Author Topic: Funded my Roth IRA. Few follow up questions  (Read 2706 times)

xclonexclonex

  • Stubble
  • **
  • Posts: 129
Funded my Roth IRA. Few follow up questions
« on: January 05, 2015, 04:33:23 AM »
Hello everyone,

I funded my Roth IRA, and I picked a target retirement fund. I looked at the funds available and narrowed down the one with high return since its inception.

https://personal.vanguard.com/us/funds/snapshot?FundId=1487&FundIntExt=INT

So this is what my account looks like -

http://i.imgur.com/A0tQbfE.jpg

I have a few questions -

1. Did I lose 92c in the stock market? Should I be concerned?

2. When I make future contributions, should I contribute to this particular fund or should I pick a different one?

3. What should I do if this particular fund starts doing poorly? Should I sell, take the loss and contribute to a different fund?

I am 31 years old. I am not sure if that makes a difference or not.

Thanks!
« Last Edit: January 05, 2015, 05:16:58 AM by xclonexclonex »

DoNorth

  • Stubble
  • **
  • Posts: 235
  • Age: 41
Re: Funded my Roth IRA. Few follow up questions
« Reply #1 on: January 05, 2015, 05:05:02 AM »
1.  Not sure what you mean by this question.  72c is the IRS provision for equal periodic payments.  If at some point before you are 59.5 years old, you decide you want to draw (earnings) from this account (contributions from a Roth can be drawn without penalty after a certain time and with some rules), then you would do so under the 72c rules.  There are a few calculators that describe the various assumptions for these withdrawals.

2.  The vanguard target dates mostly consist of three funds (total U.S. stock market, total international stock market, and total bond) with different weightings.  You most likely chose this because it is a simple option, and if simplicity is what you are looking for, then yes, you should continue to contribute to this fund.  As you learn more about asset classes, seek more diversification, and potentially better returns/less volatility, you would potentially want to add more asset classes to your portfolios with different weights.  e.g REITs, emerging markets, small cap etc.  Also, as your balances grow, you can lower your underlying expense from .18 to ~.05 by simply buying the Admiral shares versions of each fund (Total Stock, Total International Stock, and Total Bond).

3. Not necessarily.  Understand what your long terms goals and risk tolerance are.  Focus either on dollar cost averaging  or value averaging.  Vanguard will do the re-balancing for you as long as you're in the target date fund, but you if you go a different route, re-balance every year or so to ensure your asset allocations are where you want to be. 

Best advice i can give is to grab a copy of the Intelligent Asset Allocator from your local library.  It's a bit technical, but explains the concepts very well.

xclonexclonex

  • Stubble
  • **
  • Posts: 129
Re: Funded my Roth IRA. Few follow up questions
« Reply #2 on: January 05, 2015, 05:22:59 AM »
1.  Not sure what you mean by this question.  72c is the IRS provision for equal periodic payments.  If at some point before you are 59.5 years old, you decide you want to draw (earnings) from this account (contributions from a Roth can be drawn without penalty after a certain time and with some rules), then you would do so under the 72c rules.  There are a few calculators that describe the various assumptions for these withdrawals.

2.  The vanguard target dates mostly consist of three funds (total U.S. stock market, total international stock market, and total bond) with different weightings.  You most likely chose this because it is a simple option, and if simplicity is what you are looking for, then yes, you should continue to contribute to this fund.  As you learn more about asset classes, seek more diversification, and potentially better returns/less volatility, you would potentially want to add more asset classes to your portfolios with different weights.  e.g REITs, emerging markets, small cap etc.  Also, as your balances grow, you can lower your underlying expense from .18 to ~.05 by simply buying the Admiral shares versions of each fund (Total Stock, Total International Stock, and Total Bond).

3. Not necessarily.  Understand what your long terms goals and risk tolerance are.  Focus either on dollar cost averaging  or value averaging.  Vanguard will do the re-balancing for you as long as you're in the target date fund, but you if you go a different route, re-balance every year or so to ensure your asset allocations are where you want to be. 

Best advice i can give is to grab a copy of the Intelligent Asset Allocator from your local library.  It's a bit technical, but explains the concepts very well.

Hello,

Thank you for your reply.

Regarding the first question, I made a mistake.

Here is what I meant to ask -

I deposited $1000. The current balance is $999.08. Where did the $0.92 go? I didn't mean to say 72c, that was a typo. Apologies for that.

I do not understand a lot of terms you used, but I will do my research. About the expense ratio, is 0.18% high? Also, when does this expense ratio effect me? When I withdraw funds?

I will look up the book you mentioned. It sounds like something that will offer me a lot of insights into investing etc.

Thanks for your help!

DoNorth

  • Stubble
  • **
  • Posts: 235
  • Age: 41
Re: Funded my Roth IRA. Few follow up questions
« Reply #3 on: January 05, 2015, 06:15:48 AM »
.18% is not high by industry standards; very low in fact, but as your portfolio grows, you may want to consider the Admiral shares with lower expense ratios.

