Author Topic: Help with Vanguard Roth IRA  (Read 11573 times)

Fred Tracy

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Help with Vanguard Roth IRA
« on: February 11, 2013, 11:26:52 AM »
Hey guys, I am just now starting my Roth IRA at Vanguard, and I think I must be missing something very simple here...

I took Mr Money Mustache's advice and am following the modern portfolio theory.. where you basically invest in four different index funds, large cap, small cap, bonds, and international (right??).

But the minimum for each of these funds is $3000. Yet I can only contribute a maximum of $5000 for 2012's roth IRA. So how can I put all of these funds in my IRA? Do I have to pick one to add to it each year or what? I am very confused!

PS, this is the article I went by: http://www.mrmoneymustache.com/2012/02/17/book-review-the-intelligent-asset-allocator/

It doesn't really mention a small cap stock fund, other than "VB", which I am not sure what that is. So I picked NAESX. Is that a good one? Expense is like .024 or so...

Thanks! :)

jpo

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Re: Help with Vanguard Roth IRA
« Reply #1 on: February 11, 2013, 11:32:04 AM »
VB is a small cap Vanguard ETF. It is the ETF equivalent of NAESX. ETFs are probably a great choice for you as they have no minimum investment aside from the individual share price.

I have some money in VB myself through TD Ameritrade, it's one of their commission-free ETFs.

gotaholen1

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Re: Help with Vanguard Roth IRA
« Reply #2 on: February 11, 2013, 11:56:14 AM »
Fred,

Ideally you want to get to the point where you have a balanced allocation of your assets into those funds, but it might take you a bit of time to get there.  If you are wanting to get into all of those funds via Vanguard, you are correct that you will need $12,000 to fund the initial buy in. 

The good news is that you can still contribute $5,000 for 2012, and $5,500 for 2013.  Therefore, if you had the cash today, you could put in $10,500 and buy into three of the four funds.

If you really want to get into all four funds this year, maybe research some no-load funds.  I have been researching some T. Rowe Price items that seem reasonable with lower minimums.

icefr

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Re: Help with Vanguard Roth IRA
« Reply #3 on: February 11, 2013, 12:32:19 PM »
I would recommend trying one of their target retirement funds: https://personal.vanguard.com/us/funds/vanguard/TargetRetirementList

The minimum initial investment on those is only $1,000. They are diversified into US and international stocks and US bonds. Here is what the 2050 one holds today:
1   Vanguard Total Stock Market Index Fund Investor Shares   63.1%
2   Vanguard Total International Stock Index Fund Investor Shares   27.0%
3   Vanguard Total Bond Market II Index Fund Investor Shares*   9.9%

That's a good way to be diversified without having too many funds until you have more money in your Roth IRA. I did that until I had > $10,000 in it and could split up into two funds, but I wish I'd just left my Roth IRA and 401(k) in the target date fund until I started taxable investing and then split and rebalance.

hoppy08520

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Re: Help with Vanguard Roth IRA
« Reply #4 on: February 11, 2013, 07:00:22 PM »
I would recommend trying one of their target retirement funds: https://personal.vanguard.com/us/funds/vanguard/TargetRetirementList

The minimum initial investment on those is only $1,000. They are diversified into US and international stocks and US bonds. Here is what the 2050 one holds today:
1   Vanguard Total Stock Market Index Fund Investor Shares   63.1%
2   Vanguard Total International Stock Index Fund Investor Shares   27.0%
3   Vanguard Total Bond Market II Index Fund Investor Shares*   9.9%

That's a good way to be diversified without having too many funds until you have more money in your Roth IRA. I did that until I had > $10,000 in it and could split up into two funds, but I wish I'd just left my Roth IRA and 401(k) in the target date fund until I started taxable investing and then split and rebalance.
Agree with this ^

You might also want to consider the LifeStrategy Growth fund which contains those same three funds listed above but with 80% in stocks and 20% in bonds.

If you're also investing in a 401(k), then you should make sure that both your 401(k) and your IRA are invested coherently. Make sure you consider all your retirement accounts as a whole portfolio, rather than as little independent accounts.

William Bernstein, who wrote the book that MMM reviews, recommended these all-in-one funds as an easy and fool-proof way for investors to start: http://www.efficientfrontier.com/ef/404/grail.htm.

Fred Tracy

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Re: Help with Vanguard Roth IRA
« Reply #5 on: February 11, 2013, 08:52:31 PM »
Okay thanks guys, maybe I will try one of those "all in one" funds then. I'm wondering, if I do that does that mean that once I get enough money on my account ($12000) then I can just switch over to the four MMM funds for free? What kind of costs are associated with getting out of one fund and into another? I could just be patient and buy one fund at a time.. I don't mind doing that if I need to.

