Author Topic: Fully Funded RothIRA . . . for 2013!  (Read 6761 times)

smalllife

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Fully Funded RothIRA . . . for 2013!
« on: December 08, 2012, 10:33:57 AM »
I know this is chump change for you high income earners, but I have scraped together $5,500 to invest Jan. 1!

I'm really excited but feel like I'd be bragging anywhere else but here. 

As an added bonus, this also means that a good share of my emergency fund will be working for me 100% of the time instead of idling on standby. 

And as a super extra bonus, this puts me at a level of funds where I qualify for Fidelity's investor class!  I will be selling my target retirement date mutual fund and purchasing the 4-in-1 Index and my expense ratio will go from .78% to .23%  (10K minimum for all investor class funds.  Once I reach 40K I will invest in the individual index funds and manage the ratios myself, but that is another year or three - for the Roth - away.  Those compare with the Vanguard indexes everyone usually recommends.).   The FFNOX isn't perfect, but it will give me a fairly balanced portfolio compared to my old FDEEX. 

It's a small milestone I know, but a milestone nonetheless.  Fully funded on the first of the year and a five digit retirement account.  My tiny stache just grew a little bit. . . .

Honest Abe

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Re: Fully Funded RothIRA . . . for 2013!
« Reply #1 on: December 08, 2012, 10:52:40 AM »
You should consider dollar-cost-averaging it over several months rather than depositing it all at once....congrats!!

smalllife

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Re: Fully Funded RothIRA . . . for 2013!
« Reply #2 on: December 08, 2012, 11:02:11 AM »
I probably will spread out the investments over 3-5 months (just in time to be eligible for my company's 401K), but haven't decided exactly how I want to do so. 

ruthiegirl

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Re: Fully Funded RothIRA . . . for 2013!
« Reply #3 on: December 08, 2012, 07:33:41 PM »
You should consider dollar-cost-averaging it over several months rather than depositing it all at once....congrats!!

Could someone explain this a bit more?  is there an advantage to spreading out the deposits? 

And Congrats Smalllife!!!!   

sulaco

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Re: Fully Funded RothIRA . . . for 2013!
« Reply #4 on: December 08, 2012, 07:54:47 PM »
You should consider dollar-cost-averaging it over several months rather than depositing it all at once....congrats!!

Could someone explain this a bit more?  is there an advantage to spreading out the deposits? 

For tax advantaged accounts which have relatively low set limits, I don't think it makes sense to DCA. If you expect on the market to increase, DCA will underperform the market by definition. If you don't expect the market to increase, then you should probably find another investment vehicle ;)

DCA also doesn't define a period. So $5,500 once per year for 20 years is still dollar cost averaged over 20 years.

grantmeaname

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Re: Fully Funded RothIRA . . . for 2013!
« Reply #5 on: December 08, 2012, 10:36:19 PM »
The idea is that you're smoothing out your buy in price because you're buying in a the average of all the prices. If you put $10,000 in on each of 9/1, 9/8, 9/15, 9/22, and 9/29, you'd end up paying closer to the average price in all of September than if you put in $50,000 on 9/1. Of course, as jonhohle states, if you expect the market to go up, you're losing a bit of buying power across the period you are DCAing in exchange for decreasing your risk.

Honest Abe

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Re: Fully Funded RothIRA . . . for 2013!
« Reply #6 on: December 09, 2012, 04:04:07 AM »
Right, but if anyone is that sure of the market's next move then I'd like you to manage my entire portfolio! :). Hence the rationale behind DCA. You don't know, you can't know. You might have a belief, but if you've been investing long enough then you've been humbled by your past beliefs

ruthiegirl

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Re: Fully Funded RothIRA . . . for 2013!
« Reply #7 on: December 09, 2012, 07:29:23 AM »
Ahh, gotcha.   I understand now.  We are working towards maxing out the 401K, but plan on Roths in 2 years time.  I'll keep this strategy in mind when the time comes. 

plantingourpennies

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Re: Fully Funded RothIRA . . . for 2013!
« Reply #8 on: December 09, 2012, 06:11:17 PM »
Congrats OP!