The .92 drop is likely due to a drop in the price of the fund.  Over time, the fund will gain/lose money based on the overall performance of the market.

shotgunwilly

  • Pencil Stache
  • ****
  • Posts: 547
Re: Funded my Roth IRA. Few follow up questions
« Reply #4 on: January 05, 2015, 07:57:05 AM »
Yes. You lost .92 cents in the stock market. If you're worried about your account going up and down that little, then you should probably never invest. But you're going to miss out.

As long as you don't sell, then your loss will not be realized and eventually the market will go up again. Just keep investing steadily and do not worry about dips.

xclonexclonex

  • Stubble
  • **
  • Posts: 129
Re: Funded my Roth IRA. Few follow up questions
« Reply #5 on: January 05, 2015, 08:13:14 AM »
Thank you. I just wanted to find out what exactly was going on. I intend to keep investing. Hopefully that will pay off in the future.

Nothlit

  • Bristles
  • ***
  • Posts: 397
Re: Funded my Roth IRA. Few follow up questions
« Reply #6 on: January 05, 2015, 09:20:54 AM »
It sounds to me like you could definitely use some additional education on index investing and asset allocation -- that's not a criticism; everyone has to start out somewhere. In general, people pick target-date funds (like the one you picked) as a set-it-and-forget-it type of investing vehicle. The "2055" in the name is intended to mean "I'm investing in this fund because I intend to retire around the year 2055, and the fund will automatically adjust its internal asset allocation over time so as to get gradually more conservative as the year 2055 approaches." If that's not your goal -- or if Vanguard's idea of aggressive vs. conservative doesn't match yours -- then maybe this fund isn't right for you. Or maybe it is. That's up to you to decide.

First and foremost, you shouldn't pick index funds (or any investment, for that matter) based on past performance. The whole point of asset allocation and index-based investing is that you decide what percentage of stocks vs. bonds (and perhaps domestic vs. international) that you want to hold, and then you buy and hold that percentage, rebalancing periodically (e.g., annually) to keep your allocation at the target percentage. Many people who do this "manually" buy shares in just two or three basic funds: a total (U.S.) stock market fund, a total bond market fund, and (sometimes) a total international stock fund. Target-date funds essentially do this for you "behind the scenes" but you have less control over what the exact percentages are, and as I said above, they will change over time to gradually become more conservative as your target retirement date approaches.

Vanguard also has "LifeStrategy" funds which are similar to the target-date funds in that they manage the allocation for you behind the scenes, but the percentages remain fixed rather than changing over time. Have you read the Bogleheads wiki? It's very helpful for understanding this style of investing.

xclonexclonex

  • Stubble
  • **
  • Posts: 129
Re: Funded my Roth IRA. Few follow up questions
« Reply #7 on: January 06, 2015, 04:52:01 AM »
It sounds to me like you could definitely use some additional education on index investing and asset allocation -- that's not a criticism; everyone has to start out somewhere. In general, people pick target-date funds (like the one you picked) as a set-it-and-forget-it type of investing vehicle. The "2055" in the name is intended to mean "I'm investing in this fund because I intend to retire around the year 2055, and the fund will automatically adjust its internal asset allocation over time so as to get gradually more conservative as the year 2055 approaches." If that's not your goal -- or if Vanguard's idea of aggressive vs. conservative doesn't match yours -- then maybe this fund isn't right for you. Or maybe it is. That's up to you to decide.

First and foremost, you shouldn't pick index funds (or any investment, for that matter) based on past performance. The whole point of asset allocation and index-based investing is that you decide what percentage of stocks vs. bonds (and perhaps domestic vs. international) that you want to hold, and then you buy and hold that percentage, rebalancing periodically (e.g., annually) to keep your allocation at the target percentage. Many people who do this "manually" buy shares in just two or three basic funds: a total (U.S.) stock market fund, a total bond market fund, and (sometimes) a total international stock fund. Target-date funds essentially do this for you "behind the scenes" but you have less control over what the exact percentages are, and as I said above, they will change over time to gradually become more conservative as your target retirement date approaches.

Vanguard also has "LifeStrategy" funds which are similar to the target-date funds in that they manage the allocation for you behind the scenes, but the percentages remain fixed rather than changing over time. Have you read the Bogleheads wiki? It's very helpful for understanding this style of investing.

Hello, thank you for your recommendation.

I agree with you, that I need to get educated. As of now, my knowledge of the stock market is very low. I realize that I need to invest in order to let my money grow because I keeping my money in a savings account isn't going to help me.

I do know what percentage of stocks vs bonds I should be holding. I need to do some more reading on that, and this is why I thought having a target retirement fund was a good idea. Hopefully that will help in the long run.

I might have made a mistake of choosing a target retirement fund based on the past performance, but I hope that won't hurt me too much in the long run.

I am going to check out the article you sent me. Thanks a lot for that!