Roth IRA Investing for those with smaller amounts

This year I'll have 2 years worth of contributions in my Roth IRA account, which is a rather small number to be investing in. After poking around and doing a bit of reading on my own, it seems with that little money and with the current uncertainty in the market right now that I've narrowed my options down to two seperate areas: Cash Investments (CDs in my case) and Index Funds.

What I'm not sure is how to allocate these funds. I'd like to be fairly aggressive (22 yrs old) but I don't want to just flush my money away. I'm not sure if I have enough money to bother diversifying between Large Mid and Small Cap funds, (perhaps some foreign or Vangauards Total Stock - Anyone?), or whether i need to pick one area, invest, and add in more areas as I increase contributions. CDs are obviously less risky and I'm considering them because I'm not sure it is appropriate to invest now with as little money as I have.

I'm sure there are other people here in the same position as me, and any advice would be great!

silam said: This year I'll have 2 years worth of contributions in my Roth IRA account, which is a rather small number to be investing in. After poking around and doing a bit of reading on my own, it seems with that little money and with the current uncertainty in the market right now that I've narrowed my options down to two seperate areas: Cash Investments (CDs in my case) and Index Funds.

What I'm not sure is how to allocate these funds. I'd like to be fairly aggressive (22 yrs old) but I don't want to just flush my money away. I'm not sure if I have enough money to bother diversifying between Large Mid and Small Cap funds, (perhaps some foreign or Vangauards Total Stock - Anyone?), or whether i need to pick one area, invest, and add in more areas as I increase contributions. CDs are obviously less risky and I'm considering them because I'm not sure it is appropriate to invest now with as little money as I have.

I'm sure there are other people here in the same position as me, and any advice would be great!

You're 22 years old. Go to town with the money. Take chances. You have 40 years to make up for it if you made a mistake.

I started my first investment account when I was around 22. It was around the time after the entire dot com market blew up. I took $2000 and dumped it into stocks that I thought was trading very low that had little to no chance of shuttering. Over the course of the 4 1/2 years, I've turned that amount into $20K. But even more important that that, the education I've gained in trading for myself is paying dividends.

I don't believe anyone in their early 20s should be investing in CDs. (Caveat: Unless they are going to use the money to buy a house or major investment in the short term) The market has been gaining 10+% year after year. The current market condition is very similar to the time when I first started investing. There are a lot of buying opportunities at this point. Look around.

The small amount that you may lose now will be far less than the amount of knowledge that you gain for when you're managing a big account.

That's my two cents. Obviously other people have their opinions.

I am almost twice as old as you ... just having the time of my life ever since I mastered options trading.

I just pentupled (Yes 5X) my Roth IRA account balance of $5000 in 3 months ... now at 26K and growing by stock options trading ... this the exchange traded options - Calls and Puts. By playing spreads i.e. buy one and sell another, you can drastically reduce risks involved. It comes with experience and practice like everything else. I learned the trade over 3 years by playing small amounts first, falling flat on my face, then getting up and trying again. In addition to the IRA account, I will be closing the first 6 figure gain month tomorrow if all goes well in my overall portfolio.

I wish I'd gotten started when I was younger though I am not sure if I'dve been equally successful considering the priorities at that time and the patience and perseverance that develops only with age. You could start with "small" amounts and build up as well but there is a greater than 50% probability that you will loose money in the first year or two.

ThinkorSwim is broker that offers IRA options trading. They also have a "paper money" tool that allows you to trade with .... you guessed it .... virtual money. You can use that to see how well you fare in your trades before you put in real money.

Schaffer's research, Yahoo Finance, TheStreet.com are good places to learn about options.

www.philstockworld.com, TheStreet.com, Barron's websites have sample options plays that you can try out.

Good luck!

dairymtu said: i put mine in vanguard target retirement. where does this fall? aggressive i presume since stocks get less as retirement draws closer.Same here, every year I buy $4000 of VTTHX in my Roth IRA, and I forget about it. It's aggressive right now (~90% equities), it will automatically become more conservative as time goes on.

http://finance.yahoo.com/q/hl?s=VTTHX

Let the pros do it for you by funds. otherwise, pick up large cap stocks. you don't want to lose your money in the retirement account. if you want to play aggressively, play it with a regular brokerage account.

