Please Just Take My Money And Don't Make Me Decide

May 14, 2011 5:37 AM

I put money in an ETrade Roth IRA account. Now it's there. What is the next logical step?

For the past two years, I have put the maximum allowable contribution in an ETrade Roth IRA account. It is considering this cash and isn't making a lot of money. I thought it would have been a lot easier to figure out what to do.

Do I call a representative? Do they work on commission per trade? Will they try to 'up-sell' me to a service or feature I don't need?

Is this something I can do myself? I am 25 and don't need to retire for a long time. Additionally, I am not likely to need the money any time soon. Is there anything to avoid when investing with ETrade?

I tried to figure out the website and it wasn't easy. Any help would be appreciated. Thanks!

Additionally, if Etrade isn't the best place to have a Roth IRA right now, any suggestions are welcome.

posted by amicamentis to work & money (11 answers total)

What is the money invested in now? Is it just sitting in a money market account, or do you have invested in mutual funds, index funds, stocks? If none of this means anything to you the first thing you need to do is get educated on investing. I recommend The 4 Pillars of Investing by William Bernstein.

And kudos on starting early!
posted by COD at 5:55 AM on May 14, 2011

It is considering this cash and isn't making a lot of money.

What kind of returns are you expecting? You put ten thousand dollars in to the account, which isn't terribly much for not a terribly long amount of time. It probably looks like peanuts right now, but you shouldn't be touching this money for 45 years - count on compound interest here.

Do I call a representative? Do they work on commission per trade?

Not specifically sure how ETrade works as far as customer relations, but these investment funds are paid for by fees built in to the fund. They take a percentage of your gains, so it might be a good idea to find a fund with lower fees.

Is this something I can do myself?

Absolutely! Read up a little bit, it's not too intimidating. It sounds like you don't want anything too difficult, so you might want to consider moving the money to a retirement target account. Basically, the funds are structured based on when you expect to retire and the balance of stocks/bonds/etc. is shifted as you near that date. Put your money in and forget about it.

Every fund comes with a prospectus that tells you all about fees and what the management strategy is.
posted by backseatpilot at 5:56 AM on May 14, 2011

As backseatpilot mentioned, Etrade has a set of Target Date Funds you might want to look at.

I have some money in Vanguard's Target Retirement 2045 Fund, which is a "fund of funds that can be appropriate if you’re planning to retire between 2043 and 2047."

Investment gurus turn their noses up at date-targeted funds but they are certainly an OK place to start with while you learn more.

One of the benefits of Etrade and other similar brokerages is that you can invest in funds from all over the place; the downside is that you'll pay their fees as well as the fees of the fund's manager. If you're just going to let the money sit in one fund and collect interest, you might as well just move the account and get an interest boost.
posted by bcwinters at 6:11 AM on May 14, 2011

Is this something I can do myself? I am 25 and don't need to retire for a long time. Additionally, I am not likely to need the money any time soon.

Which makes sense considering that it's an IRA, so you won't be able to withdraw the earnings (without penalty) until you reach retirement age. For a very long term investment like that, the usual advice is to put most of it in stocks. The Target Retirement 2045 Fund above is about 90% stocks.

Most of the time if you talk to someone trying to sell you managed funds is trying to beat the market, which in my opinion is an exercise in futility. The smart strategy is to try to match the returns of the market as much as possible (because the overall market tends to have good returns) while keeping your costs down. That's why Vanguard and similar low-cost index funds are good. You don't want to get into buying individual stocks because that isn't as diversified and you will pay a trading commission fee every time you buy and sell.
posted by burnmp3s at 6:24 AM on May 14, 2011

Seconding COD: you don't just put money in an IRA--you put it in funds in an IRA. These are typically mutual funs based on equities (stocks) and bonds. The most like scenario is that your investment has been allocated in a Money Market fund which is pretty much the same as having it in a "high" interest bank account.

Also seconding bcwinters also: The fees of brokerages such as Etrade can seriously eat into your investment. I also use Vanguard, although I use their index linked funds mainly--the target fund is a great idea though. Vanguard are generally considered to have the lowest fees out there.

I know you wanted to keep it simple--and you can--but it wouldn't hurt to have a bit more knowledge. It really isn't that complicated. I recommended a couple of books in a previous post. These would really give you a solid foundation.