Rangifer

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Re: Help with Vanguard Roth IRA
« Reply #6 on: February 11, 2013, 09:20:17 PM »
I think it happens pretty much automatically once you reach the minimum, no fee required.

icefr

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Re: Help with Vanguard Roth IRA
« Reply #7 on: February 11, 2013, 10:53:20 PM »
Okay thanks guys, maybe I will try one of those "all in one" funds then. I'm wondering, if I do that does that mean that once I get enough money on my account ($12000) then I can just switch over to the four MMM funds for free? What kind of costs are associated with getting out of one fund and into another? I could just be patient and buy one fund at a time.. I don't mind doing that if I need to.

You can exchange money in and out of the target date funds just like any other Vanguard fund. So yes, it's just like a transfer from one savings account to another one. Quite simple online. No costs.

hoppy08520

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Re: Help with Vanguard Roth IRA
« Reply #8 on: February 12, 2013, 06:23:30 AM »
Okay thanks guys, maybe I will try one of those "all in one" funds then. I'm wondering, if I do that does that mean that once I get enough money on my account ($12000) then I can just switch over to the four MMM funds for free?
Why those four funds? That book was written in the late 1990's and while the principles haven't changed much since then, better funds have been developed for investors.

US Stocks: Rather than a large-cap index fund and a small cap index fund, you can buy a Total US Stock Market Index fund and own the whole US stock market at market capitalization weight. There is a case to be made for over-weighting small cap stocks relative to their market cap weight, but I'd consider just buying a Total Stock Market Index fund instead of those two separate funds unless you want to do an overweight.

International: VDMIX tracks the MSCI EAFE index, which is an index containing 936 large-cap stocks of 22 developed countries outside North America. This means you'll own no Canadiana, Russian, Brazilian, Indian or Chinese or other emerging stocks stocks. You'll own no small cap international stocks. Or, you could go with Vanguard Total International Stock Market Index Fund which, like its US counterpart, buys stocks (6,214) in the entire investable world market (43 countries), at their market capitalization weight. If you want to own the whole international market, then go with Total International and not the MSCI EAFE fund.

Bonds: Why short-term bonds? Why not a total bond market fund with more diversity in sector and maturity?  The short-term bond fund has all bond maturities within 5 years and mostly government, but a Total Bond Market Index Fund also invests in longer-term bonds and a broader range of bond sectors.

Of the three asset classes above, I would say going with the 2-fund US allocation in Bernstein's book is OK; not a big deal. Going with short-term bonds over a total bond market is probably not a big deal. But there is no way I'd invest my international allocation in a large-cap developed market fund when I could invest in a far more diversified international fund like Vanguard Total International Stock Market Index Fund. So, if you really want those four funds, if I could persuade you to swap just one, it would be the international one.

[When Bernstein wrote that book, there was no total international stock market index fund, so he had to recommend a basket of specific funds like MSCI EAFE, Emerging Market, Small Cap, etc. But now you can hold them all, at their market weight, in one fund.]

Coincidentally, the three funds I mentioned are the three core funds in the LifeStrategy and Target Retirement funds, which that same author recommended to investors in the link in my earlier reply.

I recommend you read Bernstein's other book, The Four Pillars of Investing. This is the best investing book I've read and if you can absorb its lessons, you'll know all you need to know to be a successful investor.
« Last Edit: February 12, 2013, 06:26:33 AM by hoppy08520 »

Fred Tracy

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Re: Help with Vanguard Roth IRA
« Reply #9 on: February 13, 2013, 09:12:10 PM »
Thanks again guys. Hoppy, I don't know anything about investing but what you said makes sense. I will just take the international one you offered for now until I do more research about the others. For now, atleast I have a plan that should produce decent (though not optimal?) results! :)

Crash87

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Re: Help with Vanguard Roth IRA
« Reply #10 on: February 14, 2013, 04:13:58 PM »
I don't think anyone advocated buying just an international fund. I think the resounding low balance advice will be a target retirement fund because it will diversify across the whole market (not just the international market).

Once you have enough money you can swap to your prefered 4 funds for free as long as they are vanguard funds.

Up until april 15th you can make a 5k contribution for 2012 and up until april 15th of next year you can make a 5500 contribution for 2013.
In general, pride is at the bottom of all great mistakes.

markstache

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Re: Help with Vanguard Roth IRA
« Reply #11 on: February 18, 2013, 10:42:47 AM »
My advice is to buy into one fund this year, one fund next year, and so on. If you want to prioritize costs, you might also think about extending the plan such that you are buying into a single fund for 2 years to reach Admiral status and lower your costs. This is what I am doing. Now that my small value is at Admiral, I'm working on large value. After that, international. Our time horizons are long, why be a rush to own all the funds today? We'll get there eventually. At this point in my life, I like to think of myself as a "saver," not an "investor." As long as I am putting money away with a long term AA in mind, I think the details are not that important.

The ETF suggestion is good as well. I just prefer the simplicity of mutual funds for my own investing. (The exception being ETFs for which no mutual fund exists or there is no Admiral class at this time.)