Kikkoman said: account balance of $5000 in 3 months ... now at 26K and growing
...... I will be closing the first 6 figure gain month tomorrow if all goes well in my overall portfolio.
Shenanigans.
[Sesame Street voice]
One of these things is not like the other. One of these things doesn't belong.
[\Sesame Street voice]

tazzy531 said: You're 22 years old. Go to town with the money. Take chances. You have 40 years to make up for it if you made a mistake.

I agree. Hell, you might as well cash out your contributions, drive to Vegas, and bet it all on black.

Or you could do the intelligent thing, and invest the money in a target retirement fund or index fund until you've amassed enough to allocate among separate funds.

I used to have an IRA with Vanguard and the minimum for investing in their funds within an IRA account was only $1k per fund, rather than the standard $3k for a non-IRA. So diversification with $8k isn't impossible. Alternatively, you could choose to have a brokerage account within your IRA and buy ETFs rather than mutual funds - then there is no minimum.

A target retirement fund isn't a bad place to start while you're still learning about investing and determining an allocation that makes sense for you. OP, I'd suggest that right now either a target retirement fund or a total market index fund should form the core of your investment. You could use contributions in future years to add in small cap and international holdings, if you choose.

kamalktk said: Kikkoman said: account balance of $5000 in 3 months ... now at 26K and growing
...... I will be closing the first 6 figure gain month tomorrow if all goes well in my overall portfolio.
Shenanigans.
[Sesame Street voice]
One of these things is not like the other. One of these things doesn't belong.
[Sesame Street voice]

Perhaps you don't understand some of these words ... 26K is in the ROTH account ... reference to the larger gain is in the OVERALL portfolio.

ChemEngGuy said: Kikkoman said: just having the time of my life ever since I mastered options trading.

::surprised owl pic::

O RELY?

Details please.

I agree with the sarcasm. "Mastered" is perhaps an exaggeration but used only to motivate OP to consider this option.

Whats a good place to open a Roth IRA account if i am interested in Vanguard and Fidelity Mutual Funds and ETF's.
I am looking for a place which has low commission rates and account maintainence fees. I am planning to start my Roth IRA investing with $ 4+4k (for 2007and 2008).

I have narrowed down my choices to Vanguard Brokerage and Fidelity Brokerage but cannot decide between the two. Is there a difference in Commission rates and Expense ratio if i buy Vanguard funds while trading from Roth account in Fidelity brokerage and vice versa?

Appreciate your feedback.

Question for all who actively trade in their IRA accounts at a brokerage firm:

Must any trading fees come out of the balance of your IRA, or can you pay those separately with a cash value account? What kikkoman and tazzy531 mention is true, that short term trading done in a tax deferred account is a usable idea, but I'm wondering if trading fees eat into it for smaller balances and trades?

ElJayL said: I'll just echo the others. I have mine at Vanguard and own Target Retirement 2045. ER 0.19% and no fees w/online statements. Can't beat it.

How would you rate costs at Vanguard brokerage as opposed to Fidelity brokerage.
Also do Vanguard Funds cost more to hold in a non-Vanguard brokerage like Fidelity ? I have heard that sometimes costs for a particular fund are more when you hold them in a brokerage firm other than the parent company ie buying Vanguard funds from Fidelity brokerage account .

Thanks a bunch.

zaky101 said: I am planning to start my Roth IRA investing with $ 4+4k (for 2007and 2008).

You know you can contribute $5k for 2008, right?

Another option that hasn't been mentioned....

I moved my IRA's to a self-directed company that allows investments in real estate. I'm sure there are many here who will "bash" RE vs. stocks, bonds and funds, but I know (for me) I was tired of the roller coaster ride with the stock market. I have seen the real estate market show fluctuations too, but not nearly as many and as steep and if you're long term hold...IMO, it's much better than the markets.

With small IRA's, you'd have to pool with others (friends, family etc) to buy or jump into a TIC deal (most would require larger amounts). Just an idea...it's worked for me.

SuperMxyz said: +1 vote for Vanguard target retirement funds. Sign up for electronic statements and they waive the "low balance" $10 fee. The expense ratio is only 0.21% for an entire balanced, managed, diversified portfolio.

With target retirement funds, are investors paying the expense 2 times ? (one for the fund itself, and one for all the index funds that the target retirement fund bought). I know 0.21% is low, but it can add up. Perhaps buying the same percents / ratio index funds like the retirement fund would save you some money in the long run.