Could someone on here care to explain a little bit about a Roth IRA or some links to information regarding a Roth IRA and mutual funds? Any information is greatly appreciated. Thank you.

I had a huge essay typed out, but I doubt anyone will read it so here are the cliff notes:

- Currently have a Fidelity 401k that employer matches 6%
- Only see my 401k as a retirement plan and/or possibly for first time buying
- 20 years old and have $2000 disposable income every month
- Currently have an e-trade savings account that I put money in
- Work just started offering a Roth IRA
- Wondering how the Roth IRA works
- Wondering how Mutual funds/Indexes work
- Not interested in trading stocks


Thanks in advance. :-D

 

Recent thread regarding many of same questions.

https://www.s2ki.com/forums/index.php?showtopic=607761

You might try running a site search -- this has been beaten to death in several threads.

 

Vanguard is the leading low cost provider of mutual funds. This section has some good information and tools to get you started:

https://personal.vanguard.com/us/planningeducation

To address your questions:

- Currently have a Fidelity 401k that employer matches 6%
Good, make sure you contribute enough to get the full match, as you don't want to turn down free money.

- 20 years old and have $2000 disposable income every month
At your age having such disposable income is great, and you should maximize your retirement and other savings options, as you have the most important aspect of successful investing at your disposal, time.

- Work just started offering a Roth IRA
do you mean Roth 401k? IRA accounts are not employer sponsored, so you can establish one at any firm you choose.

- Wondering how the Roth IRA works
Roth IRA allows you to invest after-tax money today in the investment of your choice and enjoy tax-free growth. You will never pay income or capital gains taxes on the funds once they are invested. You should contribute the maximum allowed each year (currently $5,000) so long as you fall below the income limit.

- Wondering how Mutual funds/Indexes work
Look at the Vanguard site I linked above. Also look for books by John Bogle, Vanguard's founder.

Mutual funds of all kinds operate by pooling money from many investors to buy securities (stocks, bonds, etc). You are probably most interested in equity, or stock mutual funds, which buy primarily the common stock of publicly traded companies.

Index funds seek to deliver the average return for specific market segments (large or small companies, value or growth, etc) or the market as a whole (either domestic, international or global) by owning a sufficient number of companies that represent the entire market or portion of the market. There are independent companies that come up with indexes, and various fund companies create funds that mimic these indexes. You have probably heard of the S&P 500 index, which is Standard and Poor's approximation of the US Equity market, comprised of 500 companies. You can get an S&P 500 tracking index from Vanguard, Fidelity, Schwab, etc. A broader index is the Wilshire 5000, which tracks 5000 US companies of all sizes (basically the S&P 500 for the largest companies, then 4500 small and mid size companies are added). This may be called a "Total Market" index fund.

Mutual Funds that are not index funds try to beat the market return by picking various stocks, rather than "passively" investing in the stocks of an index. Some are successful and others are not. Picking the ones that do ahead of time is difficult. And all "actively managed" funds charge higher expenses than the index funds (if the stocks that the fund holds deliver a 10% return, and the fund's expense ratio is 1% then you only earn an effective 9%).

- Not interested in trading stocks
I know there are some/many here who disagree, but I think you are on the right path avoiding buying/selling individual stocks, especially at this stage of your life and investing experience. Index funds may not be glamorous, but you capture the market return at the lowest cost.

Cheers,
Phil

 

Absolutely the wrong path but that's another story. The S&P 500 has been dead money for 10 years and so too have the majority of mutual funds. 90% of mutual funds don't even beat inflation let alone the S&P500 and considering a dollar invested in the S&P500 in 1999 is worth about $0.60 today I'd say that's not a great way to make money.

 

^ I disagree that it's "Absolutely the wrong path." I think the "absolute wrong path" would be to try investing in individual stocks without knowing what you're doing. Sure, an S&P500 index fund purchased in 1999 might be worth 60 cents on the dollar today, but that's a heck a lot better than the individual stock that I bought in 1999 that's worth less than a penny on the dollar. There are a lot of stocks that are just as bad as the one that I invested in (not to mention you conveniently chose a market peak to base your timeline on, start your timeline in 2002 and the number would be considerably different).

