Starting a Roth IRA....please help |
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BrianJone
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Starting a Roth IRA....please help |
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I will be starting a Roth IRA for the first time, can anyone offer suggestions as to where I should be placing that money? I will likely retire in about 35 years. If you need more information please ask. Thank you
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Fri Apr 05, 2013 11:34 am |
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oldguy
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We use Vanguard's SP500 Index Fund (VFIAX). All of the major fund companies have an SP500 index fund, and their fees/costs are competitve. The index is unmanaged, no trading in/out by a fund manager, so costs are low.
The historical longterm return is about 11%/yr.
http://politicalcalculations.blogspot.com/2006/12/sp-500-at-your-fingertips.html
It was 10.78%/yr for the most recent 30 yrs (1983.02 - 2013.02). You can select various 30-year blocks of time and check for the average return, usually any 30-yr block is about 11%/yr.
The 2013 Roth max is $5500. If you invest that each yr for 30 yrs and get an average 11%/yr, you'll have $1,215,000. (It will probably be more becasue the gov adjusts the $5500 regularly.) I did a similar thing, but in my 401k, and retired with about a million - so it worked for me.
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Fri Apr 05, 2013 3:52 pm |
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BrianJone
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quote: Originally posted by oldguy We use Vanguard's SP500 Index Fund (VFIAX). All of the major fund companies have an SP500 index fund, and their fees/costs are competitve. The index is unmanaged, no trading in/out by a fund manager, so costs are low.
The historical longterm return is about 11%/yr.
http://politicalcalculations.blogspot.com/2006/12/sp-500-at-your-fingertips.html
It was 10.78%/yr for the most recent 30 yrs (1983.02 - 2013.02). You can select various 30-year blocks of time and check for the average return, usually any 30-yr block is about 11%/yr.
The 2013 Roth max is $5500. If you invest that each yr for 30 yrs and get an average 11%/yr, you'll have $1,215,000. (It will probably be more becasue the gov adjusts the $5500 regularly.) I did a similar thing, but in my 401k, and retired with about a million - so it worked for me.
Wow is that true, 11% every year? that is amazing! Why doesn't everyone do this? and is it just SP500 or other funds are like that too?
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Sat Apr 06, 2013 11:38 am |
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Publius
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To be clear, BrianJone, that is an average rate of return over a 30 year period. There were a lot of volatile years that had returns very different from that +11%. There were plenty of years where the rate of return was a significant loss for the year. The point is, that if money were left in the market for that entire 30 year period, the over all trend was upwards. The abundance of +10 to +15% years more than make up for the -20% years that happen -- and they do happen over a period of time that long. To have the best success with this long term strategy, you have to be prepared to not only leave your money invested as it loses 20% of its value, but continue to buy through those times.
As an example, one of the worst years of that time frame was 2008. The index lost 37% of its value including dividends. However, the following four years the index returned +26.5, +15%, +2% and +16% from 2009 to 2012 respectively. If one had left their money in after that -37% year in 2008, they would have more than recovered after 4 years, but if an investor panicked after 2008 and pulled their money out of the market, they would have missed out on four very strong years of growth.
No everyone does it because not everyone has the stomach to weather the losses. Any many people think they can beat the market by trading in the short term. However, it has been shown that the vast majority of traders and investment managers fail to beat the indexes over the long term.
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Sat Apr 06, 2013 12:48 pm |
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oldguy
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quote: As an example, one of the worst years of that time frame was 2008. The index lost 37% of its value
Yes - and 1987 was no walk in the park either, lost about half of the money in two days.
quote: Wow is that true, 11% every year? that is amazing! Why doesn't everyone do this? and is it just SP500 or other funds are like that too?
Publius is correct, I should have emphasized AVERAGE return of 11%/year. Mostly it is the SP500, it contains over 80% of the the investment capital in the US, it gives you a diversification across all industry and services. Conversely, if you try to pick market segments, you'll get 'hot' for 4 or 5 yrs and then lose favor. IMO, you'll do best with the SP500. Why dosesn't everyone do it? A mystery of human behavior. When the 401k was started in about 1982 only about 35% of the employees signed up - the comments were "I can't afford it", "why are you screwing with that, it's 30 years away", etc.
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Sat Apr 06, 2013 1:29 pm |
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Brownsfan2k5
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What about target retirment dates through Vanguard? Does anyone suggest those?
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Sat Apr 06, 2013 5:01 pm |
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oldguy
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I like the Targets. But in your case, it amounts to the same investments, the Target2055 is mostly SP500 Index - and as time passes they start introducing bonds into the mix. Personally, I stayed 100% in stocks until after I retired, then I moved some into bonds. Stocks are for wealth-building, bonds/cash is for wealth-preservation.
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Sat Apr 06, 2013 5:25 pm |
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Publius
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I have a 403b through Vanguard and I put all of it in a 2050 target fund. That is actually a little after I plan on being retired, but it keeps the mix more aggressive for longer. Vanguard is great, in my opinion, they have a lot of well performing funds and as a rule, they keep costs at a minimum, which is one of the few things we can control in the short term.
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Sat Apr 06, 2013 9:03 pm |
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BrianJone
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quote: Originally posted by oldguy I like the Targets. But in your case, it amounts to the same investments, the Target2055 is mostly SP500 Index - and as time passes they start introducing bonds into the mix. Personally, I stayed 100% in stocks until after I retired, then I moved some into bonds. Stocks are for wealth-building, bonds/cash is for wealth-preservation.
Did you buy stocks, or stock funds? Can you tell me in a bit more detail about what and where you found your success and wealth?
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Sun Apr 07, 2013 2:24 am |
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oldguy
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quote: Vanguard's SP500 Index Fund (VFIAX).
lol - not enough specificity? Company? Fund? Symbol?
Mainly you fund a SP500 Index Fund incrementally (monthly) for your working life, about 30 yrs or more. The 30 yrs provides adequate time/data points for statistical averaging so that the 11%/yr average can happen.
If you invest $5000/yr it will be $1.1M in 30 yrs. And $10,000/yr = $2.2M, and so on.
If you fund a 401k with the max $17,500/yr you'll have about $3.8M. That only costs about $12,000/yr out-of-pocket due to the tax break. And if your company gives a match that adds to the $3.8M at no cost to you.
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Sun Apr 07, 2013 4:12 am |
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Brownsfan2k5
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What's the diffrence between the investor shares and the admiral shares?
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Sun Apr 07, 2013 8:42 am |
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oldguy
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quote: What's the diffrence between the investor shares and the admiral shares?
Most of the Fund companies reward bigger accounts with lower expense ratios. That encourages investors to build wealth, avoid trading - plus it doesn't cost Vanguard much more to do th eaccounting/reporting om a $300,000 accont than on a $3000 account. Admiral is Vanguard's name for "big account", others have Pllatinum, Jumbo, yada. The minimum investment to start an investor account is usually $1000 or $3000. And when your account gets over $10k or $50k, they put you in the big account category and give you a lower expense ratio.
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Sun Apr 07, 2013 4:04 pm |
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