Roth IRA Help for a Youngin'

[SheepInWolfsClothing]

Hi guys,

Soooooo...I have a bit of extra cash in the bank. I'm a college student who is lucky enough to have good parents who allow me to save pretty much all my money that I make from internships and jobs at school. I am tired of watching it all just sit there in the bank. I want to put this money to good use. So I thought investing in a Roth IRA would be a good start!

I've done some research, and also gone to a financial advisor. He recommended to me that I max out for 2013 before April rolls around and put it all into this thing called and ING Select Advantage IRA. Here is the website on it, mainly it just talks about the kinds of stuff they wont tack on fees for, and it looks pretty good to me...?: http://ing.us/individuals/products-services/annuities/select-advantage-ira

I know Mr. Money Mustache is not a fan of managed funds, but the arguments for this mutual fund seem ok. I figured this might be a good place to start, and then also invest in the Vanguard Total Stock Market Index Fund as well, but not as an IRA, just for funzies. Also maybe the S&P. Why not have both...right?

Mr. Financial Advisor man told me to invest in these guys within my Roth IRA. I don't know how much this will help/how much people care but here's a list:

Janus Overseas Fund R class
Oppenheimer Developing Markets Fund N class
American Funds The Growth of America F-1 class
American Funds Washington mutual investors Fun F-1 class
Eaton Vance Atlanta Capital SMID-Cap Fund R class
Royce Total Return Fund R class
Ivy Small Cap Growth Fund R class

I've looked them all up on Morning Star, and the majority of them seem to have "low to average fees". I know I need to put most of my investing into stocks because I am young. I don't plan on touching this thing for a few decades. I don't mind if I lose some money once in a while, as long as I get a worth-while return by the time I start withdrawing from the account when I am in my 60's or whatever.

I guess I am just a little nervous about giving this dude a bunch of my money!!! He has been working for my mother for a while and she seems to trust him. :$ Just a little scared. This is my first big investment ever. I am wondering if even this is even worth my time...?! How much am I really gambling...? Ah, so many questions. I just need any help I can get.

Suggestions? Is this IRA BS?!??! Should I just invest my IRA  in the Vanguard Total Stock Market Index Fund or...?

Any help is appreciated. Thank you so much.

[amha]

Invest it all in Vanguard's Total Stock Market index fund!!! No need for anything else! I mean, if you really want, you could throw in their total international stock market index fund for some balance, but really---you should always give the benefit of the doubt to passive index funds. With actively-managed funds, you're likely to get the average market return... MINUS the cost of the fund. Active funds can easily cost 1-2% a year, and since you can only expect the stock market to go up by 5-10% a year, you're giving away 10-40% of your money to the fund company. (Vanguard only charges 0.05% for the total stock market index fund---as in, five-one-hundredths of a percent!)

You also don't need so many different funds. Your IRA will only have $5,500 at most (or $11,000, if you deposit your 2014 contribution at the same time), and it's really not worth splitting it up among lots of funds. If you get ambitious, you might want to diversify with some REITs and maybe some bond funds; you can also make strong arguments for overweighting small-cap and value stocks (i.e., for buying small-cap and value index funds). But those are all marginal improvements.

Just to take a quick look at the funds your mom's FA suggests, they cost:

Janus Overseas Fund R class: 1.18%
Oppenheimer Developing Markets Fund N class: 1.70% (with 1% load)
American Funds The Growth of America F-1 class: 0.71%
American Funds Washington mutual investors Fun F-1 class: 0.62% (with 5.75% load)
Eaton Vance Atlanta Capital SMID-Cap Fund R class: 1.50%
Royce Total Return Fund R class: 1.74%
Ivy Small Cap Growth Fund R class: 1.67%

In other words... the CHEAPEST of these suggested funds is still more than TWELVE TIMES more expensive than Vanguard's Total Stock Market Index fund! (And the most expensive is 35 times as expensive.)

[amha]

Go to Vanguard and open up a Roth IRA online. You won't have to pay anything, ever, except for the very low expense ratio of the Vanguard funds.

[iamlindoro]

^^^ Both of the above, +1.

Read:

http://jlcollinsnh.com/stock-series/

And especially in light of the fact that you are young:

http://jlcollinsnh.com/2011/06/14/what-we-own-and-why-we-own-it/

http://jlcollinsnh.com/2011/06/08/how-i-failed-my-daughter-and-a-simple-path-to-wealth/

All of that said, you are remarkably well informed for a college student.  You should be very proud of yourself-- but man, if I knew the contents of the stock series above when I was your age, I would be retired already.

