![[personal profile]](https://www.dreamwidth.org/img/silk/identity/user.png){kind=small}
sabrinamari"OK," you may say, "I am a fabulous (writer, healer, priest, teacher, advocate, care giver...) but I don't know much about personal finance. How can I open an IRA by myself online?"
My answer, after much experience: "It is harder to cook a three-course Thanksgiving dinner and have every dish come out hot and yummy at the same time than it is to open a good IRA by yourself."
I *still* cannot get every dish out on time in good condition, yet I managed to open my own IRA. If I can do it, you can too.
NOTE: I am not a financial planner nor do I have degree in finance. But if good money management required a degree, we'd all be alot more broke than we are now. The following information is based on two years of independent study on finance and personal investing. Please take what I tell you with an appropriate grain of salt and consult multiple sources before you make any financial decisions. If you have the opportunity to talk to a reasonably priced fee-only financial planner, by all means, do so.
Basic Principles:
1. DO NOT PAY excessive fees. Ever. Ever!
What is an excessive fee?
If you are starting your first IRA, avoid any mutual fund family that wants to charge you a percentage of your investment, or a "load". Avoid all "loaded" funds. All the research available suggests that no-load funds do as well *or better* over the long term than actively managed funds that charge a load.
Instead, go for fund families that offer no-load funds. These will usually be index funds, or funds that buy and hold equities according to a formula that reflects one of the major stock indexes.
Good fund families to choose from:
* Vanguard (my favorite---lots of good choices)
*T Rowe Price (has some GREAT target-date funds, explained below)
* Fidelity
2. If you do not yet know much about asset allocation, start with one of a few basic, no-lose, always-a-decent-choice fund types:
* A target-date fund:
Target date funds are great for people who want to make one good choice and then forget about everything EXCEPT saving money to invest. With a target-date fund, you simply choose a fund named for a year close to the year you want to retire. I expect to work for about 20-25 more years and retire around 65-70, so I'd probably pick a 2030 fund.
Target date funds start out very aggressive: early on, they invest most of your money in stocks and a little in bonds. This is great for younger people who can tolerate more risk and benefit from stock's greater returns. As you get older, these funds gradually get less aggressive and more and more conservative, moving your money into bonds instead.
With target funds, you do no work. You buy them, and just focus on putting in as much money every month as you can. The fund managers do all the rest of the work. They rebalance your portfolio regularly and manage your asset allocation based on your age. You can just invest your money and walk away.
I highly recommend target-date funds for anyone who doesn't want to learn much more about investing but wants to make smart decisions pointing them in the right direction now.
My favorite independent investment advisory website, Morningstar, maintains a list of their own favorite funds in every fund category. Premium members like me have access to this list, which is maintained by the research efforts of over 100 Morningstar analysts. For this post and future IRA and investment posts, I will use my membership to report on Morningstar's premium lists.
Right now, Morningstar's favorite target date funds are:
T. Rowe Price's 2015, 2020, 2025, 2030, 2035, 2040, 2045 and 2050 funds
Vanguard's 2015, 2020, 2025, 2030, 2035, 2040, 2045 and 2050
If you see yourself as someone who will want to learn a little bit more about investing, you might want to invest in a fund that's one step more complicated than a target date fund: a total market index fund. These funds allow you to buy shares of the whole stock market in one single swoop. In fact, you can create a totally balanced portfolio by creating your own personal mix of only three funds:
1. A total stock market fund (like Vanguard's 500 Index Fund)
2. A total international stock market fund (like Vanguard's Total International Stock Market Fund), and
3. A total bond market fund (like Vanguard's Total Bond Market Fund)
To create your own asset allocation, you just tinker with the percentage of each fund, starting by buying mostly #1 (total stock market) and #2 (total international stock market), but gradually, as you get older, by buying more and more of #3 (total bond market). If you are an aggressive investor who can stand to watch your portfolio drop and rise a great deal with ease, you buy less, in general, of #3 (total bond). BUT If big drops make you queasy, you buy more, in general, of #3 (total bond), and less of the other two.
However... if you are a young investor (in your 30s and 40s), and if you are buying *right now*, you can't go wrong by buying #1, a total stock market fund. Right now, the American stock market is on sale. And everyone knows you *always* try to buy on sale.
Good options in this category:
* Fidelity's Spartan Total Market Index fund
* Vanguard's Total Stock Market index fund
And finally, if you think you may want to build your own portfolio one day, and the thought of rebalancing your investments once or twice a year is fun, consider starting out with an S&P 500 fund. This is a fund that buys you shares in the 500 biggest US companies, many of which also have international operations. This kind of fund is cheap, dependable, and can be customized as part of either a simple or more elaborate portfolio...and guess what? Right now, these super-large US/global companies are the most stable and dependable companies on Wall's Street's sale shelf. They are a good bet no matter what.
