Roth IRA

[dullard]

There are two facts in life.

1) The sun always rises
2) Dullard knows his math

Thanks. You make great posts in Off Topic as well. You know your stuff here quite well (I won't speak of P&N though )

 

[brianmanahan]

VFINX which has been at that level on average since 1976. I guess today, is at a 10.79% average. Should I alter my posts to correct for the minimal change?

It is an S&P tracking fund. You certainly could find better ones I bet. But it is a pretty safe fund over the long run and a good starting point for a new investor.

how do you think that stacks up against something like a target retirement fund ala vanguard 2040 (VFORX)?

 

[dullard]

how do you think that stacks up against something like a target retirement fund ala vanguard 2040 (VFORX)?

Above I said an alternative would be VFFVX (the vanguard 2055). VFORX would be just the same. As far as I'm concerned they are both almost identical to the S&P. The bulk (70%-80%) of the target date retirement funds this far from retirement is just mimicking the S&P, so there isn't much difference. The target date funds have the benefit of some foreign exposure which should help. But, the target funds have bonds and cash which really aren't needed this far from retirement. Plus, I'm always a little hesitant of large target funds suddenly shifting focus every 5 years (won't selling large blocks like that potentially be self-defeating?)

Early on, it often doesn't matter what fund to choose. If one fund does 1% better than another, so what? With $5000 that difference is only $50. That is eating out one meal. Early on, the contributions of $5000/year far, far outweigh differences from one fund to another (tens of dollars).

Add another zero and it'll start mattering. And in that case, I happen to personally perfer making my own retirement target mix. But if someone doesn't want any effort, the target date funds are great.

 

[brianmanahan]

thx for the help dullard, your advice looks sound. opening a roth now and will probably start with a vanguard 2040 to 2055 (probably the latter)

 

[mshan]

Depending upon your age, I still might go with VTSMX.

The Vanguard Target Date funds seem to give you instant diversification if you have only a low amount of capital to deploy, but even if this is the case, if you are really young, you can be daring (it is actually not reckless, just aggressive in proper way) by just going 100% stocks (VTSMX) until you have more capital to deploy in a more fully diversified overall portfolio.

Also, I am not sure what tax consequences of changing strategic asset allocation of target date fund is when you get to certain target date points, but my guess is you want to keep this type of one stop shopping mutual fund in a tax deferred or tax already paid account.

VTSMX has a lower expense ratio (and you are automatically converted to even lower cost Admiral Shares when your investment reaches a certain amount) but most importantly typically over 99% stocks (the target date fund has about 10% bonds and cash, which will be a drag over very extended periods of time). http://portfolios.morningstar.com/fund/summary?t=VFFVX&region=USA&culture=en-US

Target Date fund does give you more instant diversification, including a slug of international stocks, but that might just get you better risk adjusted returns, not best absolute long term compound wealth. Also not sure if expense ratio is weighted average of actual expense ratios of underlying funds, or is a second expense ratio overlayed ontop of expense ratios of underlying index funds themselves (e. g. real expense ratio is 0.4% or greater?)

Other problem with target date funds is that sometimes they tweak strategic asset allocation to make them look better performance wise than competitors.

VTSMX is particularly advantageous in taxable accounts because of high tax efficiency (plus no mandatory withdrawals at certain age, so you can keep letting it compound as growth component of portfolio in early years). Over time, and as you get closer to say age 50, you can adjust strategic asset allocation yourself to meet your targed retirement date and tolerance for greater or lesser volatility of a particular investment vs broad market.

Simple but effective strategy for young investor targeting retirement: just dollar cost average into VTSMX. Educate yourself about the basics of personal finance and mutual fund investing and you can later add investments to complement a core investment in VTMSX.

 

[jteef]

There's a loophole this year where you can start and roll over a traditional IRA into a Roth and bypass the 120K income limit. WHY CAN'T POOR PEOPLE GET THESE SAME SUBSIDIES?

 

[snoopdoug1]

There's a loophole this year where you can start and roll over a traditional IRA into a Roth and bypass the 120K income limit. WHY CAN'T POOR PEOPLE GET THESE SAME SUBSIDIES?

umm, because they're poor and can already contribute to the max? They get plenty of other subsidies anyways.

 

[Ninjahedge]

I would also recommend the Rachel IRA......

 

[James Bond]

Thanks for all of the input guys. That really helps. I plan on getting a Vanguard Roth going within the next week or so.

I wish I would have done it 4 years ago when my dad told me too, but better nate than lever I guess

 

[Thump553]

Thanks for all of the input guys. That really helps. I plan on getting a Vanguard Roth going within the next week or so.

I wish I would have done it 4 years ago when my dad told me too, but better nate than lever I guess

On the slim chance you haven't yet filed your 2010 income tax return and got an automatic extension you should be able to do a 2010 IRA contribution as well as a 2011 one.

