where to start up a roth IRA?

First of all, a good rule of thumb is never to invest in things you don't understand. Since not investing for retirement is a dumb idea, too, that means you ought to do some background reading about different kinds of investments before you open an account anywhere. I recommend morningstar.com, which has some excellent tutorial material.

Second, to address some of your questions. There are two basic strategies to mutual fund management, indexing and active management. Indexing is "tracking the market". ETFs are just a specialized kind of index funds that you buy on the open market like stocks, instead of through the company offering the fund. The main benefit of index funds is that they usually have very low expenses, since the manager doesn't have to do anything except buy whatever stocks are in the index. In a non-tax-sheltered investment account (so this isn't a concern for a Roth), the less frequent stock trading in an index fund also results in more favorable tax treatment for your returns.

In actively-managed funds, OTOH, the manager (hopefully) does research into lots of different companies and chooses the ones with the best prospects to be profitable, instead of just socking money into whatever companies are in the index, good or bad. Because research is expensive, actively-managed funds tend to charge higher expenses than index funds. An index fund might charge 0.2-0.5% per year, while an actively-managed fund might charge 1% or more. And, on top of that, you might end up with a clueless manager who makes lousy investment decisions and whose fund ends up significantly underperforming the market in the long term. So, before investing in an actively-managed fund, you should do some research yourself to decide whether the manager has a clue. Read the fund manager's recent quarterly market commentary reports as well as the fund prospectus, for instance.

Now, about where to start up your Roth account. Vanguard offers a good selection of both index and actively-managed funds, but they have the reputation of being unfriendly towards small investors in terms of account maintenance fees, investment minimums, etc. I would look into that carefully. Another alternative is to open your Roth account at a brokerage "supermarket" like E-Trade, T.D. Waterhouse, etc. If you want Vanguard funds at these places, you'll have to pay a transaction fee for each purchase (at E-Trade it's $19.99), but they have funds from many other families available without a fee ("NTF"). Personally, I find this makes more sense for me since I own mutual funds from several companies and it's much easier to have my accounts all in one place than a separate account with each fund company.

If you don't know where to start with choosing specific funds, I strongly suggest you either stick with a "target retirement" fund (like the ones from T. Rowe Price, TRRDX or whatever), a balanced fund (OAKBX is my favorite, but you must open an account directly with Oakmark to get into this fund), or a large-cap fund (VTSMX, VCVLX, SLASX, TWEIX, OAKMX, etc) that you can use as the "core" of your eventual portfolio. $4000 isn't enough to diversify into a whole slew of specialized funds yet.

-Sandra the cynic

First a little kick in the assets -- you better start getting busy with your retirement funds. There is no promise that social security will still be there in 30 years, and I doubt that anyone will be getting pensions very much longer in the future. As a result, it is up to YOU to take care of retirement, and you have to get started NOW. If you don't, you are going to end up old and jobless with no income, and you will have to fight the stray dogs and cats to get what food you can out of the local dumpsters. Is that how you envision your golden years? If not, then you need to take care of it TODAY.

$4,000 is a great amount to start with. Do fund your roth, or any other IRA options you might have. Go see some kind of financial person to help you get started--either at your bank, the company that has your 401K, a financial planner, or a broker. Any of them can help you out. Take to at least 2 before you put down any money, and maybe get a recommendation from someone you know that has some wealth.

Next, get your 401K or other work-related program going in high-gear. If you don't have work-related program, then find a new job. You cannot afford to end up broke at 65 just because your boss is too busy to spend 45 minutes setting up a 401K or similar program.

ETFs and mutual funds are the same thing as far as you are concerned right now. Some mutual funds cost money to get into, and that money is mostly pay for the broker, bank, or planner. Other funds cost no money to get in, but cost to get out of. Avoid them. Some cost no money to get in, and no money to get out. That is often the best, but not always. ETF have small cost to get in.

Beyond that, the differences are too subtle for your level of eduction. That doesn't mean that I think you are stupid. Rather, it means that you need to educate yourself on these matters. You see, nobody cares as much about your money as you do, and everyone else out there is trying to find a way to turn your money into being their money. Start with the dummies books, and do some reading. The books go pretty quickly if you take them a few pages at a time, and read about stuff that you are asking questions on. You can even get books on tape (or CD) and listen to them while you commute in traffic.

Good luck, and get yer butt moving here....

-john-

Sandra and John have give good advice.

I would also look at T Rowe Price and Fidelity (if you are looking at mutual funds). T Rowe Price is primarily managed funds, with many domestic funds having expenses under .75%.

