Hi Dong,

Thanks you so much for encouraging me to set up both an online savings account with HSBC, and a Roth IRA with E*Trade. My question has to do with my Roth. I have been socking money in there for a few months, but have not allocated the money yet.

What is your advice on how to allocate for someone who is just starting out on retirement savings plan? (I have had a 401k for a few years, too).

-Rachel

Rachel I’m glad to hear you’ve been socking money away in your Roth and HSBC account. Now that you have a kitty built up in your Roth – there’s still a question of what to do it. There are embedded in that one question, two separate questions:

  1. What do Invest In?
  2. How do I time my Investments?

The first one is actually easier to answer as it’s a more straightforward. At this point given that you are just starting to accumulate substantial capital in your ROTH IRA, I would stick with mutual funds. You always want to make sure you’re diversified and that’s what a good Mutual Fund will give you. What Mutual Funds specifically? My mutual funds of choice for broad diversification are:

WFIVX - Wilshire 5000 Total Market Index Fund

DODFX – Dodge and Cox International

The Wilshire 5000 is index of the entire U.S. Stock market – you can’t get much more diversified (at least as far as U.S. stocks are concerned). You wouldn’t go wrong if you opted into any of other the broad market funds as the Vanguard 500 VFINX, or Vanguard Total Market VTSMX Full Disclosure, I own both DODFX and WFIVX at part of my portfolio. I do think it’s important to get international exposure and in some ways would recommend a fund like DODFX over a purely domestic fund if I had to pick just one. DODFX and funds like it are international not foreign which means that they actually have a fair amount of exposure to U.S. companies via large multinationals. News Corp, Murdoch’s baby, for example is one of DODFX largest holdings.

As for timing your investments, it depends a little on what mutual funds you’ve decided to make the core of your holdings and how frequently you fund your IRA. If you’re constantly funding your IRA and can purchase a mutual fund free of any sales charge then you might want to set up a purchase schedule of a fixed dollar amount to coincide with your funding schedule. I know for instance that WFIVX is free to acquire on E*Trade while DODFX is not. The advantage of spreading your purchases over many different intervals is that you reduce your exposure to the volatility inherent in the market. You’re not buying everything at a peak nor are you buying everything at a valley, this is commonly referred to as “dollar cost” averaging. If there are transaction charges associated with the purchase of a fund then its better not to incur them. For example if you were to buy $100 of DODFX every month, it’d cost you $240 while you’d be only purchasing $1200 of the fund. Right off the bat, you are 20% in the hole. You would be better off just purchasing the full $1200 in one slug at cost of $20, only putting you 1.6% down due to transaction costs.

Now specifically for you, if you have less than $2000 but more than $1000, I’d go ahead just purchase one fund like DODFX. If you have more than $2000, I’d still go ahead and purchase a fund such as DODFX, but limit that purchase to about $1500. Then start purchasing a transaction free fund such WFIVX via a set schedule (once a month should work) until you are robustly invested. If you have substantially more than $5000 seek more advice as that might imply a much more complicated course of action. If you have less than $1000, and are consistently funding the account, I’d go ahead setup a schedule to purchase shares of a fund like WFIVX. Purchase a fixed amount that is less than the deposit amount so the leftovers can accumulate for a bigger purchase on fund like DODFX at a later date. It’s likely that you might have to first purchase some initial quantity of WFIVX before you can setup a recurring plan. In either case use what you have in the account already for a seed purchase.

There’s also an argument to be made to invest in a life-cycle fund that is tailored to your age group. A life cycle fund involves the least work on a ongoing basis as it is designed to shift it’s holdings to best match the risk profile related to one’s age. I haven’t looked at the details of the specific funds and can’t really make a recommendation there. All I know is they vary greatly and widely and because of that will have to save any advice with regards to those for another day.

Disclaimer Below:

Any investment decision lies in the scope of a greater context, and should reflect your complete financial situation. That said it’s better to do something in your Roth rather than nothing just because a decision can’t be made. Again, I’m not a financial advisor – just a friendly guy with friendly advice. This answer should not be construed as anything but that.