Some great choices:
* Fidelity's Spartan 500 Index Fund
* Vanguard's 500 Index Fund
A QUICK RECAP:
1. Pick a no-load, investor friendly mutual fund family: Vanguard, T. Rowe Price or Fidelity are all great choices.
2. You can't go wrong by buying your first fund in one of the following categories, explained above:
* A target date fund (see above for Morningstar's specific fund recommendations)
* A total market fund (ditto), or
* An S & P 500 Index fund (ditto)
Right now, it easy to make good investment choices IF you follow the above basic principles. It's not hard to know what makes sense to buy if you are entering the market right now.
If your partner or spouse already has a portfolio, then it becomes a little more complicated. In that case, you want to buy a fund that complements what the two of you already own.
Still, it's hard to go wrong by buying a fund in one of the three categories above, especially right now. The biggest mistake you can make in this market is not to invest at all---or, heaven forbid, to withdraw your retirement money from the market entirely.
Tomorrow: Step 2 - using fund minimums to help decide which fund/fund family is for you.
My answer, after much experience: "It is harder to cook a three-course Thanksgiving dinner and have every dish come out hot and yummy at the same time than it is to open a good IRA by yourself."
I *still* cannot get every dish out on time in good condition, yet I managed to open my own IRA. If I can do it, you can too.
NOTE: I am not a financial planner nor do I have degree in finance. But if good money management required a degree, we'd all be alot more broke than we are now. The following information is based on two years of independent study on finance and personal investing. Please take what I tell you with an appropriate grain of salt and consult multiple sources before you make any financial decisions. If you have the opportunity to talk to a reasonably priced fee-only financial planner, by all means, do so.
Basic Principles:
1. DO NOT PAY excessive fees. Ever. Ever!
What is an excessive fee?
If you are starting your first IRA, avoid any mutual fund family that wants to charge you a percentage of your investment, or a "load". Avoid all "loaded" funds. All the research available suggests that no-load funds do as well *or better* over the long term than actively managed funds that charge a load.
Instead, go for fund families that offer no-load funds. These will usually be index funds, or funds that buy and hold equities according to a formula that reflects one of the major stock indexes.
Good fund families to choose from:
* Vanguard (my favorite---lots of good choices)
*T Rowe Price (has some GREAT target-date funds, explained below)
* Fidelity
2. If you do not yet know much about asset allocation, start with one of a few basic, no-lose, always-a-decent-choice fund types:
* A target-date fund:
Target date funds are great for people who want to make one good choice and then forget about everything EXCEPT saving money to invest. With a target-date fund, you simply choose a fund named for a year close to the year you want to retire. I expect to work for about 20-25 more years and retire around 65-70, so I'd probably pick a 2030 fund.
Target date funds start out very aggressive: early on, they invest most of your money in stocks and a little in bonds. This is great for younger people who can tolerate more risk and benefit from stock's greater returns. As you get older, these funds gradually get less aggressive and more and more conservative, moving your money into bonds instead.
With target funds, you do no work. You buy them, and just focus on putting in as much money every month as you can. The fund managers do all the rest of the work. They rebalance your portfolio regularly and manage your asset allocation based on your age. You can just invest your money and walk away.
I highly recommend target-date funds for anyone who doesn't want to learn much more about investing but wants to make smart decisions pointing them in the right direction now.
My favorite independent investment advisory website, Morningstar, maintains a list of their own favorite funds in every fund category. Premium members like me have access to this list, which is maintained by the research efforts of over 100 Morningstar analysts. For this post and future IRA and investment posts, I will use my membership to report on Morningstar's premium lists.
Right now, Morningstar's favorite target date funds are:
T. Rowe Price's 2015, 2020, 2025, 2030, 2035, 2040, 2045 and 2050 funds
Vanguard's 2015, 2020, 2025, 2030, 2035, 2040, 2045 and 2050
If you see yourself as someone who will want to learn a little bit more about investing, you might want to invest in a fund that's one step more complicated than a target date fund: a total market index fund. These funds allow you to buy shares of the whole stock market in one single swoop. In fact, you can create a totally balanced portfolio by creating your own personal mix of only three funds:
1. A total stock market fund (like Vanguard's 500 Index Fund)
2. A total international stock market fund (like Vanguard's Total International Stock Market Fund), and
3. A total bond market fund (like Vanguard's Total Bond Market Fund)
To create your own asset allocation, you just tinker with the percentage of each fund, starting by buying mostly #1 (total stock market) and #2 (total international stock market), but gradually, as you get older, by buying more and more of #3 (total bond market). If you are an aggressive investor who can stand to watch your portfolio drop and rise a great deal with ease, you buy less, in general, of #3 (total bond). BUT If big drops make you queasy, you buy more, in general, of #3 (total bond), and less of the other two.
However... if you are a young investor (in your 30s and 40s), and if you are buying *right now*, you can't go wrong by buying #1, a total stock market fund. Right now, the American stock market is on sale. And everyone knows you *always* try to buy on sale.
