Small vs large cap fund for Roth IRA

[Guest CWarner]

I would like to begin making contributions to a Roth IRA. Is there anything wrong with investing in a small cap fund (growth or value) as compared to a large cap fund? I have 35 years until retirement. Thanks

[John G]

Nothing wrong about choosing a fairly broad based stock mutual fund for getting started. Large cap (cap=total market capitalization aka totalshares*shareprice) would mean holdings like IBM, Microsoft, General Electric, JP Morgan, Dupont, Exxon or the well known names in business. Small cap companies are less well known and can be regional firms. The general theory in favor of small caps is that these firms are growing, in contrast to the "giant sloth" view of big firms. Growth vs value further divides potential investments into above average expansion vs priced below comparables.

You reduced your diversification when you narrow the field to some combination such as small cap value. But the mutual fund will typically have between 30 to 500 stocks in its portfolio.

Go ahead and make your pick. Perhaps even put additional contributions into that fund the next few years. Maybe after 3-4 years you may want to pick a second fund. I highly recommend that you select a mutual fund from the universe of NO LOADs with expense ratios below 1.5% (below 1% would be better!).

Keep pushing your plan and maybe you will find your magic number is less than 35.