In order for someone to have made money by investing in individual stocks over the period from 1999 to today, they would've actually needed to know what they were doing and/or get really lucky. Picking a winner in this market requires real skill and/or good fortune. For the rest of us, Index Funds are a safer bet, and as the market turns around, those Funds will become profitable again.

 

Oh I see. You've got a way to make money without knowing or doing anything.

Do you know how many mutual funds there are? According to Morningstar there are over 18,000. Do you know how many stock there are in the S&P500? I'll guess 500.

90% of those 18,000 funds don't outperform the 500 stocks on the S&P500 which over the past ten years hasn't outperformed inflation with a total return of only 4%.

Despite all that you think that selecting one or more of the 1800 mutual funds which actually don't lose money is easier than choosing one or more of the 200 stocks in the S&P500 which do?

F*** it! I'm sick of arguing the same point over and over and getting the same retarded answers in return. How about I just prove it?

Any monkey can beat the S&P500 index by picking any 5 S&P500 listed stocks at random more often than not. Not only do you not require any skill whatsoever you don't even need to open your eyes. To prove that point I created my own stock picking monkey. It's very simple. It invests $2000 in 5 different S&P500 stocks chosen at random at the split adjusted price on Jul 29 1998 and sees how that portfolio would do in comparison to investing $10000 in the SPY S&P500 index ETF over the same period. I even added in the compounded dividend payments from the SPY and left out any potential dividends from the 5 random tickers, just to give the SPY a fighting chance.

Spank my Monkey

Now after the Monkey kicks your ass 70% of the time any sort of sensible research and knowledge you can add to what the monkey doesn't know only increases your chances of not picking losers or at least not riding them down to zero. I'd make a very justifiable argument that not only do you not have to be lucky but that you'd have to go out of your way to make less that the index as a whole by screwing it up. 90% of fund managers prove it.

 

Wow cthree, I refreshed your monkey dozens of times and couldn't find any time when the negatives overpowered the positives. Why then does the S&P500 not perform very well? My guess is that the money is placed mainly in the largest companies, which happen to be most stagnant, and very little is placed in the smaller companies which have more room to grow.

 

There are a number of reasons, that is a big one.

There is no intelligence behind the selection process. It's designed to demonstrate that the odds of picking a winning stock are in your favor (roughly 3.5:5) but the very nature of the index itself works against you reducing those odds dramatically.

The same is true with mutual funds by their very nature. Mutual funds have enormous sums of capital to invest, billions of dollars. There are only so many stocks you can buy with that much money so the money gets invested in the largest companies which are the least volatile and have the least opportunity for growth. It's a problem of too much of a good thing. Not only that but the more money you have the harder it is to move that money. It takes time to buy large positions and the very act of buying and selling billions of dollars of stock has a dramatic effect on the price.

The portfolio becomes static and trapped by its own mass. Again, you give up all of the advantage of being able to move your money with the market to take advantage of the conditions. All of those funds (most of them) who are heavily invested in banks couldn't get out of them and had to ride them down. The first problem is how do you get a billion dollars out of the banks without slamming the price of the stock and the second is what do you do with that money once you finally do get out. It's like trying to steer an ocean liner down a river.

As an individual you can make two $7-$10 trades to move out of banking and into something else when you think the conditions don't suit you. With mutual funds all you can do is watch it founder.

The best mutual funds are those with lower capital, the small ones, but they are highly restricted and usually closed before there is enough of a track record to decide if they are any good. The large, no load funds which you can actually invest in are the most mediocre performers over the long term.

The choice to be ignorant and "safe" is an expensive one.

 

Well, on the point of actively managed funds we have common ground. It seems the primary focus of many fund managers is to just maximize capital under management and charge the 1%+ operating expense.

 

nice model cthree, i like it. i spanked the monkey for about 5 minutes non stop and only had 4 random combinations that underperformed the index. also, the amount of under-performance on the "losing" combinations was immaterial to the huge gains from some of the other winners.