This is my first time with investing and need some advice about the
same. I am planning to start by putting about 3k in my Roth IRA.
I have a couple of options
1) Buy Stocks
2) Buy Mutual Funds
3) Buy ETF's.
I am leaning towads buying ETF's with International Focus. What would
you guys recommend? Which should be the way to go?
Thanks in anticipation
I suggest first introducing yourself to the notion of
diversifying so as to maximize returns while reducing risk.
Spend a weekend experimenting with some or all of the free
online asset allocator tools linked at
Do you have any debt? If so, what are its terms (interest
rate and timeframe)?
Do you have six months or so of expenses socked away in a
low risk, highly liquid "emergency fund"?
Do you anticipate needing any of your money for something in
the next few years, like a house, wedding, etc.?
With only $3K, you won't be able to build any sort of diversified
portfolio buying individual stocks. If this were "play money" (or
"mad money", as Kramer calls it), I would say that's not such a big
deal. But since this is money in a Roth, I'm assuming it's for
retirement, so I wouldn't play it fast and loose.
In the special case of index funds, these two are essentially the
same. The primary difference is in how you pay the associated fees.
Index funds are typically no-load funds, meaning you don't pay
anything when you buy or sell them. ETFs are traded like a stock, so
you have to pay a commission when you buy or sell them. On the other
hand, ETFs generally have lower expense ratios than index funds, so
you save money there.
If you're going to be doing a lot of buying or selling, the
commissions on ETFs can cost you a lot. This includes the situation
where you're dollar cost averaging (i.e. buying periodically).
Conversely, if you're just going to buy and hold you can save some
money by taking advantage of the lower expense ratios of ETFs.
Personally, I stick with mutual funds.
If the answer is 'no', and you are deciding between an emergency fund or
a Roth, make the Roth deposit, keep it in staggered CDs, i.e. $1000 in
each of three maturities, maybe 3mo, 6mo, 1 yr. As you save your way to
a 'real' emergency fund, take Bill's advice and start to shift to mutual
funds (index). If you do need the money, no loss, but if you don't then
you got a jump start on the retirement savings.
I'm refining the way I present this, but the above is getting very close
to my 'final version'. As always, I welcome whatever tweaks would add
clarity to the this.
Thanks Bill!!!! That gives me some insight. I am planning not to trade
a whole lot.
ETF's were one reason for my primary choice, just because they do not
need high amounts to buy like mutual funds.
I also learned that the trading would cost $10/ trade. If I plan to
trade just about a year, would that make ETF's preferable?
Also from reading here and there it seems that I should just buy some
funds, and leave it alone for 2-3 years and see based on its
======================================= MODERATOR'S COMMENT:
Please trim the post to which you are responding. "Trim" means that except for
a FEW lines to add context, the previous post is deleted.
I will try the tool you sent.
I have about 2k in debt which I can easily take off.
I do not have en emergency fund.
I am planning to buy a house soon, but decided that since it is
uncertain, I will save for it again. I know ROTH will lock my money,
but want to use it as a saving for the years to come.
A Roth does not lock your money. In particular, the
contributions (but not their earnings) may be withdrawn at
any time. See Joe's post, whose main theme I see as one to
consider. Just remember that drawing on one's Roth means one
cannot return that same money to it.
Pay off the debt, get your emergency fund together, and then
compute how much you need to buy the house. Keep the house
fund amount in CDs or a money market account.
Also, lurk here. Questions like yours come up often.
Continue to ask questions, 'cause the only dumb question is
an unasked one (assuming a reasonable effort was put forth
to answer the question on one's own, using google, etc.).
Zecco offers $0 commission trades. That would make ETFs an even better
option than mutual funds as long as you buy-and-hold them. That also
allows a more customized asset allocation plan due to the low minimum
For some reason I had the idea that the ROTH IRA cannot be touched for
5 years and the earnings for a longer period of time. Is that True?
I am planning to set up a seperate fund for emergency and the house.
Your suggestion is CD's. I also heard about ING etc. Do you have any
suggestions for those where I can contribute regularly?
I know some of these questions are really dumb, but for a first times
some times the information out there is over whelming.
No. The run-of-the-mill, ordinary Roth IRA contribution may
be withdrawn at any time. What you may be thinking of is
something called a Traditional IRA Conversion to a Roth IRA.
The conversion amount cannot be touched for five years
(using the IRS code's calendar). Earnings cannot be touched
without penalty in either case until several other
requirements (notably, age) have been met.
Don't be shy about googling on the subject of IRAs,
withdrawals, etc. Many good consumer sites are available on
them. They tend to be repetitive. Anything you read that
strikes you as odd can be queried further here.
Ask about this in a separate thread. I happen to use my
brokerage's (Fidelity's) money market fund. Currently it's
paying 4.9%. Many institutions are paying in the 4.5+% right
now, so this is for what you should aim.
Where is your money currently parked? If you say, then this
might help others give you advice.
is a good resource for checking money
market rates nationwide, including online offerings.
Note that U.S. interest rates are anomalous now, with what's
called an "inverted yield curve" present. This means short
term rates (e.g. money markets) are very close to or even
better than long term CD rates (e.g. over 3 years).
