Should I put my Eggs in a Risky Basket?

July 17, 2007 8:34 PM

IRAfilter: Am about to get a traditional IRA to roll some retirement funds into from an expired employer plan. Got stuck when I was asked which mutual funds to select.

I've probably got around $4K coming from an old emloyer in another state. I must roll it into a traditional IRA or take heavy tax penalties. I've decided on Vanguard, but know nothing about which mutual funds I should select. I guess I'm young enough to afford to be a little risky, but I'm taking any and all advice. Mid-caps? International Value Index? I'm so overwhelmed with choices, and I don't have a lot of time to whittle through them all.

posted by ikahime to work & money (10 comments total)

Standard disclaimers apply, but if you have a choice of any Vanguard fund, the S&P Index Fund (VFINX) would be a good choice. Should the trends of the past 40 years continue, you will get a decent return and good diversification. It also has an incredibly low expense ratio, so more of your money goes to the investment instead of paying a fund manager.

Another trend to consider is that the US dollar has lost significant value against other currencies during the past five years. Better interest rates and growth prospects overseas combined with expected weak outlook for the greenback mean that having some international exposure is probably a good idea.
posted by tomwheeler at 8:52 PM on July 17, 2007

I put my money in a scottrade IRA which gives you the advantages of vanguard (same prices, same selection), but you also get other mutual funds. The one I have 2/3s of my retirement in (well, about 2k...) is UMEMX, which is an emerging markets fund that has performed amazingly for me, again, remember that if you take advice from strangers on the internets about investing, you will get burned.

I think that low-fee brokerage IRAs are the way to go over mutual fund companies.

As far as risk is concerned, my current IRA is off the charts in terms of risk, but I have a 401(k) and I'm 22... so I can afford it.

If you want something less risky, go for a combination of international/emerging markets and a S&P 500 index fund.

Be aware that vanguard, while having great funds, has a fairly high minimum on most of them, charging extra fees for holdings in any given fund under 10k, so it might be worth finding another fund that has similar characteristics. Especially if you invest in an index.
posted by cschneid at 9:07 PM on July 17, 2007

Have them roll it into your IRA using the Vanguard Prime Money Market fund which is currently yielding 5.13%. This much like a bank savings account but with a higher interest rate. Your money will be very safe there while you take all the time you need to decide what you want to do next. There's no need to make a decision under time pressure.

Later, I would recommend putting it into one of the Vanguard Target Retirement funds. These provide wide diversification across the U.S., international and bond markets without you needing pick and choose yourself.
posted by JackFlash at 9:07 PM on July 17, 2007

Be aware that vanguard, while having great funds, has a fairly high minimum on most of them, charging extra fees for holdings in any given fund under 10k, so it might be worth finding another fund that has similar characteristics. Especially if you invest in an index.

Actually, Vanguard just changed their fee structure to eliminate all fees if you chose to get your quarterly statements electronically instead of by mail. You still get a paper copy statement at the end of the year. Most fund minimums are $3000, except for the STAR fund which is $1000.
posted by JackFlash at 9:12 PM on July 17, 2007

The VFINX, which tracks the S+P 500, has, to my knowledge, the lowest fee (0.07% per annum or thereabouts) of any mutual fund. That's quite attractive. If you can't really think of a compelling alternative, it is a great default choice if you want to invest in the broad stock market.

There's also something to be said for owning the entire US stock market, which can be done with something like VTSMX. If you own enough of a fund like this, *every time* you hear good news about an American stock, you get to think to yourself, "Yeah, I own some of that." Changes the way you think about investing.
posted by ikkyu2 at 1:20 AM on July 18, 2007

I don't know about Vanguard specifically, but a low-load S&P 500 index is a good bet, especially for long-term holding. No fund has beat the market over decades.

The problem with IRA mutual funds isn't so much "being risky", it's that you still have to manage that money. If you end up in a poor-performing fund you need to get your money out and into something else, and you need to watch to see if it's poor-performing, which IMO beats the point of IRA mutual funds in the first place.
posted by mendel at 6:08 AM on July 18, 2007

No fund has beat the market over decades.

Haven't small cap index funds beaten the S&P 500? Vanguard has small-cap index funds. See: NAESX, VISVX, VISGX. Higher risk, higher reward, of course.

OP: How old are you?
posted by Dec One at 6:16 AM on July 18, 2007

Dec One: Not over decades, no. (Within a decade, yes.) IIRC there's no fund that's beat the S&P 500 over something like 16 or 17 years. A lot of that has to do with the careers of fund managers, of course, but independence from fund managers is one of the advantages of index funds.

It's great if you can get into the right fund at the right time and out before its luck runs out, but that's not a great deal easier than getting into the right companies at the right time and getting out before their luck runs out.

A Random Walk Down Wall Street addresses this nicely -- that's where my decades statistic comes from, but since I borrowed it from the library I can't give a specific reference.
posted by mendel at 8:08 AM on July 18, 2007

Vanguard publishes a complete list of funds by asset category; that's where you should do your research. If you are opening a new account with Vanguard, I believe you can also call them and ask for advice and they will help you for free.

VFINX, the S&P 500 fund, is a fine fund if you want basic exposure to the US stock market. If you want a more diverse allocation, consider one of the "Balanced" or "Life-Cycle" funds that is a mix of basic stock and bond funds. VBINX, for instance, is the classic 60% stocks 40% bonds. Or VFORX, a fund for people expecting to retire in 2040; it will start aggressively and over the years rebalance to more conservative investments.

If all this seems overwhelming, JackFlash has great advice. Roll it in to a money market now, so you at least get started, then take a few months to slowly read up on investment until you know enough to make a choice appropriate for you.
posted by Nelson at 8:33 AM on July 18, 2007

Mendel, if you pick your 16 or 17 year period right, there's an argument to be made that Fidelity Magellan beat the S+P 500 during the period. Frankly, though, I think that not only were the managers of Magellan good, but they were lucky too.
posted by ikkyu2 at 2:39 PM on July 19, 2007