Mrs. Pop and I do a happy dance whenever our Roth account gets maxed for the year.

Interesting idea about doing DCA over months; I thought it was meant as something you did over the span of a decade or more.

Best,
Mr. Pop

gdborton

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Re: Fully Funded RothIRA . . . for 2013!
« Reply #9 on: December 10, 2012, 03:24:01 PM »
Quote
You should consider dollar-cost-averaging it over several months rather than depositing it all at once

You may want to toss in a disclaimer about trade fees.  Not everyone goes with a transaction fee free account.  Scottrades $7.95 would be almost a 1% fee if you broke that down to deposits of $1000.

chucklesmcgee

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Re: Fully Funded RothIRA . . . for 2013!
« Reply #10 on: December 10, 2012, 03:29:45 PM »
Right, but if anyone is that sure of the market's next move then I'd like you to manage my entire portfolio! :). Hence the rationale behind DCA. You don't know, you can't know. You might have a belief, but if you've been investing long enough then you've been humbled by your past beliefs

You have to consider that the market has a positive expected return. Money that's hanging around waiting to be invested under DCA is experiencing opportunity costs, most likely. If smalllife broke his contribution into 12ths and made monthly contributions, the money in December would have given up the most gains he'd be expected to experience over 11 months and would probably have lost value unless he found something else to protect it against inflation.

If smallife wanted to be certain his returns most closely tracked the market, then sure, investing in 12ths or daily is more likely to match the market. But he's already got the cash in hand, and the money's going to be invested for years anyway, chances are he'll do best by putting it into savings January 1st.

I think the real point illustrated by DCA is not to try to time the market. Some people will wait until they get a big chunk of change and spend months waiting and waiting  for what they think is a bit of a crash or correction or bottom, invest it, and in the end turn out to be wrong. They've wasted all that time and energy, and having waited, the likely opportunity costs as well.

But if smalllife's got the cash in hand, his expected returns are going to be greater putting it all in January 1st as opposed to diddling it out.

smalllife

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Re: Fully Funded RothIRA . . . for 2013!
« Reply #11 on: December 10, 2012, 04:20:03 PM »
I'm a she, by the way.

The most dollar cost averaging I will likely do will be $1000 at a time through the month of February, or at least breaking it up until the fiscal cliff scenario reaches a conclusion to avoid a possible fall.  The probable scenario is that I do two big chunks a week or two apart in early January. 

AnnaD

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Re: Fully Funded RothIRA . . . for 2013!
« Reply #12 on: December 11, 2012, 09:46:14 AM »
Quote
You should consider dollar-cost-averaging it over several months rather than depositing it all at once

You may want to toss in a disclaimer about trade fees.  Not everyone goes with a transaction fee free account.  Scottrades $7.95 would be almost a 1% fee if you broke that down to deposits of $1000.

Perhaps I am confused or just splitting hairs, but the deposit of funds and the actual buying of investments are two different transactions, right?
If you deposit your entire contribution on January 1 you are not incurring any costs nor are you affecting your DCA. 

Honest Abe

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Re: Fully Funded RothIRA . . . for 2013!
« Reply #13 on: December 11, 2012, 10:58:57 AM »
@Chuckles, I respectfully disagree with your take on dollar cost averaging, because your assumption is that the market will invariably go up this year from Jan 1st until the end. Whereas it may actually lose value. Perhaps the market in January is overbought and will experience a 5% decline. Even if the market recovers 8% between January 1st and Dec 31, the $5500 deposit will only make 3%, whereas a $1000/month deposit over 5 months will greatly benefit, experiencing most of the 8% gain along the way as it is averaged into. Perhaps the market will be down this year from its Jan 1 high and DCA will protect your principal from the loss it would incur

