View Full Version : 05 Roth IRA Contribution

12-16-2004, 09:44 PM
I am starting to do research on what I will be doing with my $4000 contribution to my Roth IRA. I currently have $9500 in there and it is about 50/50 VFINX and VTSMX so it's currently 100% equities. Although I am young (22) and should invest a lot in stocks, several investors whose opinions I value (including several on this forum) believe the market has a good chance of declining significantly before it goes up again. Therefor I would like to diversify a bit with my next contribution. Would putting that money in either a bond fund or a real estate investment trust fund be good diversification choices to go with my vanguard equity funds?

12-17-2004, 03:56 AM
Kudos to you for beginning to accumulate assets at a relatively young age! Lord knows most of our generation is knee deep in credit card debt and care nothing about accumulating anything but "bling"...

The objective of diversification is to limit your risk, whether that be company risk, sector risk, or market risk. It sounds like you want to protect yourself against market risk, that is the risk of a downturn in the US economy. Investing in a broad based index like VFINX limits your company and sector risk but not your market risk.

To diversify against market risk, you would put your money in investments that are not correlated with the US economy or even investments that might profit off an economic downturn. REIT's would be a poor instrument for this, as any downturn in the economy would likely be accompanied by a downturn in real estate. A decline in real estate is typically considered a leading indicator of a downturn in the economy (housing starts are down 13% in November, btw). Bond funds are a bit more complicated, but you should know that they tend to decline in value as interest rates rise.

Historically, sectors that tend to do well during the downward slope of the business cycle include Consumer Non-Cyclicals (food, drugs, cosmetics) and Healthcare. As consumers will continue to fork out cash for these goods and services even through hard times.

I would seriously consider stashing some of your money overseas. Stocks in the United States are not cheap. The S&P500 index trades at a P/E of about 21, while the historical average is somewhere around 15. When you make an investment, you are banking on it appreciating in value because it is A)Cheap or B)Growing. The US economy is neither.

The Brazillian MCSI ETF (EWZ), for example, trades at a P/E of around 8 and has a number of macrotrends working in its favor such as rising commodity prices/the falling US dollar.

The Chinese economy, even after years of annualized 10%+ growth, still makes up only 4% of the world GDP despite having 20% of the world population. Business and wealth are moving into the country, not out of it as it is with the US.

I don't really like giving any more specific advice than that to strangers (you shouldn't be willing to accept it so easily from strangers either), but hopefully that gets you thinking in the right direction...

Disclaimer: I am a poker player, not an investment advisor. /images/graemlins/cool.gif

03-02-2005, 07:52 PM
In short, NO.

Keep buying good stock mutual funds with your Roth IRA money. Forget about market timing. Invest in good stock mutual funds and forget about them.

03-02-2005, 11:21 PM
Since these guys you've been talking to can tell the future, I'd appreciate them posting some stock picks.

Seriously, if you're going to sock money away for 30 years, stick it in an index fund. I seriously doubt anyone or any investment will beat your return over that time frame.