Retirement Investing Question

Xstatic3333 · November 2013

Hi all, I have a question about how to handle my Roth IRA that googling hasn't been able to answer. My fund currently has money in three different mutual funds-one medium risk fund with some stocks and some bonds (this fund has the largest chunk), one higher risk international fund, and one medium risk domestic stock fund. When I add money (I do this manually each paycheck) it automatically goes to "cash reserves." The chunk in "cash reserves" is now about equal to the amounts in the two smaller mutual funds.

My basic question is whether it is a good idea/wise to keep some money as cash reserves, or if it is pretty standard to have all of the money invested somewhere. I'm 28, a bit behind on my retirement savings overall, and have a decent risk tolerance. Fidelity's "portfolio review" tool suggested keeping a very small percentage in cash and also putting some money in bond funds. After researching them I feel a little confused about what the advantage of that would be (other than pure diversification), and I also want to take Fidelity's advice with a grain of salt. I'm also interested in learning about index funds; a financially apt friend of mine just leant me a book by the founder of Vanguard that he found helpful when he was getting into investing, and I plan to dig into that soon to learn more. I know nobody should be giving investing advice over the internet, but I'd definitely welcome any advice about other good resources to check out, helpful blogs, things to consider when making these decisions, etc. I'd hate to have that money just sitting there if it doesn't need to be.

*If it affects anyone's advice on this, we have a 4-month e-fund and our job security is probably medium (our jobs have to be re-funded by legislation periodically). We have school and car debt that we are able to prepay a bit on, but since we're a behind building the retirement fund is still a very high priority for me.

hoffse · November 2013

Eh I don't keep any in cash. I figure if one of my funds really starts to tank I can just reinvest in something else. The problem with keeping it in cash isn't just the lack of growth - it's inflation. I really want today's dollars to be worth the same thing tomorrow. We're about the same age, and I figure I'll start slowly converting to cash sometime in our late 50's/early 60's. I doubt we'll ever convert all of it.

That's just what I do - Fidelity does recommend keeping some in cash, but I don't invest in stock directly (just through mutual funds), so I'm willing to keep it all in the market. If you want something safer than cash, you could always do bonds or something along those lines. Then you're at least (hopefully) keeping with inflation. But I personally don't want TOO much in super "safe" investments at this age.

I figure I want my investments to be growing as rapidly as is reasonable right now to really get that "seed" money started. It's kind of amazing. When H and I just started out it took us a little over a year to make our first thousand in the market. And then we contributed more... and it started to snowball. Before long we were starting to earn or lose several hundred dollars a day in the market. It takes take a few years to get it there, but then it just starts going and blowing. We will shift to a more conservative strategy as we get older and that seed money is well established.

Re: index funds. Basic definition is a fund that has a certain portfolio that "matches" or "tracks" how a particular sector of the market is doing. The S&P 500 is an index fund. It's a sample of 500 large businesses in the US. I think it's generally a pretty good strategy to have some money in one or two index funds. Then, in general, you're pretty much keeping up with the market.

Disclaimer: this is just what I do. I'm obviously not an investment adviser. As far as resources go.... every year for xmas my parents get me a subscription to Money magazine. It's been a pretty great resource for me (and it's a gift that keeps giving!) It's only like $15/year and I think it's easily worth triple that.

vlagrl29 · November 2013

I think it is standard to keep a little bit in cash. I keep some of mine in reserves in case I want to buy additional funds and what not.

jtmh2012 · November 2013

We keep nothing in our retirement funds in cash. Let your money work for you.

Xstatic3333 · November 2013

Thanks everyone. For those of you who don't keep money in cash, do you just designate a fund for each deposit to go to? My deposits tends to be $100, so I'm not even sure that would be allowed until I have $500 chunks.

hoffse · November 2013

Xstatic, that's a good point. I think most Roths have a "cash" account - and when we are in the process of funding our Roths, that's where our money goes first to settle before investing it. That said, I tend to fund our Roths once a year instead of with every paycheck (probably a bad habit since I could spend that money on something else throughout the year, but there you go). So I've never had to deal with minimums, etc. You can always try to buy funds with the $100 deposit and see what happens. If you don't have enough, they simply won't let you do it. It can certainly sit there as cash for a couple months until you have enough to invest it. You just don't want it sitting in cash for too long.

maple2 · November 2013

At least where I invest, you can contribute as little as $25 at a time to funds in which you have already invested. So, if you want to divide your $100 a month between the 3 funds you already have, that would be fine (at least it would be fine with my particular mutual funds and company). If you want to invest in a whole new fund, that is where you might run into difficulties with minimums.

Xstatic3333 · November 2013

I bet you're right, @maple2. I think I'll research one new fund to buy, and then switch to that approach for a while.

@hoffse I think funding yearly is standard for Roths; I just do it this way since I don't have an employer-sponsored account. My company is too tiny! Thanks for the magazine suggestion; I may check it out for my Thanksgiving flights next week. I had no idea the S&P was actually a fund, so I've got a lot to learn!

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