How much to start a Roth IRA? More than one fund OK? Can I select indi

[Guest diggerdave]

My wife and I have 401k's file jointly and have agi less then $100k. I understand I'm not eligible for a traditional IRA but am for a Roth. Assuming this is true I have the following questions

1. how much $$ to start a Roth?

2. Am I limited to one fund?

3. Or Can I est. a Roth as a stock portfolio that would contain the stocks I pick and choose as I find and buy them?

[John G]

Answers:

1. Very little is needed to start a Roth at many mutual funds if you elect the monthly direct draw from your checking account. In some cases there may be no minimum with auto-draw down. This approach is a forced dollar cost average system. The minimum initial deposit for IRAs if not using the monthly option varies among custodians, but there are firms that have initial miniums of $250 or $500. Max IRA annual contributioin is currently $2,000 each for you and your wife if you make atleast that much in earned income.

2. You are not limited to just one fund. However, to keep things simple, reduce paperwork and statements and to avoid account fees it may make sense to have one fund. You can also have funds with different organizations, but given the range of offerings in most fund families I don't see a big need to shop elsewhere. Bear in mind that many funds in the same family have a substantial overlap of holdings. If you opt for two or three funds, I would think the primary value will be in stimulating your interest in the "horse race" of how they perform. There may be some value in that if it encourages you to learn more about investing. There are perhaps 10,000 or more mutual funds in the USA. Some folks get good results with just one good broadbased fund.

3. A self directed portfolio is definitely an option you can consider. Some of the negatives: higher transaction costs, difficulty in buying any reasonable amount of shares (odd lot problems), more time spent researching, less diversification, more tracking and confirming, and possible greater risk of excessive trading just because you can trade so easily. Positives: nothing like learning from your mistakes and you will make mistakes so perhaps you will learn more about investing (mistakes a mutual fund makes gets buried in the average), chance to buy overlooked stocks, option to control moral choices (like cigarette firms), and clearly other positives that just don't come to mind. If you go this route, you may want to use the lower cost internet brokerages so you transaction costs are low. Think Etrade, Ameritrade or similar www service. Fees and initial required investment vary.

The self directed account might work much better after you have built up the size of your account from a few years of contributions and growth.

[Guest diggerdave]

thanks much for the excellent reply. brings to mind another question. can my wife and I have separate Roths or just one that we both contribute to?

I'm thinking I'd use a good general fund like Vanguard and then one that is more specialized like NALFX the New Alternatives Fund that invests in alternative energy companies, solar, fuel cells etc.

[John G]

Answers to more Qs:

1. "Separate and unequal" - the I in IRA stands for individual.... each account is separate in the individuals name only. Why unequal? because you typically will not get the same performance unless every contribution and investment is identical, and that is too much a hassle to attempt.

2. Vanguard has a significant advantage because most of their funds have a very very low annual expense percent. Their flagship S&P500 fund is huge, reflects 500 major companies (diverse), has little turnover, is NO LOAD (no front end or back end commisions), low turnover (small capital gains - only relevant in taxable investments rather than IRAs), and ultra low annual expenses. A great initial fund for a begining investor.

Since I spent a large part of my life in energy consulting and corporate planning, I do not like your second choice. First, the track record of exotic energy stocks is littered with failures and even the companies that have stayed afloat have performed poorly. Second, you do not want all your IRA assets is ANY niche sector, market cap size, region, or country. Keep your gambling in small stakes stuff like we have in Colorado (limit $5 not $2000, hope you don't object to the "plug"), investing for the future should not be based upon long shots. You don't need to seek gigantic returns to get wonderful results in an IRA. A few months ago a fellow posted on this message board a question about how to take a tax loss... if I recall in less than a year his IRA had lost 75% in value. He narrowly backed some niche technology firms that lost favor. That is a painful lesson in the difference in gambling vs investing.

Same thing with single company bets in a brokerage. How many folks do you think loaded up on Lucent (LU) because it was a sure thing in the telecomm, wireless, and fiber optic side of the internet... and saw the stock price drop from $84 to $20 in six months. This was no pennystock but the Bell Labs spin off from AT&T. And, there was once a time that folks said buy Xerox for life... check that chart out.

My point: don't invest narrowly, don't assume that whatever "worked" last year will always work, and be diversified. If you are not planning to spend time researching before you buy a stock, stick to mutual fund investing for now.

[Guest diggerdave]

Thanks again. While I appreciate and recognize the wisdom of your advice I do differ in opinion of NALFX over a 20 YEAR period. Of course my beliefs may have nothing to do with reality but I do believe that our energy future is in renewables not fossil based. Of course fossil fuels scarcity is what guarentees the success of the stock in this sector but because I believe the way I do about the environment and health of the planet IF I invest in energy stocks it would be something like NALFX. Also I am not putting all my eggs in that basket just a small fraction. Most will go in Vanguard. I agree Vanguard would be best until I take the time to become a real investor (not likely in the near term). Until then I will keep the bets on my whims and hunches relatively small. ciao for now and,

[John G]

OK, keep it small, thing long term....

But, understand there is a huge difference between what you might like as a business and what makes a great stock. Think Snapple for a minute. Great product. But as a stand alone business they were limited. Then Quaker Oats bought them... and never achieved their objectives. Then Snapple division was sold off as a loss. Second example, I love Celestial Seasons teas, visited their "plant" 90 miles from here in Boulder Colorado, talked with management. Great product, nice people. But never a great stock.

I agree that renewables, or what I would call an environmentally sustainable economy, is critical for long run survival. Someday, we may rediscover the concept of walking. But I try not to confuse my big agenda with what I must do for investing.

Good luck with your decisions.