Beginners Roth IRA Advice

[hokies2688]

I currently have about $4000 in my Vanguard Roth IRA that I opened this year. The whole balance is in the Vanguard Target Retirement 2045 (VTIVX). Is this a bad thing because it's not diversified? Since the mins are usually $3k, I could only buy one fund. I'd like to buy the total stock market fund, but I believe the min is once again $3000. Does that mean I just save up that much before adding anymore next year and just buy that fund in one purchase? Also, others at work have a Fidelity Roth where they can buy and sell stocks in their Roth. Is this just not allowed with a Vanguard Roth? Any advice would be appreciated.

[bjl584]

You should be allowed to buy virtually anything that you want within your Roth. The limits that you are talking about are the minimum amounts that you can purchase with the particular funds that you are looking at. There are plenty of funds with no minimum buy ins or lower buy ins. And with individual stocks, you can usually buy as little or as much as you want.

The fund that you are in is a retirement fund. A "Set it and forget it fund" to quote Ron Popeil. The fund reallocates as you get older, so you don't have to make any changes yourself.

If you want to start investing in individual stocks in your Roth, do your homework. Don't jump into something if you don't know what you are doing. until you get up to speed you may want to stick with the fund that you have. In the meantime, save up some cash in your acount, and when you are confident and educated enough to pull the trigger on a stock you will have some cash on hand to make a purchase.

[jpg7n16]

The whole balance is in the Vanguard Target Retirement 2045 (VTIVX). Is this a bad thing because it's not diversified?

This is a common misconception. Mutual funds are very different than individual securities. If you only have one 1 stock, or 1 bond - you aren't very diversified. If you own only 1 mutual fund, you usually have excellent diversification, as that 1 fund is actually a portfolio of MULTIPLE stocks/bonds.

But there are 2 pieces to the puzzle:
1) Diversification
2) Asset allocation

In your case, the Target funds have diversification (because it's a mutual fund) AND asset allocation (because that's the type of fund it is).

If you are comfortable with a moderate risk allocation for your portfolio, you really don't need another fund.

It's worth watching these two videos:
https://personal.vanguard.com/us/fun...RetirementList (on the right hand side)
Fundamentals of Investing - Fidelity (just click begin)

And here's a little of what the SEC has to say about Target Date type funds:

From: Beginners' Guide to Asset Allocation, Diversification, and Rebalancing

Options for One-Stop Shopping - Lifecycle Funds

To accommodate investors who prefer to use one investment to save for a particular investment goal, such as retirement, some mutual fund companies have begun offering a product known as a "lifecycle fund." A lifecycle fund is a diversified mutual fund that automatically shifts towards a more conservative mix of investments as it approaches a particular year in the future, known as its "target date." A lifecycle fund investor picks a fund with the right target date based on his or her particular investment goal. The managers of the fund then make all decisions about asset allocation, diversification, and rebalancing. It's easy to identify a lifecycle fund because its name will likely refer to its target date. For example, you might see lifecycle funds with names like "Portfolio 2015," "Retirement Fund 2030," or "Target 2045."

[Nobulladvisor]

I currently have about $4000 in my Vanguard Roth IRA that I opened this year. The whole balance is in the Vanguard Target Retirement 2045 (VTIVX). Is this a bad thing because it's not diversified?

you are diversified in a crappy fund.

These target date funds are very misleading. There are NOT "set it and forget it" funds. Actually there are riskier then you think. Lots of firms are dis continuing these type of investment because there are very misleading. The only reason firm offer it is because deep in the disclosures of the fund it says, that this fund will satisfy any rebalancing, testing, or additional investing education. This will reduce cost for the firm who offer these funds, who are the only ones who are benefiting from these funds. Not to mention the high cost involved in them. Have you ever wondered why everyone who signs up for a 401k is automatically invested in these funds. ALSO is an advisor offers these fund to you it basically means " here invest in this fund because I really don't want to deal with you anymore, I have more important clients to deal with" or they have to go play golf.