Of course there's a possibility that you are right as well, and that the Jan 1st price is the bottom price for the year. The fact is  no one knows and that's why a DCA regimen works out to be good investment dicipline in the long run.
« Last Edit: December 11, 2012, 11:02:06 AM by Honest Abe »

Ben

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Re: Fully Funded RothIRA . . . for 2013!
« Reply #14 on: December 11, 2012, 11:24:47 AM »
You have to consider that the market has a positive expected return. Money that's hanging around waiting to be invested under DCA is experiencing opportunity costs, most likely. If smalllife broke his contribution into 12ths and made monthly contributions, the money in December would have given up the most gains he'd be expected to experience over 11 months and would probably have lost value unless he found something else to protect it against inflation.

This. Ironically, DCA would be a better decision than a lump sum today if you COULD predict the market (and knew that the next X months would not have a positive slope).

If you are the kind of person that moons over temporary stock setbacks, tossing the full amount in makes it a little bit easier to beat yourself up over returns. But in general, you're better off jumping in with what you've got (esp. since you will continue to contribute in the future anyways).

Ben

Ben

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Re: Fully Funded RothIRA . . . for 2013!
« Reply #15 on: December 11, 2012, 11:39:49 AM »
@Chuckles, I respectfully disagree with your take on dollar cost averaging, because your assumption is that the market will invariably go up this year from Jan 1st until the end. Whereas it may actually lose value.

It doesn't have to invariably go up. As a matter of fact, it probably has a 30-40% chance of going down from Jan 1 to Jan 1. However, the expected value (E.V.) of investing early is higher than spreading it out. She will get the benefit of DCA by investing another $5k next year, and the year after that, etc.
 
http://en.wikipedia.org/wiki/Expected_value

Besides, she will be DCA investing in the stock market throughout the year as she earns money and then purchases more shares (via 401k). There just isn't value in leaving cash that is earmarked for investing out of the market because the slope is positive, unless you are able to determine that the market will drop (and remember, the general trend is positive, so you'd have to be much better than chance to strategically hold money out and win over the long term).


Ben

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Re: Fully Funded RothIRA . . . for 2013!
« Reply #16 on: December 11, 2012, 11:44:44 AM »
Honest Abe,

I did want to clarify that there is a strong argument for DCA if there is substantial market volatility but minimal overall change in valuation, because you are benefiting from greatly discounted shares on the downswings. I didn't address that in my response and I think DCA is certainly a legitimate investment stance to take (although I generally tend to invest my money as I earn it).

Ben

chucklesmcgee

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Re: Fully Funded RothIRA . . . for 2013!
« Reply #17 on: December 12, 2012, 09:13:55 AM »
Perhaps the market in January is overbought and will experience a 5% decline. Perhaps the market will be down this year from its Jan 1 high and DCA will protect your principal from the loss it would incur.

Of course there's a possibility that you are right as well, and that the Jan 1st price is the bottom price for the year. The fact is  no one knows.

But that's exactly the point here. We can't know the investment strategy that will give the best returns. But we can choose the strategy which will probably result in better returns.

The market goes up in the long run. If it didn't, we wouldn't invest. If you decide to take $450 and invest it in the stock market now, it will probably be worth more in a year than if you parked it in a savings account for 11 months and then invested in November. If you have the money to invest, and we're assuming the markets are unpredictable (with a positive expected return) you should invest it immediately in the markets if you wish to maximize your expected value long-term.

DCA will ensure that your profile itself will most closely track the markets, but again, your overall return will be lower if you already have that cash on hand and wait to invest it. DCA is certainly superior to the "get $20k together and wait when you think the market bottoms out" approach.

If you think about this a little bit it'll probably become clear. What's so significant about DCA by month? There really isn't one, aside from the idea that people's monthly paychecks will have come in giving them more cash to invest. Let's do a thought experiment.  Suppose you DCA by year. You've got $120,000 on hand, to invest over the next 12 years. Do you put it all in the market on day 1, or DCA, buying once a year?