[mxt0133]

Was the financial advisor 'fee only', meaning did you pay for his advice up front?  If not then he is working on commission.  He earns a sales commission by having his clients buy from a list of investment.  This can sometimes cause a conflict of interest, the investments might not be ideal for his clients but he will not make money otherwise.

If you do trust him, ask about any fees associated with the funds he recommends, sales loads, management fees, expense ratios, and 12b-1 fee (marketing fees) to start.  The lower the better.

Now compare them to similar Vanguard Funds, make sure the investment styles are similar for a valid comparison.  I know for a fact that some of the funds you listed have much higher fees than similar Vanguard Funds.

Good luck and if you are starting this young on investing you won't have to wait until your 60's to start withdrawing from you account, with a reasonable safe withdrawal rate (SWR).

[amha]

I'd avoid S&P500 index funds, incidentally. They miss a big chunk of the stock market (all of those stocks that aren't the 500 largest!), and small-cap stocks tend to do slightly better than large-cap stocks; if you buy the total stock market fund, you'll likely do better over the long term than if you just buy an S&P500 fund. (Actually, this is the a common trick that active fund managers do: they say, look, our fund has always outperformed the S&P 500! Yeah, no shit. You can do so yourself for (almost) free just by buying the rest of the stock market!)

But really all of this is at the margins. Even if you bought an S&P500 index fund, you'd still be way better off than buying active funds; even if you buy active funds, you're still way better off than leaving your $$$ as cash (which is itself better than not saving at all). Welcome!

[Cromacster]

Good job on looking into Roths and investing.  Good to start when you are young.

You still have to be wary of financial people.  Even if they have been working for your parents or whoever.  When I was 19 and first starting looking into a Roth IRA, I sat down with my parents financial advisor.  She got me setup with a Roth, buying a managed fund with a 5.5% front load.  My mother worked for that financial institution, so that front load was waived while I still lived in the same household.  So at the time I didn't think anything of it, also I didn't know any better.  Once I officially moved out and wised up to the actual cost of this fund I got the hell out of there.  I now have my Roth in Vanguard :)

[Another Reader]

Does Mr. Financial Advisor also sell insurance?  This ING product is on the annuity website and appears to be an annuity related product.  You do NOT need or want this product.

Run, do not walk from his recommendations.  As you read through this site, the JL Collins series, and the Boglehead site, you will see investing is a DIY job.  Much cheaper and with much better results in the long term.  Unlike most folks here, I do like some managed mutual funds, but I pick them myself.

Mr. Financial Advisor is lining his pocket, not yours.

[judgemebymyusername]

If you read only one book on this topic, please let it be this http://www.amazon.com/Bogleheads-Guide-Investing-Taylor-Larimore/dp/0470067365

Also you should do a quick search on the blog, MMM has covered this topic.

[Nothlit]

Yes, open an IRA! But do it yourself using Vanguard Total Stock Market or one of their LifeStrategy funds or one of their Target Retirement funds.

Stay far, far away from actively managed funds, or anything where an "advisor" (aka salesman) is trying to get you invested in something that lines his pocket. Even a "small" management fee can add up to tens or hundreds of thousands of dollars over a lifetime of investing.

[randymarsh]

Those funds are completely awful. All you need to do is go to www.vanguard.com and open up a Roth IRA and select the Total Stock Market fund.

[Another Reader]

I just saw the part about this guy and your mom.  In your shoes, I would do everything you can to get her out of the clutches of this salesman.  Because of her age, he is probably pitching her heavily on annuities, if she has not already bought one.  She is likely paying through the nose for whatever he is selling.

[chucklesmcgee]

Those funds are completely awful. All you need to do is go to www.vanguard.com and open up a Roth IRA and select the Total Stock Market fund.

+1 for Total Stock Market.

I actually might suggest looking at Ameritrade's Roth IRA. I believe they have a no-fee structure like Vanguard if you're buying and holding certain ETFs. Buy Vanguard's Total Stock Market ETF fund VTI, there's a slightly lower expense rate than the mutual fund flavor.

[CanuckExpat]

Hello there,

I think this will help you with a lot of questions: http://www.bogleheads.org/wiki/Getting_started

You've gotten some good advice already, you may also want to consider what your investing time frame is, what your risk tolerance is like, and what asset allocation you want. Also, you haven't mentioned what your income is, but what makes you think a Roth IRA is a better choice for you than a traditional deductible IRA?