If you want to invest in the total stock market fund, that will be the best thing for you. Call up Vanguard and say you want to "exchange" your current fund to the total stock market fund. It s free transaction and doing an "exchange" it will avoid the minimum requirements. Another way to avoid minimum requirement if you do a systematic investing plan or "dollar cost average" in to a fund.

I agree with bjl584, one fund should be plenty of diversification for you.

http://www.thedailybeast.com/newsweek/2011/12/04/target-date-funds-for-retirement.html

http://www.thedailybeast.com/newsweek/2011/12/04/target-date-funds-for-retirement.html

[disneysteve]

Not to mention the high cost involved in them

As I've pointed out before, this is NOT a high cost fund.

This fund has an annual expense ratio of 0.19%. I'm not sure how anyone can complain about that being a high cost.

Now whether or not the fund is a good choice for this person is a whole different question.

[Nobulladvisor]

As I've pointed out before, this is NOT a high cost fund.

This fund has an annual expense ratio of 0.19%. I'm not sure how anyone can complain about that being a high cost.

Now whether or not the fund is a good choice for this person is a whole different question.

The target date fund is a bucket for other funds. The bucket cost .19%. The other funds are the expensive ones. Again they do not have to disclose those fees. so people think it only cost .19%. Again, Misleading! do some research. If you find anything that proves me wrong I'll donate all my points to you.

[disneysteve]

one fund should be plenty of diversification for you.

VTIVX is currently 63% in Total Stock Market index, 27% in Total International Stock index and 10% in Total Bond Market index. How is that not a better diversification than going 100% into Total Stock Market?

I read the article you linked to. I happen to like and respect Jean Chatzky but I fail to see how that article is speaking against target funds. It points out some things to be aware of but still supports their use.

The reason people are automatically put in these funds is because for the vast majority of people, these funds will do far better than what the people would do left on their own.

[disneysteve]

The target date fund is a bucket for other funds. The bucket cost .19%. The other funds are the expensive ones. Again they do not have to disclose those fees. so people think it only cost .19%. Again, Misleading! do some research. If you find anything that proves me wrong I'll donate all my points to you.

Vanguard's site lists an expense ratio of 0.19% with no purchase fee, no redemption fee and no 12b-1 fee. What other expense is there? If there is any other expense, please provide some link to document that it exists. I'm happy to admit if I'm wrong but I can't find anything anywhere that suggests there are additional expenses not stated in the prospectus.

[Nobulladvisor]

VTIVX is currently 63% in Total Stock Market index, 27% in Total International Stock index and 10% in Total Bond Market index. How is that not a better diversification than going 100% into Total Stock Market?

If they put him/her into a 2045 fund, I'm assuming he/she is between 20-30 years old. he/she has 30-35 years to retirement. Why would you want bonds that young??? If the market crashing and he/she is still working and contributing that will be the best opportunity for he/she they will buy more shares ( buying low).

The site I posted is just saying its misleading.

The reason people are automatically put in these funds is because for the vast majority of people, these funds will do far better than what the people would do left on their own.

Before target date funds. Company would automatically invest in the most conservative fund. Stable or money market fund. Some companies still do that. There have been many lawsuits that the employees sued their employers because they did not give them education or guidance on there 401K plans. Many people after 30+ year at a company could of had lots more money in there 401K if they invested properly because many Americans don't care to look at there plans. BUT the company who offers then plan is still responsible. SO, to avoid these lawsuits they created target dates funds. Now with these funds people won't lose opportunity in the market. The idea sounds good but the product is crap!

Sounds like you enjoy learning about investing and money. You can do lot better then target dates.

[Petunia 100]

I currently have about $4000 in my Vanguard Roth IRA that I opened this year. The whole balance is in the Vanguard Target Retirement 2045 (VTIVX). Is this a bad thing because it's not diversified? Since the mins are usually $3k, I could only buy one fund. I'd like to buy the total stock market fund, but I believe the min is once again $3000. Does that mean I just save up that much before adding anymore next year and just buy that fund in one purchase? Also, others at work have a Fidelity Roth where they can buy and sell stocks in their Roth. Is this just not allowed with a Vanguard Roth? Any advice would be appreciated.

No, it's not a bad thing. You have made an excellent choice. Your money is split between the total US stock market, the total US bond market, with a few thousand foreign stocks thrown in for good measure, all at rock bottom expense.