 

[sunzt]

Index tracking is for PANSIES!!! Be a man and manage your own portfolios.

 

[mshan]

http://www.nytimes.com/2009/02/22/your-money/stocks-and-bonds/22stra.html

VTMSX will beat vast majority of funds over extended (i.e. decades of compound interest, not years) because all these funds that are basically asset gathering, relative performance chasing funds that have tremendous headwinds to overcome just to match a broad market index (expense ratio, hidden transaction costs from high portfolio turnover, taxes from yearly capital gains distributions). Having to beat an unmanaged index by 2 - 3% or more average annual return just to keep up with unmanaged index is very hard thing to do, over extended periods of time.

Will their be index beating funds over time? Absolutely, but it is hard to predict in advance, and there is an element of luck in not having a very meaningful position in fund blow up despite best research and significantly impair long-term results, even for truly shareholder friendly mutual fund (e. g. managers have significant net worth tied up in same funds and get rich by having fund perform well, not just collect 1% plus management fee on billions and billiions of dollars of assets, without ever closing fund when inflows become to great to invest in way meaningful to fund performance)
with proven investment strategy and the experience and discipline to execute it properly over time.

 

[kami333]

Thanks for all of the input guys. That really helps. I plan on getting a Vanguard Roth going within the next week or so.

I wish I would have done it 4 years ago when my dad told me too, but better nate than lever I guess

Meh, considering that 2008-2009 was horrible you probably didn't loose out too much compared to starting just 4years ago. Now if you had started 1 or 2 years ago...

My 3year return on VFIFX (vanguard 2050 retirement) is less than 2%.

 

[Suspicious-Teach8788]

I started in 2008, and I made huge gains on my money overall. My 401k contributions started in July 2008 or so, and I kept it in cash until maybe mid 2009 when the market started recovering. I missed out on the big crash, but I probably also missed on a chunk of the gains I could've realized from Feb - June 2009, but oh well. It's long run anyway right?

My balance isn't too shabby at all right now for only having 2 years of stuff. Now I'm back in school so just watching the money slowly grow. Damn the recent market pullback though!

BTW I'm 24.

 

[JSt0rm]

Great info here guys. Thanks. I'm good at being good at what i do and its not investing lol. So its nice to see some threads like this. I've been investing in myself for a long while now but I think I can handle this 5k a year easy. At what point does it not make sense to keep adding money to a roth ira? Like 55? or 50?

 

[sunzt]

Meh, considering that 2008-2009 was horrible you probably didn't loose out too much compared to starting just 4years ago. Now if you had started 1 or 2 years ago...

My 3year return on VFIFX (vanguard 2050 retirement) is less than 2%.

FYI to all, unless you're near 50, Asset Allocation (target date) funds are pretty bad investments. It's much better just to get an index fund if you're gonna be that lazy.

 

[edro]

FYI to all, unless you're near 50, Asset Allocation (target date) funds are pretty bad investments. It's much better just to get an index fund if you're gonna be that lazy.

Why are they bad if they are 85% S&P type stocks? 2040, 2045, 2050 are all over 85% stock I believe.

 

[GotIssues]

You are correct that $1 million in 40 years isn't worth as much as it is now due to inflation. But, it is still worth a lot of money ($262,529 in todays money if historical inflation averges keep up). And $262,529 is more than the average retired person has right now. Just four years of contributions now and he'll do better than many people who had their whole life to save.

As for your "really, really, really optimistic" quote, you certainly are really, really, really bad at math. I gave a fund ticker that has averaged 10.8% over the last 35 years. Then, I said if that historical trend repeats, he'll have over $1 million by investing $20,000 as soon as possible. That is what the math says.

$5000 * 1.1080^40 = $302,385
$5000 * 1.1080^39 = $272,911
$5000 * 1.1080^38 = $246,309
$5000 * 1.1080^37 = $222,301
Total: $1.044 million.

It may be optimistic to think history will repeat itself (I personally use 8% in my own estimations for my planning). But it certainly isn't really, really, really optimistic. Don't like the result? Then reinvent math since you'd be wrong with math as it is.

I didn't question your math. It's not particularly difficult math, anyone that passed 8th grade algebra has done more complex math than is involved in estimating these returns. I questioned the underlying numbers and said they were optimistic, and I stand by that statement.

Wouldn't a better indicator be the lifespan of the stock market? The historical return of the stockmarket (last I checked, at least) was 9.26%. Assuming that return (even that I feel is slightly optimistic, I usually use 8% or 8.5% when planning), those contributions would add up to $608,012.50 in 2051 dollars. Using the historical average of 3.26% for inflation, it becomes $168,510.80 in today's dollars.