Historically, such a situation has not lasted too long
(maybe a couple years?), and longer terms start to pay
better interest. This is some kind of argument for a CD
ladder going out about five years, or to whenever, depending
on your timeframe for needing the money.
No dumb questions exist here, AFAIC. Money and its handling
are important to surviving.
You can withdraw your deposit at any time. The earnings are what would
incur tax and 10% penalty. There are enough combinations of how the
money goes in and how/when it comes out that understanding the rules
isn't so simple. We are still discussing whether a roll-over (from a
regular IRA to a Roth) avoids penalty after 5 years. The IRS pubs are
not as well written as we'd like.
Your questions are far from dumb. They are quite appropriate for a
beginner, and welcome here.
We never did ask - do you have a 401(k) at work? If it has a matching
provision, are you getting the full match? That's the first step for
most people getting started.
That's a good idea because you would be diversifying your risk.
Normally, I prefer investing in individual stocks, but foreign stocks
are difficult to buy because not all are traded on American stock
exchanges and information is sparse. For instance, I own some EWY
(iShares MSCI South Korea Index ETF).
Are you trading on your own? I agree with Elle and Joe on this one,
for the most part, but ETF's aren't the holy grail the media is making
them out to be. They are basically funds traded like stock, so you
get the diversification, but not so much the benefits of fund
investing. I really recommend minimizing the debt first tho.
Thanks Elle and Joe!!!!
I now have my first step clear!!! I do have 40k matching at my place
and contribute to it. I set it up with lots of diversity. I am
planning to use the ROTH IRA as my emergency fund and also as a
retirement fund. Since gains from ROTH IRA are long term, I might do
I am also thinking about stocks. I know diversity is an issue, but if
I buy robust stocks which are say recommended by Fortune etc, would
that be a better idea?
Or would you advise just sticking to mutual funds with good returns?
My opinion is, since this will function as an emergency fund, you should
keep it liquid, either laddered CDs (a few CDs of varying maturity to
take advantage of the higher rates depending on maturity) or a decent
money market fund.
It's a way to avoid the risk that your transmission will die the day the
fund or stocks are down, and you need to tap that money. (This is why I
feel compelled to refine the way I present the dual use Roth. It has to
come with this type of warning.) If you save your way to a strict
emergency fund, then this account gets invested in the stock market.
Even then, few here, if any, will suggest individual stocks.
Would you please define "robust"?
If Fortune magazine knew it all, there would not be a
guzillion other methods for picking stocks.
How much time do you have to study companies' fundamentals,
among other things?
Before buying individual stocks, I recommend you at least
_The Intelligent Investor_ by Ben Graham
_The Future for Investors_ by Jeremy Siegel
When you can intelligently explain (1) what it means to own
stock; (2) why stock prices tend to keep up with inflation;
(3) the significance of reinvesting dividends through ups
and downs of a stock's share price; and (4) how a
well-allocated collection of index mutual funds does against
any random stock pick, then IMO you may contemplate a search
for stock picks.
Well, ETF's don't trade much inside of their basket of holdings. The
holdings are meant more as a cross section of the sector or market
they represent. This means that there are minimal capital gains
distributions that, despite creating a taxable event, can make up a
significant portion of return. Plus, fund managers can move their
portfolios to match or hedge market movements, ETF's don't do this as
much. Don't get me wrong they are good, just be careful to look into
all the pros and cons.
There are specialized ETFs. There are specialized mutual
funds. There are S&P 500 index ETFs. There are S&P 500
mutual funds. I suggest you re-check the pros and cons of
each, because those you list are not ones I have ever seen.
Today I would hesitate to draw a distinction between the two
categories of mutual funds.
The same may be said of any well-managed index funds
whether ETFs or not.
There are some other very small tax-related distinctions,
but for most folks, overwhelmingly, the main differences
between ETFs and more traditional index funds are related
to one's transactions into and out of the funds.
ie. if you are going to be buying a little bit at a time -
a lot of smaller purchase transactions - a regular index
fund is very likely to be superior, since every transaction
into or out of an ETF generates a brokerage commission (as
well as potential bid-ask spread costs which are harder to
If you want to buy in and then sell out in a relatively
short period of time, an ETF may be better, since many
traditional index mutual funds impose some sort of short
term trading fee (ie. some of the Vanguard international
index funds have a 2% redemption fee if shares are held
less than 2 months).
Additionally, ETFs may make more sense if you want to
hold several funds but don't have enough to make the
various minimums (ie. again, typically some $3k/fund -
if one only has, say, $5k to invest and wants more than
one index, that could be costly, though minimums are
often waived or much lower if one commits to making
additional regular investments).
As I said, mostly the issues are transaction-related.
As far as expense ratios - they are so close that unless
you are talking about a *lot* of money, these transactional
issues will overwhelm. And if you are talking about a lot
of money, there are often even lower-expense classes of
shares in the traditional funds.
For other tax-related issues about ETFs, this is not a
bad little summary:
note that early on, it talks about regular funds makingyear-end distributions which are taxable, etc - without notingthat regular index funds typically don't have much in the wayof cap-gains to distribute any more than ETFs typically do.(It mentions an *actively* managed fund which made a 20+%distribution, but that's a bit of an apples-to-orangescomparison given the rest of our discussion here)