Good options in this category:
* Fidelity's Spartan Total Market Index fund
* Vanguard's Total Stock Market index fund
And finally, if you think you may want to build your own portfolio one day, and the thought of rebalancing your investments once or twice a year is fun, consider starting out with an S&P 500 fund. This is a fund that buys you shares in the 500 biggest US companies, many of which also have international operations. This kind of fund is cheap, dependable, and can be customized as part of either a simple or more elaborate portfolio...and guess what? Right now, these super-large US/global companies are the most stable and dependable companies on Wall's Street's sale shelf. They are a good bet no matter what.
Some great choices:
* Fidelity's Spartan 500 Index Fund
* Vanguard's 500 Index Fund
A QUICK RECAP:
1. Pick a no-load, investor friendly mutual fund family: Vanguard, T. Rowe Price or Fidelity are all great choices.
2. You can't go wrong by buying your first fund in one of the following categories, explained above:
* A target date fund (see above for Morningstar's specific fund recommendations)
* A total market fund (ditto), or
* An S & P 500 Index fund (ditto)
Right now, it easy to make good investment choices IF you follow the above basic principles. It's not hard to know what makes sense to buy if you are entering the market right now.
If your partner or spouse already has a portfolio, then it becomes a little more complicated. In that case, you want to buy a fund that complements what the two of you already own.
Still, it's hard to go wrong by buying a fund in one of the three categories above, especially right now. The biggest mistake you can make in this market is not to invest at all---or, heaven forbid, to withdraw your retirement money from the market entirely.
Tomorrow: Step 2 - using fund minimums to help decide which fund/fund family is for you.
![[identity profile]](https://www.dreamwidth.org/img/silk/identity/openid.png){kind=small}
no subject
Date: 2008-10-30 04:48 am (UTC)Sending you a hug
Date: 2008-10-30 11:57 am (UTC)But I guess I'm assuming that most of my friends are either just starting to contribute to an IRA or have only a small-to-modest amount of money to invest right now.
For those folks, I think it's reasonable to start by buying solid, conservative no-load index funds, at least at first, and focus mostly on gradually shifting their lifestyle to allow for increased savings and retirement plan funding.
I don't think most people will actually go through the trouble to find and pay a fee for service planner, so they'll end up with someone selling loaded funds they barely know who makes a commission off of their investments. And none of the research I've seen has supported the idea that funds sold this way do better over the long run (5, 10, 15 years) than funds that don't charge a load.
But there *is* a great deal of research showing that the more expensive a fund is (the higher the load and the higher the expense ratio), the lower its overall returns. That's why so many great fund managers---the majority of them---can't beat index funds over the long haul.
Perhaps if you've found a fee-only manager you trust, and you're really sure that you don't ever want to manage your own investments,it would be worthwhile to invest in working with a professional at the beginning.
But most of us aren't in that position. You are very, very fortunate to have met so many great planners, and to know at least a few of them who you would trust with your money.
As people's nest egg grows, it makes sense to me to do the research required to find a good local specialist with whom one is compatible, but at the beginning, I think it's more important to learn everything you can, make a simple and solid choice and focus hard on saving money for retirement over time.
Still, my opinion is only that; one opinion. I think you should consider posting more about this so folks in our community can get a variety of solid opinions to ponder.
And in the end, what matters most is that people start/keep saving, especially in a down economy---*how* they save is a secondary issue, although it's an important one.
Re: Sending you a hug
Date: 2008-10-30 03:43 pm (UTC)I have to agree with 98% of what you said. People just starting out would do well to do a little reading on investing, maybe try to understand the difference between fundamental analysis and technical analysis (I like both for different reasons and situations).
If some of our people (Blue Star family) are in a 401(k) Plan, all the better. The Plan Trustees are strongly urged by the Department of Labor and the PPA 2006 (Pension Protection Act of 2006) to hire an investment professional (IP) to advise their participants regarding specific investments for their risk tolerance, age, retirement date, etc. One of my jobs where I work is to have heart-to-heart (so-to-speak) conversations with business owners and Trustees of Plans to accomplish just that, and a few other details as well. The IP is supposed to provide that service free of charge for participants of Plans for which they are the broker of record. Please, arrange to have a one-on-one with that person when the Trustee has arranged for it. If the Trustee has not, try to ask when the IP will be available and you will probably be surprised how swiftly that happens. If the IP does not make themselves available, you have a crappy IP and you can tell your Trustee to call me - I would love to bring them in as a client because the Plan is probably being administered by a crappy TPA Third Party Administrator) as well. We pay attention to our clients fiduciary requirements and that is a big one, a really big one.
I work for a TPA, just so everybody knows, I do NOT sell investments, nor am I an IP.
Where you and I depart is that for someone just starting out, they can go to a local person, at such companies as Edward Jones and Company, Investment Centers of America and other companies like that. There is no fee to be paid, except through commissions from the purchase of the securities, which is not generally very large. It is sort of pay-as-you-go.
Later, you can pay for the in-depth analysis and personalized financial plan that financial planners are good at.
I took your hug, kept it a while and sent you one of my own. Blessings, and lets keep this conversation going!
Re: Sending you a hug
Date: 2008-10-30 07:00 pm (UTC)