Fidelity has the largest selection of managed funds I am aware of.

T Rowe Price, Fidelity and Vanguard are probably the 3 largest no load mutual fund houses. I don't invest in ETFs, so I cannot speak much for them.

Piggy wrote on [Sun, 10 Jun 2007 05:19:15 -0500]:

I suggest looking at Vanguard, Fidelity or T Rowe Price, put that money into a target date retirement fund for the year you are planning on retiring. Then, research more on what you will need and adjust accordingly.

Vanguard is an excellent place to invest. Others here may recommend ETFs for you, however, I am in the index fund camp. Vanguard practically invented index funds and they have very low fees. Take some time to learn about the various investment vehicles in which you might place your future.

Someone suggested that Vanguard isn't very good if you haven't much to invest. I disagree. Yes, they have fees when your invested balance is low. However, it won't take you long for that low balance to become a larger balance and then you will reap the benefits of the low expenses on their funds.

I also do not agree with the Target Retirement Funds idea, although they have apparently become quite popular. With these funds, you have no control over the aggressiveness or lack of aggressiveness with these funds. Vanguard has a Life Strategy series which I prefer, or you could choose one of several of their index funds. Many find their S&P 500 Index fund to be excellent for a core holding and then build from there, adding funds as the balance of their total investments increase.

Good luck,

Elizabeth Richardson

Elizabeth Richardson wrote on [Sun, 10 Jun 2007 20:24:02 -0500]:

I know I suggested the Target funds as a stopgap, so the OP can get started and then reallocate once they have learned more and are able to invest enough to meet the minimums for the S&P or TSM funds (10,000) and others so they can allocate as they wish.

If one insists on ETFs, note that Vanguard offers most of its index funds in multiple share classes - Investor shares for small balances, Admiral shares for over $100K, and ETF shares if one wants to buy that way. The ETF share class has an expense ratio that is usually at or slightly below the expense ratio of the Admiral share class (which in turn is always cheaper than the Investor shares). The downside is that you have to pay stock commissions to buy and sell ETF shares.

If you are willing to accept online statements (and an annual paper statement that shows all transactions for the year), then Vanguard funds have no maintenance fees - no fee for a sub $10K index fund account, no fee for a small balance fund of any sort, no IRA fee.

You can achieve a similar effect by switching betwen Target Retirement Funds, if the level of aggressiveness of your particular fund no longer suits you. In the meantime, it adjusts over time, so that you shouldn't have to make as many switches.

IMHO, either the total market index fund or their large cap index fund would be a better choice. The total market fund gives at least some exposure to smaller cap companies, and the MSCI indexes that most of Vanguard funds (including their large cap index fund) track are designed for lower turnover, less human judgment (the S&P indexes are created by human beings, not machine), and better market representation.

MSCI index attributes:

Of course, as Elizabeth suggested, reasonable people may differ on these points.

Mark Freeland snipped-for-privacy@sbcglobal.net

Frankly, any of the suggestions here will serve well. The differences are mostly a matter of style and approach. The big mistake would be to over analysis the situation and do nothing. Start saving.

-- Doug

"Sandra Loosemore" wrote

Some ETFs are index funds. Some are not. Same for mutual funds (some are indexed; some are not). Expense ratios and other fees associated with both should be checked.

Also, some of the subtle differences regarding cap gain distributions do not apply to a tax-deffered account. The diversification that would be discussed here for $20K-$40K is also less of an issue. Just buy VFINX (the Vanguard 500 index mutual fund)with 0.18% expense or $4000 worth of SPY with 0.10% annual expense (plus that first commission).

After this purchase, read the suggested books, plan for your future with specific end goals as a target. Take the year until your next deposit to learn. JOE

The problem with control is that it requires knowledge to apply appropriately. For someone who doesn't really know what they're doing with their investments yet, and who doesn't really know what their risk tolerance might turn out to be, the target retirement funds are a reasonable choice -- better than putting everything into a risky sector or emerging markets fund, or going to the opposite extreme and choosing a too-conservative stable value fund, or similar newbie investor mistakes.

-Sandra the cynic

Not if you are willing to get your statements online instead of having paper mailed to you every month.

I would like to second the first part of that advice: do not invest in anything until you have a basic understanding of all of your options, or get help from a qualified financial advisor.

I take exception with second part of that advice: "do some background reading __before__ you open an account".

I think you can go ahead and open a Roth IRA __now__ and invest in a money market fund.

