2008 Roth IRA Contribution: Where should I invest it?

[DeadByDawn]

How about a vanguard target retirement fund? Dump it in and leave it until you retire.

 

[dullard]

I'll just comment on the posts as I scroll down.

Wedi42: BRK-B is basically S&P tracking. It isn't exact, but it does follow the S&P movements really well, just with a little more volitility. And at the moment, the volitility puts BRK-B overpriced compared to the S&P. I'm not saying that it is a bad buy, but another fund that basicaly tracks the S&P movements may be a cheaper buy at the moment.

Babbles: Well, I suppose if he got an unlikely 10% return year after year, he'd get $1M at the age of 85. I perfer to call it a $5000 question instead. I think though he wants to put it into a retirement account, not cash out a retirement account. You have it backwards.

GTaudiophile: I'd say you are overly conservative at the moment. Bonds, mutual funds, and metals are too conservative when stocks are so cheap. They were great investments 2 years ago. Not so much today. So, I'd dump all $5000 into stocks at the moment. Stocks will go down from here, but not by that much and you want to be in it so you don't miss their ride back up.

Beattie's comment of making sure you have some international stocks is sound advice. You didn't mention that in your mix. So, if you don't have international stocks, you really should consider some now especially since they are even cheaper than US stocks at the moment.

Mshan: Vanguard is nice since they have low fees. Going all stocks though is not really necessary. While a 100% stock portfolio returns a small amount more than a 90% stock portfolio, you lose the ability to rebalance in these diverse areas. For example, about 2 years ago, I shifted stocks into bonds due to rebalancing needs. Then last month, I shifted bonds into stocks for rebalancing needs. That alone gained me so much - far more than I can expect from the small historical difference between a 90% stock portfolio and a 100% stock portfolio. Point taken though, now is not the time to be too conservative with all the good deals on stocks.

Beattie: the historical average return isn't 12%. It is closer to 10%. And that 10% includes dividend returns. Dividends were slashed in the 1990s and are being slashed again this year. Don't expect 12% or even 10% in the next few decades unless dividends make a come back.

 

[mshan]

"As investors try to decide what to do now, I think it is useful to contrast two options. Let?s assume investors are making their decisions for a five-year time horizon. Were the time horizon any shorter, we would say stocks shouldn?t even be considered because short-term results can be too random. One option for an investor is to say ?no? to any risk, and invest in a five-year government bond. Many investors, stinging from recent losses, are making that very choice. The annual yield for that bond today is 1.8%. So, at the end of five years, that investor could be certain to have a 9% return (not considering either taxes or inflation). The other choice is to buy equities, anticipating a higher return in exchange for accepting uncertainty. Can history give us any guide as to what that return might be? One approach would be to assume that returns would simply match the historical average of 9% per year, or 54% compounded over a five-year period. That answer, however, ignores the effect of the starting price. I think the following is more useful.

First, the dividend yield of the S&P 500 is now about 3%, so over five years the equity investor should receive a 15% return plus or minus price change. We can estimate the S&P price five years from now by estimating both its earnings level and its P/E ratio. Over the past 80 years the median P/E ratio for the S&P 500 has been 15 times. I could argue that today?s very low rates on government bonds suggest future P/Es should be higher, but let?s not bother with that complexity. Earnings are trickier to forecast. Operating earnings for the S&P 500 peaked at $88 in 2006 but the consensus forecasts a trough at about $62 this year. Extrapolating either peak or trough earnings is not likely to be productive. Instead, let?s look back over the past thirty years. A regression analysis of the past thirty years shows that trend earnings for 2009 are about $84, or 5% below the peak achieved three years earlier. Further, that same regression analysis calculates that earnings growth has averaged between 6 and 7% per year. Extrapolating based on those numbers puts trend line earnings for 2014 at about $115. Multiplying $115 in earnings by a P/E of 15 produces a 2014 expected price for the S&P 500 of 1725, 116% higher than today?s price of 798. Were that to happen, the annualized return for the next five years would be about 20%, a little more than twice the historical average, and more than ten times the bond return.

What about the downside? By 2014, the S&P could fall to about 750 and still match the return on a five-year bond because the current dividend yield exceeds the bond?s interest rate. If the historical average P/E is attained, that means the S&P earnings would have to be more than 50% below trend for the stock investor to underperform the bond investor. Alternatively, if the earnings trend line proves accurate, the P/E would have to be below 7 times for the stock investor to underperform. While those outcomes are certainly possible, they would be extreme historical outliers. The possibility of historically high returns, combined with what we believe to be a low probability of loss, makes me excited about investing in stocks today. And that?s why I significantly added again to my personal Oakmark investment last quarter."

http://www.oakmark.com/opencom...&news_from=c&fund_id=0

 

[HopJokey]

Originally posted by: IHateMyJob2004

Originally posted by: HopJokey
VFINX is a traditional but reliable investment. It tracks the S&P 500. Domestic Large Caps this fund is.

So, it is like an S&P index fund with the exception that you don't make as much because the fund managers need to take their cut?

Total Expense Ratio : 0.15%

 

[dullard]

Originally posted by: mshan
...snip...

The conclusion of that article is sound - stocks are cheap now, so it is probably better to get in now.

But the analysis is utter crap. P/E ratios are a guideline at best and a disaster at worse. Assuming a doubing of profits in 5 years is an assumption that is highly suspect (regression analaysis can't be extrapolated into the future or the past, yet the author repeatedly did so). Also, P/E ratios are best used when taking the average earnings over a long period (say a decade). Taking only the peak earnings and using that in a P/E ratio is a blatant misuse of the P/E guidelines (especially when you are guessing at that peak value). The result is that the author assumes an S&P500 level of 1725 which is about 10% higher than its all time peak - again a pretty extreme assumption giving the current economic conditions.

 

[dullard]

Originally posted by: HopJokey
Total Expense Ratio : 0.15%

Vanguard is upping most of their expense ratios as we type. 0.2% is more likely what to expect over the next couple of years assuming that fund follows Vanguards average 0.05% increase in fees.

 

[Beattie]

Originally posted by: dullard
I'll just comment on the posts as I scroll down.

Beattie: the historical average return isn't 12%. It is closer to 10%. And that 10% includes dividend returns. Dividends were slashed in the 1990s and are being slashed again this year. Don't expect 12% or even 10% in the next few decades unless dividends make a come back.

Whether you use the 10% compound or the 12% nominal return figures it is largely irrelevant anyway. Both are better than any bond return.

As for dividends, as banks and other companies recover they will come back up. I am not sure that it's really relevant in the big long term picture either.

 

[coaster831]

Originally posted by: IHateMyJob2004

Originally posted by: coaster831
Impossible to give decent advice without knowing age, risk tolerance, debt (if any), and what other investments you have.

I love how people throw this hype down people throats. The sad thing is that people know so little about investment, that it is a relevant topic.

So you would give the same advice to everyone regardless of their personality and financial situation?