Considering that each successive generation has a longer lifespan than the previous generation, it's not all that unlikely that he'll need to live 20+ years on his retirement money. Do you think you could live how you want to live (within reason) on $168,510.80 for 20 years (Social Security contributes a little more, but it's not something one should count on)?

All this is also assuming that healthcare's metoeric rise in costs temper off. Geriatric healthcare is not cheap now, it probably won't be cheap in the future.

 

[GotIssues]

Why are they bad if they are 85% S&P type stocks? 2040, 2045, 2050 are all over 85% stock I believe.

Depends on the target fund, asset allocation %'s are pretty much decided by the managers. Some of the allocations can get pretty far from each other, especially the closer the target date is.

Target date funds aren't bad, but personally, I'd go index fund until the date gets closer, then switch over to target dates so I don't have to mess around with rebalancing all that often.

 

[kami333]

Great info here guys. Thanks. I'm good at being good at what i do and its not investing lol. So its nice to see some threads like this. I've been investing in myself for a long while now but I think I can handle this 5k a year easy. At what point does it not make sense to keep adding money to a roth ira? Like 55? or 50?

Until you retire.

 

[edro]

Are there any "what if" calculators out there?
Like, what if I had $X in X_Stock on X_Date and sold on this date?

There has to be a website that keeps track of ending prices of all stocks for each day.

 

[sunzt]

Why are they bad if they are 85% S&P type stocks? 2040, 2045, 2050 are all over 85% stock I believe.

In short, your returns will be less than the market. These are usually conservative funds that aren't too aggressive. Having more % stocks alone doesn't mean you're aggressive. The types of stock you buy, geography, and sectors matter a lot. These funds also don't provide good risk diversification for most people in terms of sectors and location diversity. Target date funds typically invest in the same mutual funds (from the company of course) to get its allocation. Because of that all of a company's target date funds consist of the same stocks and will go up and down at the same time, just at different rates.

Target date funds also don't necessarily provide the "right" allocation of equities/bonds/etc for everyone. I consider myself pretty aggressive and even I vary my portfolio to have 5-35% of non-stock assets (cash/fixed income).

http://www.bankrate.com/finance/retirement/target-date-fund-pros-and-cons-2.aspx

 

[mshan]

I forgot exact number, but something like 92% of actual return can be predicted just by knowing strategic asset allocation (stocks vs. bonds vs. cash).

Reason, over very extended periods of time, stocks >> bonds > cash (rough guesses maybe 8 - 10% average annual return vs. 5 - 6% average annual return vs. 2 - 3%).

Actual investment choice can make a difference, but over very extended periods of time, having the right strategic asset allocation is what is most likely to produc greater returns, again over very extended periods of time (decades, not years).

Good intermediate term bond funds are not there to increase absolute returns, they are to reduce overall volatility of portfolio to a level of risk a given investor is comfortable with. Excluding recent worldworld crash in all markets, bonds are supposed to go up when stocks go down, thus dampening paper losses if one can't stomach that much change in value or if you are in draw down stage and need more stable investments.

 

[edro]

Can I improve my 401k and IRA by tracking the performance of the funds and switching to better funds periodically?

What criteria do some of you use? If the 3mo average is negative? 6mo?

One obvious move that worked well for me a few years ago was to move a large portion of my IRA into a Real Estate Fund. It has had awesome returns as the real estate market has picked back up.

It seems that if you make decisions on recent past performance and move to another fund, you might miss the rebound or you might move into a high performer at its peak and lose more money that if you stayed put.

It's like the opening scene of Office Space when he is switching lanes in a traffic jam.

Some of you are saying to play stocks hard when the going is good, then switch to bonds when the market appears to be going bad for stocks. That seems way too difficult to predict.

 

[sunzt]

Can I improve my 401k and IRA by tracking the performance of the funds and switching to better funds periodically?

What criteria do some of you use? If the 3mo average is negative? 6mo?

One obvious move that worked well for me a few years ago was to move a large portion of my IRA into a Real Estate Fund. It has had awesome returns as the real estate market has picked back up.

It seems that if you make decisions on recent past performance and move to another fund, you might miss the rebound or you might move into a high performer at its peak and lose more money that if you stayed put.

It's like the opening scene of Office Space when he is switching lanes in a traffic jam.

Some of you are saying to play stocks hard when the going is good, then switch to bonds when the market appears to be going bad for stocks. That seems way too difficult to predict.

And that's the secret to get rich... timing. I like to keep myself diversified in terms of geography, company size, sectors, and growth/value. I'll overweight in areas where I believe the money/returns are at and be underweight the slow areas. I'll be risk-on during the start (or prior to start) of good times and buy more. I'll start selling a bit if things look toppy or slow down. I'll be risk-off and move out of stocks during down times.