[Petunia 100]

No Bull - You speak of "target funds" as though they were all identical. They aren't. Vanguard most certainly does not add an extra layer of fees to its target retirement funds. Look at the fund prospectus for yourself. Certainly there are some low-quality target retirement funds out there, but the OP is not invested in those. The OP has wisely chosen the excellent target retirement funds available at Vanguard.

As to your question of why should a young investor hold bonds, this question has been debated ad nauseum with respectable arguments on both sides.

[jpg7n16]

Lots of firms are dis continuing these type of investment because there are very misleading.

Really? Like who?

Vanguard? https://personal.vanguard.com/us/fun...RetirementList
Fidelity? Fundamentals of Investing - Fidelity
Schwab? Target Retirement Funds: Charles Schwab: Schwab Target Funds
Blackrock? BlackRock - LifePath® Portfolios
American Funds? https://www.americanfunds.com/funds/...e.htm#fundnav8

Nope. In fact, a few of these companies are showcasing them front and center.

So where are these fund companies who are discontinuing them?

[Petunia 100]

I currently have about $4000 in my Vanguard Roth IRA that I opened this year. The whole balance is in the Vanguard Target Retirement 2045 (VTIVX). Is this a bad thing because it's not diversified? Since the mins are usually $3k, I could only buy one fund. I'd like to buy the total stock market fund, but I believe the min is once again $3000. Does that mean I just save up that much before adding anymore next year and just buy that fund in one purchase? Also, others at work have a Fidelity Roth where they can buy and sell stocks in their Roth. Is this just not allowed with a Vanguard Roth? Any advice would be appreciated.

Oh, and in order to buy individual securities you need a brokerage account. Yes, they have those at Vanguard.

My advice is to skip the brokerage account for now. Your money is just fine right where it is.

[disneysteve]

If they put him/her into a 2045 fund, I'm assuming he/she is between 20-30 years old. he/she has 30-35 years to retirement. Why would you want bonds that young???

Fair question for sure, but that becomes more of an academic discussion. The average return of a 100% stock portfolio and a 90/10 portfolio is within a couple of tenths of a point but the 90/10 portfolio does it with lower volatility and less risk. I don't see anything wrong with a small exposure to bonds, even at a young age, but I wouldn't argue with someone who chose to go 100% stock as long as they understood the difference.

I'd still like to see some source about the hidden expenses of this fund.

[Petunia 100]

The target date fund is a bucket for other funds. The bucket cost .19%. The other funds are the expensive ones. Again they do not have to disclose those fees. so people think it only cost .19%. Again, Misleading! do some research. If you find anything that proves me wrong I'll donate all my points to you.

Awesome! What are the points for, anyway? I'm so excited that I'm about to get yours.

https://personal.vanguard.com/us/literature/prospectus/mutualfunds

Vanguard Target Retirement 2045 Fund
Investment Objective The Fund seeks to provide capital appreciation and current income consistent with its current asset allocation.
Fees and Expenses The following table describes the fees and expenses you may pay if you buy and hold shares of the Fund.
Shareholder Fees (Fees paid directly from your investment)
Sales Charge (Load) Imposed on Purchases None
Purchase Fee None
Sales Charge (Load) Imposed on Reinvested Dividends None
Redemption Fee None
Account Service Fee (for fund account balances below $10,000) $20/year
Annual Fund Operating Expenses (Expenses that you pay each year as a percentage of the value of your investment)
Management Expenses None
12b-1 Distribution Fee None
Other Expenses None
Acquired Fund Fees and Expenses 0.19%
Total Annual Fund Operating Expenses 0.19%
Example
The following example is intended to help you compare the cost of investing in the Fund (based on the fees and expenses of the Acquired Funds) with the cost of investing in other mutual funds. It illustrates the hypothetical expenses that you would incur over various periods if you invest $10,000 in the Fund’s shares. This example assumes that the Fund provides a return of 5% a year and that operating expenses of the Fund and its underlying funds remain as stated in the preceding table. The results apply whether or not you redeem your investment at the end of the given period.