(By Christine Benz) We're kicking off an IRA Optimization Week on Morningstar.com this week. In anticipation, I recently asked participants in the Personal Finance forum
of Morningstar.com's Discuss boards
to share their IRA ideas for newer investors, particularly basic building blocks as well as supplemental holdings.
Users were eager to share their wisdom, and the responses rolled in fast and furiously. To read the complete thread, click here.
Keep It Simple
A broad swath of users preached the virtues of simplicity for IRA investors just starting out. Atlasandgalt laid out the case for why less is often more: "Simple is better than complex for portfolios, especially for the majority of people who do not have the time or depth of expertise to micromanage their holdings."
In the same vein, low-cost broad-market index funds and exchange-traded funds, all-in-one balanced offerings, and target-date funds all received multiple shout-outs as top first-stop (and perhaps last-stop) investment options.
Poster MarkSinger kicked things off for the index enthusiasts, calling for a global stock market ETF. "This is a no brainer! I assume the person is young because they are just starting an IRA (if they are just starting, I hope they're young!). I'd suggest buying Vanguard Total World Stock Index ETF (VT). It has a low expense ratio, 0.30%, and captures the entire world's economy. Over time, this is the bet to make because one never can predict the future accurately and global sectors, specific countries, and specific stocks and stock sectors are subject to unforseen changes." (I'm thinking like Mark; I recommended the same fund in a video with Morningstar Site Editor Jason Stipp this past week.)
Poster enigma also argued in favor of index funds for core IRA holdings, noting that they make a great way to kick-start a savings program for the kids. "I just opened Roth IRAs for my three children in lieu of traditional Christmas gifts. They are all in their 20s and just starting out. I bought them Vanguard Total Stock Market Index (VTI) for openers, a broad-based, core, domestic ETF. Funds with minimum investment requirements were too expensive, and fixed income didn't seem like a good idea right now. Future contributions for birthdays will include a foreign component, Vanguard FTSE All-World ex-US ETF (VEU). I told them that not saving for retirement at an early age was my biggest financial mistake, one that I hoped they would not duplicate."
Poster beecnul8r also favors index funds, and shared a recommended allocation of 60% in a U.S. index fund and another 40% in an index fund devoted to foreign stocks. "Both with Vanguard and both with auto reinvestment of dividend and income distributions. Simple, diversified, very cheap way to riches." Atlasandgalt chimed in with a similar formula, but added a dash of bonds to the mix.
Fillmoredds' index-based prescription was slightly more exotic: "I just did this with my son. For now, half in a Wilshire 5000 fund, 20% in a large-cap international fund, 20% in small caps, and 10% in emerging markets. He uses index funds with low costs wherever possible. If he sticks with it, he should be far ahead of me when he reaches my age."
Seeking All-in-One Simplicity
Rather than using individual building blocks to craft an IRA portfolio, other posters argued in favor of all-in-one options such as target-date and balanced funds for those just getting started.
Lengrav wrote, "To steal from Nike: Just do it. Get an account open and fund it. Set yourself up for automatic funding. Then 'keep it simple stupid' (KISS principle). Start with balanced funds."
PLAToday likes a target-date vehicle for IRA investors just starting out. "The simplest hands-off IRA portfolio would be to include a target-date retirement fund--T Rowe Price if you prefer a more managed approach or Vanguard for indexers."
Saji1986 likes T. Rowe for newbies who are starting to invest on a shoestring: "My son is 19 years old. Last year we set up a Roth IRA using a target-date retirement fund from T. Rowe Price (TRRNX). Also got him to use their automatic asset builder so it takes out $50 a month from his paycheck. Occasionally he gets an extra bonus from his company, and he is good about depositing 50% of his bonus into his Roth. For mutual funds, I love T. Rowe because they have such low minimums for investing, which I think is ideal for a young investor. Once he completes college, I would advise him next to contribute the max amount every year, having it taken right out of his paycheck so he gets used to living on whatever is left over."
Meanwhile, LavonJAW favors Schwab's target-date fund Schwab Target 2040 (SWERX) as a core holding, augmented by two supporting players: Schwab Global Real Estate (SWASX) and Gabelli Utilities and Energy (GABUX). "
In addition to the target-date fund enthusiasts, balanced funds also have many proponents among Morningstar.com users, with many touting their simplicity as a major selling point for new investors.
Poster DouglasJohnson argued that the ultimate plain-vanilla approach would probably trump most more active strategies: "One could do worse than dollar-cost averaging in and out of Vanguard Balanced Index (VBINX) for one's whole life. In fact, most do worse. Dollar-cost average in during the accumulation phase and out during the withdrawal phase. Be simple, low-cost, and well-diversified. In order to do better, one has to spend considerable time, effort, and money (in terms of investment mistakes) learning how to do better. It can be done, most people on this board probably have.