuming they have two levels of service: people who are free for you to talk to and people who they want to charge a fee for. There's no harm in talking to the free-to-talk-to people. They can, for example, help you to evaluate between certain mutual funds to be sure you pick one with no loads or fees. And you can always have a note pad and take lots of notes on what they suggest and then take time to think it over; you're not locked into their advice.

[GMK]

Good for you. (Some of us should have been so wise as to start early.)

Here's a link to a previous discussion of getting started that might help you (again with good advice from masteff):

http://benefitslink.com/boards/index.php?showtopic=38508

[masteff]

And John G's posts in the IRA subforum are generally excellent and packed w/ good tidbits of advice.

[Guest bjs2025]

Thanks a lot for these tips guys. I am checking out Morningstar and it is extremely helpful. Now another question: Should I only go with mutual funds to start and if so, how many should I start with? Also, in terms of expense ratio...what is a good number to be at? Thanks again for all the help and taking the time to do this, it is much appreciated.

[John G]

Congratulations on getting started. You are wise to begin now for two reasons: (1) learning how to manage money and invest is a lifelong task, even when you think you know about your choices...new stuff is being invented and circumstances change, and (2) time is your friend...start early and your assets will grow larger.

Process:

1. The first thing you must do is pick a custodian. There are thousands of choices. Schwab, Fidelity, Etrade, Scottrade, TDWaterhouse, etc. are examples of brokerages. T Rowe Price and Vanguard are examples of mutual fund families. About 90% of what a custodian delivers is common across companies. There are slight differences in fees, types of available investments, research tools, etc. that might make a difference down the road or for folks with more digits in their assets. I suggest that newbies pick either a brokerage or mutual fund family with low or zero annual fees. Later, if your needs change you can transfer your assets between custodians.

2. Most folks are best served by choosing mutual funds as their initial investment. When you buy a fund, you are buying a portfolio of many individual investments and that gives you some diversification. Diversification helps you avoid a disaster like buying ENRON and watching to company self destruct. In your first few years, just a single broadly based mutual fund will suffice. You are only 20 and have a life to lead. You do not have enough experience to be picking individual stocks. Because many broad based funds overlap in the stocks they hold, you don't get a lot more diversification by owning multiple funds.

3. Mutual funds: I would first look to NO LOAD funds - the ones that don't charge up front or on the back end a commission. NO LOADs are almost 1/2 of all mutual funds. Decades ago, "advisors" used to assist households in buying LOADED funds...mostly they got to pocket the 5-7% commissions.

4. Advice: Sure, go ahead and talk with Schwab. Read their materials. Go on line and use some of their screening tools - like the Morningstar star ratings mentioned above. Better yet, spend $15 for a years subscription to Kiplinger Financial magazine. They cover credit, car buying, first homes, IRA/Roths, investing....lots of stuff in layman's language that will help you over the next 10 years. While you are investing your $$, don't forget to invest your time. Devote 1 or 2 hours a month to reading Kiplinger or equivilent magazines and your will be miles ahead of your friends at the age of 30.

Don't get overly worried about your near term "performance", that is the annual results you will achieve. Roughly 8 out of 10 years will show stock market increases vs. two down years. If you fund your IRA/Roth for 5 years, your will start to build a nice nest egg. Think of 5 years out as a good time to review your holdings and maybe split your assets among two or three mutual funds....mostly as part of your learning experience.

Post again if you have other Qs.

[GMK]

Another excellent resource for books and magazines on investing is the free book store (known in many places as the public library ).

[Guest bobolink]

You say because you're young you shouldn't be very aggressive. IMHO, you should be way aggressive because you are young! I give "Savings for Retirement Without Living Like a Pauper or Winning the Lottery" by Gail Marks Jarvis as a college graduation gift. It has some great advice and a nice explanation of the miracle of compounding interest. Also, once you get a job with a qualified plan opportunity, jump in and auto-escalate, you won't miss it and boy, will it grow. I know it is hard to believe, but you will never have an easier time to save. Make it your habit and you will be a winner.

[John G]

The term "aggressive" is very vague when it comes to investing. I generally think of aggressive as a continum that is very personal...what is aggressive to one person might be considered "normal" to another. Age, risk tolerance and experience all factor into to how we perceive a specific investment choice.

From an economic perspective, the safer an investment the lower the likely return. For example, some of the lowest returns are associated with government bonds. Ditto federally insured CDs at a bank. The market is composed of thousands of individuals, and those that seek high level of safety will tolerate meager returns. Investors in the stock market should know that individual stocks can go up and down, but expect that over the long term their "equity" (aka stock) investments will perform better than basic IOUs because part of your stock investment is in the long term future of capitalism. They expect life to be better twenty years from now. We can go out further on the continuam or risk/reward and look at international stocks (Libyan refineries to Indian railroads!), stock options (about 80% of all calls expire worthless!) and commodities (pork bellies!).

Some folks confuse investing with gambling. In investing, you try to make intelligent choices that over a long period of time should grow your capital. I know a lot of investors that would be very happy to consistently achieve 8 or 10% a year on their capital.

Folks that think investing is picking long shots in the hopes of making 10x or 30x on their investment... the phrase "a fool and his money are soon parted" come to mind. If you want to gamble, play the lottery or go to Vegas. Note the difference. Gambling results are nearly instantenous. Rewards are multiple times the amount risked. But the most common result is a 100% loss.

[Guest bobolink]

Good points, JohnG. I made my suggestion because I have met young people so protective of principal that they're in CDs. A little intelligent leveraging can go a long way, but I agree throwing caution to the wind in the face of huge and unrealistic gains is irresponsible. Bernie Madoff, anyone?

[John G]

Bobo...

I am not arguing for low yielding "safe" investments. One of the problem with ultra safe investments is that they rarely appreciate above the rate of inflation. So what seems to be safe on any given day, week or year may be a bad idea over the long haul.

Beginning investors often want to know "what's best". No one can tell you that. Things like the tsunami in Japan, Bernie Madoff, the deep oil blowout in the gulf, and the foolishness of Leyman spring up without warning. Last years great success can turn and become the worse investment.

Someone who is starting in their 20s should be thinking long term. I would highly recommend that they be 100% invested in a general purpose mutual fund. Each year, make the best contribution they can make. After 5-10 years they will have a very nice accumulation. Then, they may want to choose a second mutual fund. For example, if they chose a domestic general purpose mutual fund they might want to add an international. Or, if they are mostly large cap, pick up a small cap fund.

- - - -

My prior post may have sounded more conservative because of a recent experience with a couple in their 50s. They wanted to take their company plan and roll it over into an IRA to buy gold or gold stocks. This disease is called chasing last years winner, or reacting to dire predictions of the demise of western civilization. Its pretty amazing that folks would think of something like this when they also say "we don't know anything about investing".