And dip into the Bogleheads forum and their wiki for great objective advice.
posted by NailsTheCat at 6:29 AM on May 14, 2011

Congratulations on funding your Roth IRA. You're smart to do so at such a young age. If you can keep that level of contribution up you will be very grateful when you are older.

You should totally call eTrade and ask your questions. They should not upsell you or be worried about commissions; they should just give you some simple explanations of how your account works and what your options are. eTrade is geared towards the individual investor who manages their own account, so you won't get a lot of hand-holding, but they should explain the basics to you.

If you're unhappy with eTrade's support you may want to consider switching to another broker. I'm a big fan of Vanguard: it's low cost, good funds, and an investor-friendly philosophy. There's nothing wrong with eTrade, but should you want an alternative they're a good one.

As for what you should actually do, you need to invest your dollars in specific stocks or funds. It sounds like right now it's sitting in a cash account which, as you noted, doesn't earn much. Instead you could use the money to buy individual stocks, or a mutual fund, or an ETF, or gold. You have to choose your investment, and that takes some research. Some of the books linked above can get you started; the eTrade folks should be able to point you to their own research resources, too. Those target date funds are a good option to explore, they're designed for exactly your purpose. Individual stocks and gold are probably bad ideas.
posted by Nelson at 7:35 AM on May 14, 2011

Well congratulations on being responsible enough to invest your money. Here is an excellent book for someone starting out trying to figure out how to invest for the first time. The first thing to understand is that there are two types of mutual funds: actively managed fund and indexed funds. In actively managed funds there is an invest manager who is trying to "beat" the market and give you an excess return. So let's say the stock market returned 7% in a year. The investment manager's job is to come up with a strategy that will return 8 or 9% in a year. Then there are index funds. Index funds just return what the market returns. So if the stock market returns 7% you get 7%. the problem, in my opinion, with actively managed funds is that (a) they are expensive (you're paying the invest manager to try and beat the market) so the fee for an active manager might be as high as 1% of assets where an index fund might be .015 percent (b) the other problem is that the average investor doesn't know enough or care enough to monitor and active manager and understand what he is doing with your money. So you would need to know about small cap v large cap, growth v value etc. An index fund takes less monitoring (c) actively managed funds on average don't beat the market.

The next question is you asset allocation. How much in stocks, how much in bonds, how much in international, how much in emerging markets (china, India, brazil), real estae funds?, commodities? There's a lot to consider. One option is to let the investment manager figure out what an appropriate allocation is for someone your age. These are called target date retirement funds (that's the 2045 fund recommended above) basically the investment manger just picks an allocation that's appropriate (so for someone as young as you that would mean a higher allocation to stocks) another option is to pay a fee-based financial planner (you don't want someone on commission because they'll try and sell you products) that costs about $900 but is something to think about when you get older. The other option is to do it yourself. A good place to learn about investing is the NPR podcasts market place and market place money.
posted by bananafish at 7:53 AM on May 14, 2011

The question you are asking -- At age 25 how should I invest for retirment? -- will have as many answers as people you ask.

Regarding the title of your post -- Please Just Take My Money And Don't Make Me Decide -- you're out of luck. You're going to have to make a decision of some sort -- even if it's just who you are going to listen to for advice.

Regarding E-trade, it is designed for do it yourself investing. If you get a human involved it will cost more money although not necessiarily more than anywhere else. There is nothing wrong with E-trade. I've had accounts with them for years. The investment decisions (there's that word again) you make should be irrespective of who your broker is.
posted by dzot at 10:21 AM on May 14, 2011

The ultimate no-brainer approach is to just put it in an index fund and hold forever.

Of course, I am entirely unqualified to give financial advice: I opened a Roth IRA in late 2007, put most of my savings in an index fund, and watched it promptly lose 50% of its value in the financial crisis. Good thing it wasn't very much money to begin with! sob
posted by en forme de poire at 10:12 PM on May 14, 2011

Did you leave your money in that index fund? If so, you're probably back to close to where you started. One of the advantages of IRAs for young people is you are literally investing on a 30-40 year time horizon.
posted by Nelson at 8:56 AM on May 15, 2011 [2 favorites]

Nelson: yup, I am indeed close to where I started by now (though I've also been contributing in drips and drabs since then). I just thought a full disclosure was in order.
posted by en forme de poire at 4:46 PM on May 26, 2011