How to Diversify Retirement Account
January 15, 2007 8:54 AM   Subscribe

I'm planning to diversify my retirement account in the next 5-7 years. I need some advice on the best way to do this.

I have a Roth IRA with Vanguard. I currently have one fund in my account. I'm planning to add 3-4 more funds in the next 5-7 years (I already have my asset allocation planned out, so no suggestions are needed). Here's my question: does it make more sense to make monthly deposits to the one fund I'm currently in, and then buy new funds from that fund, or to withhold monthly deposits, and buy new funds with cash? Or does it matter? I feel like it must matter on some level, but the math of it is beyond my skill level.
posted by ThePinkSuperhero to Work & Money (9 answers total) 4 users marked this as a favorite
 
Since you are with Vanguard, you might want to look at their targeted retirement accounts that provide automatic diversification that also changes over time to become more conservative as you get closer to retirement age. That way, you don't have to worry about maintaining the integrity of your asset allocation - they do it for you.

Either way, I'd buy in each month. No sense having money earning 1% in the cash account. The only caveat is the minimums at Vanguard. You may have to save ash for a few months. Actually, that is another argument for the targeted accounts - only one fund minimum to worry about.
posted by COD at 9:30 AM on January 15, 2007


I am not interested in a target date fund. Thanks.
posted by ThePinkSuperhero at 9:33 AM on January 15, 2007 [1 favorite]


Math of these things is beyond me as well - which is why I go with a trusted friend who's also a financial adviser by day. He's right in mid-town (Grand Central-ish), and I'm sure he'd be more than willing to speak with you about your retirement account, if you don't get your answers here.

He's with a smaller investment house but one big enough that its trustworthy. Email in profile if you'd like me to get you in touch with him.
posted by allkindsoftime at 9:59 AM on January 15, 2007


Let me make sure I understand: This is your Roth IRA you're talking about, not a 401-k, so any investing is self-directed and any amounts of money you put in are on your own timing and at your own discretion without any company match involved.

I think a lot depends on what Vanguard will allow you to do. Will Vanguard allow you to start investing in the new funds with relatively small amounts of cash? Or are you going to have to save up before you can become an investor in the fund?

If you can get started in the new funds with a smaller monthly investment, you should just do that right away.

If you must buy in at a higher level, it's probably safer to set aside that money in a high-interest savings account (HSBC pays better than 5% interest right now) until you've saved up the amount needed to buy in to the fund you want.

Why save instead of investing? Though the potential return on your current Vanguard investment is higher than 5 percent, also comes with a risk. You may wind up losing money, at least in the short term, and that could set back your diversification goals. You shouldn't invest money you have other plans for in the next couple of years.

A lot depends on the risk level of your current fund. If its a bond fund or a relatively low-risk fund with a very long history of returns you may be safe investing the money there and then transferring it to other funds. I wouldn't do it, though. The Wall Street Journal and Fortune magazine have both had a lot of articles in the past few months that suggest investment experts are pretty torn on where stocks are going in the coming year.

(Note: I'm not an investment professional, I'm just reasoning this stuff out based on what I've read in the mainstream financial press. If other people with more experience come forward, please put their advice ahead of mine.)
posted by croutonsupafreak at 10:24 AM on January 15, 2007


The minimum initial investment in most of the funds I'm looking at is $3,000.
posted by ThePinkSuperhero at 10:27 AM on January 15, 2007 [1 favorite]


Check for transfer fees and limitations on the maximum number of annual transfers. One advantage of having automatic deposits to several funds versus one deposit that you spread around yourself is that once they are in place you never have to do anything, except check your statements.
posted by caddis at 10:32 AM on January 15, 2007


I don't think you're going to get an answer based on "math" alone, because the real answer depends a lot on your threshold for risk, what the market does in the coming years, and how easy/difficult it will be for you to save up $3,000.

In my case, where it would take a year or more to save up $3,000, I'd probably try to save it in the current fund I already have. But doing that is a gamble. I'd be putting all my eggs in one basket, and I could be set back from my goals significantly if the value of that fund declined.

If your current fund already has $6,000 or more in it, you could theoretically start diversifying now by transferring money from that fund into one of the other funds you'd like to get into (or into two if you have $9,000, etc.).

Once you've got two or more funds, you may want to spread new investment evenly among them to pool the risk until you've built up another $3,000 to use to get the next fund going.

This is NOT the safe route, though. By choosing to "save" for a future investment in current investments, you are putting your future at risk -- especially since you do not have diversified current investments yet.
posted by croutonsupafreak at 10:37 AM on January 15, 2007


You could also open up a Vanguard Prime Money Market Fund in your Roth IRA account and contribute cash to that. This has a 5% yield. Then when the timing is right, you can purchase other funds with cash from the money market fund. They will, however, charge you a $10 yearly fee for a balance under $5000 (may not apply if you have >$50,000 total assets with Vanguard).
posted by Durin's Bane at 11:28 AM on January 15, 2007


Forgot to mention, like other funds, the Money Market Fund has a $3000 initial minimum. So you will either need to hold off on monthly deposits to make a lump sum purchase or move $3000 from your existing fund. Once that is established, though, it should solve the problem for the 5-7 other funds you want.
posted by Durin's Bane at 11:34 AM on January 15, 2007


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