Another IRA Question..

MissChanandlerBong

Hi everyone, I have been lurking for awhile and learning a lot from you all.  I have a question regarding IRAs that I'm hoping you can help me with.  Right now, I am only contributing to my company's 401(k).  However, I also have a traditional IRA with CapitalOne.  My job has some independence restrictions, so right now the money is just sitting in a cash fund (i.e., not growing).  It is a small amount (~$700), but I'd like to do something with it.

It looks like I can choose stocks, ETFs, mutual funds, etc. to invest in.  I guess my question is, what would you suggest I choose?  I am pretty risk-averse, so I'd prefer a mutual fund, but most of those have high minimums that I don't meet.  My goal is to increase contributions eventually, but I'd rather contribute to a Roth IRA.  I'm also snowballing debt first. 

I apologize if this is a stupid question, I'm just not sure what to do with this! 

hoffse

Not a stupid question at all.

When you're just starting out, index funds are a good place to begin.  These are mutual funds pegged directly to "the market" because you're buying into the S&P 500 or whatever.  You will never "beat the market" with those funds, but you also won't lose more than the market loses any given day.

If you're risk adverse, I would avoid stocks.  You can earn a lot, but you can also lose a lot.  They are a lot more volatile than mutual funds.  I'm not particularly risk-adverse, but I still won't invest in stocks directly.

ETFs are fine too - and I'm pretty sure their buy-ins are often lower than mutual funds, since you mentioned that's a concern.  You can buy ETFs that track index funds - for instance, the spider funds which track the S&P.  The biggest difference between ETFs and mutual funds is that mutual funds settle once a day at the end of the trading period.  Whereas, the value of your ETF will fluctuate all day long because they can be bought and sold at a moment's notice just like stocks.  I think the ETFs themselves are "tradeable" on a secondary market of sorts.  But ETFs still have the "basket" effect that mutual funds have, so they tend to be less volatile than stocks.  

To be honest, I don't know a ton about ETFs so you need to do your own research on those.  But I have looked at adding ETFs for our portfolio because I like that you can sell them at a moment's notice if you see the market is in the process of tanking.  You can't do that with mutual funds since those only settle once a day after trading is over for the day.  There have been a few days over the last couple of years where I was literally watching the market tank for hours, and I couldn't do anything about it until the account settled at the end of the day because we are all-in with mutual funds.  I ended up losing more money than I would have lost with an ETF, because I would have sold the ETF part-way through the day and then re-purchased the next day at a lower price.  Still, we haven't pulled the trigger on them yet because I feel like we need to learn more about them.  

Obviously any investment is risky to some degree.  You have to decide how well you tolerate that risk relative to the return you might get.