That is a safe investment (no loss of principal). It will allow you to start growing your investment while you learn and decide on a long-term course of action.

For a Roth IRA, I would choose a "taxable" MMF, which typically has a higher yield than a tax-exempt MMF. Since Roth IRA earnings are never taxed, there is no benefit to a tax-exempt MMF.

Don't worry too much about which brokerage to start with. Select a well-known brokerage that offers a variety of alternatives to choose from later. I am familiar with Schwab and Fidelity; they are good choices, IMHO. Perhaps Vanguard and others are, too.

You can always do a direct transfer later, if you choose an investment that is only offered by another brokerage. Again, because Roth IRA earnings are tax-free, there is little "penalty" for liquidating investments in order to transfer them.

OTOH, it's become very common for brokerages to charge a fee for an outgoing account transfer -- I think it's $60 at E-Trade, for instance. Plus it's extra hassle and usually takes a few weeks. OP isn't going to lose much growth if he/she takes a month or so to do some research first and check out the different offerings, fee structures, and web site features at various brokerages. A "supermarket" like E-Trade is useful if you'd like to have banking features and other investments all in one place, but if you're going to invest primarily in funds of one company, Fidelity/Vanguard/T. Rowe Price may be a better choice as they all have brokerage services for buying funds from other companies as well as offering their own funds without a transaction fee. And for a few funds (OAKBX, BRUFX, etc) you may have no choice but to invest directly with the company running the fund if you want to get in.

-Sandra the cynic

Even if getting help from an advisor, I highly *highly* recommend that the OP read Personal Finance for Dummies by Eric Tyson. I've recommended it here several times before and it's still my best suggestion for a beginner - it addresses not just the investing but the bigger picture, too. It's also got a chapter about selecting an advisor, if one deems it necessary. Over the years (and editions) I've given away half a dozen copies of this book to get folks started.

Agreed. I frequently tell folks "don't just do something - stand there!" to keep them from rashly tying their money up in something or engaging in inappropriate transactions. However, when taking that advice, the money needs to be

*somewhere* in the meantime - a money market fund from a reputable company is exactly the place for it. There's no reason for the OP to not go ahead and open the Roth IRA account at, say, one of the low-cost brokerages or mutual fund houses, stick the money into a money market fund, and then proceed to figure out the next step - read the book, ask us questions here, etc.

The default cash account for a brokerage IRA should be a taxable fund automatically.

Fidelity used to have a pretty big account maintenance fee on small brokerage accounts, but no fee on mutual fund accounts (which look just like brokerage accounts on their system except that they may invest only in Fido mutual funds). Glancing through their online materials, though, makes me think they've gottenr rid of the small-account fee. They're pretty competitive on most fees and commissions and their fund supermarket is very broad. The only thing about them that's really unfortunate is the non-NTF no-load fund transaction fee (an absurd $75), but those funds are easy enough to stay away from with very little impact on portfolio construction. Their website is quite good and the yields on their money-market funds used for core cash in their brokerage accounts are pretty good, too.

Vanguard is excellent if you are going to be using only Vanguard funds and no non-Vanguard funds and no individual stocks or such.

I've no experience with Schwab. ETrade seems okay, though the money market core cash accounts in their brokerage accounts aren't great, but their non-NTF-no-load fee is more like $20. That's probably the only reason I'd use them instead of Fidelity and that's almost certainly not a major consideration for the OP, a new investor.

[Can you tell that I've been mostly happy - not perfect, but mostly - with Fidelity?]

Anyway, the OP's certainly going to be just fine by putting the $4k into a brokerage account with any of those and letting it sit as "cash" (again, usually the core account at such places is a money market fund anyway) until having done a bit more reasearch and figuring out what to do next.

Make sure that it does go into a decent MMF or high paying bank account, though. Some brokers will stick you in low paying cash accounts by default. Fidelity will put an IRA into Cash Reserves (good); Schwab into a Schwab Bank Sweep account (currently paying only 0.92%). You can usually get around lower paying brokerage accounts by explicitly moving cash to a higher paying MMF or bank account within the IRA.

Vanguard is IMHO good for mutual funds, but you will want to avoid their brokerage account, if for no other reason its $30 annual fee (for under $250K).

That describes the situation at Vanguard now (though to avoid all fees on their mutual fund accounts, you'll have to accept online statements, except for a paper annual statement - or keep $10K in each account, or $100K total at Vanguard).

Yes.

Mark Freeland snipped-for-privacy@sbcglobal.net