ETF for IRA?

[veritasophia]

Do you think it would be wiser to buy ETFs instead of mutual funds for IRA acounts?

I only buy once a year for IRAs, with lower expense ratios, it might be worth it. For taxable accounts, DCA makes ETFs a bad choice.

 

[Nords]

Do you think it would be wiser to buy ETFs instead of mutual funds for IRA acounts?

Gotta do the math.

An $8 commission on a $4000 IRA purchase of an ETF with a 0.25% annual expense ratio is the equivalent of a first-year .45% expense ratio of a mutual fund.  Of course after that first year the ETF's expenses drop to .25% and stay there-- probably without any custodial fees or other nuisance charges.

[($4000-8)*.0025 = $9.98, +$8 = $17.98, /$4000 = .45%]

So depending on your asset allocation and the fund, a Vanguard or Fidelity index mutual fund may be cheaper than an ETF.

 

[2B]

I vote with Nords on this. I own both ETFs and index mutual funds. The ETFs are in accounts with significant dollar amounts so the ETF is cost effective. You can get 0.09% on the ETF SPDRs but only have to pay 0.18 (I think) for the equivalent Vanguard. Since it's in a tax deferred account, you can reinvest the dividends and avoid all commissions.

 

[veritasophia]

Yeah, makes sense.

Thanks!

 

[ladelfina]

OK gang, I am looking around myself for a good way to invest about $30k in an IRA. For some reason I had bought ATT several years back and sold yesterday being less than thrilled over the spying issue, the lawsuits, and their future acquisition plans. Looking for an ETF or fund also, because I want to be able to relax and not worry about such things with individual stocks so much.

I have ~75% in taxable accounts and ~25% in IRAs. I'm trying to get a handle on all the things that one "should" or "shouldn't" put in tax-deferred accounts. Bernstein goes so far as to say person X in one of his example allocations "can't" put most asset classes in his taxable accounts. He also uses words like "forbidden"  !

I listed my wacky portfolio elsewhere. I made some adjustments using the advice on this board to get into some REITs and foreign bonds where there was cash to do so (I picked IGR and GIM, in tax-deferred/non-tax accounts).

The overall picture right now is this:
S-Intl-Large     %30.69
S-US Large Cap   28.77
S-US Small Cap   11.11
Cash                     8.18
B-Long Term gov't 7.86 (TLT)
S-Intl-Emerging    4.85 (EEM)
B-Med. Term gov't 4.71 (TIPS)
REIT                     1.73 (IGR)
B-Internat'l           1.45 (FAX and GIM)
S-US Mid Cap        0.56
Other…                 0.14


In the Roth (about 20% of holdings) it's this:
S-US Large Cap %82.48
REIT                      8.29 (IGR)
Cash                      5.94
S-Intl-Large           1.52
B-Internat'l            1.38 (FAX)
S-US Mid Cap         0.42

In the SAR-SEP (about 5% of holdings, which I plan to rollover bit-by-bit into the Roth) the situation is this:
Cash                %57.82
S-US Large Cap   26.27
B-Internat'l           7.85 (GIM)
S-Intl-Large          4.94
S-Intl-Small          3.14

In the retirement accounts, everything is individual stocks except as noted. "S" and "B" means stocks and bonds, respectively.

I now infer that I "shouldn't" have TLT, TIPS, EEM(?) in a taxable account, but that's where the cash was to invest at the time... Should I sell some bonds and put them in the SAR-SEP (don't want to take a CG hit on EEM) now that the cash to invest is there? Or would you add more IGR and GIM? I would take a look at other asset classes that I have none of, like commodities and PM, but they seem overly hot right now. Similarly, I might buy more foreign indexes if I didn't already have a huge foreign exposure in my taxable account.

...I'm dealing with decisions that were made years ago, before I knew anything about asset allocation, and everything has developed in a kind of bass-ackwards way...

What are really the "best" investments to put in retirement accounts and which are to be avoided?

my head is spinning.. help! 

 

[2B]

ladelfina,

You have a complicated life -- at least your investing life. I subscribe to simplicity. First, a few suggestions on what to put where. Bonds or bond funds (ugh! but your choice) should be in tax deferred accounts until in a withdrawl mode. That's because the tax treatment from IRAs is as ordinary income so there isn't any penalty putting bonds there. Your taxable accounts should show a bias towards dividend paying stocks and long term capital gain investments -- again, favorable tax treatment. Roths should show a bias towards aggressive growth but without dividends because the money from them are tax free anyway.

I favor index mutual funds except for foreign where I just am not comfortable with any of the indexes covered. I have about 20% in cash or bonds/CDs, 20% foreign, 20% small cap and 40% S&P/Total Market index. I like Vanguard for everything and Dodge & Cox International for, you guessed, international.

Good luck. This is only one persons opinion. I strive for simplicity. I used to be a very complex individual but decided it was too much work.

 

[bosco]

Ladelfina,

based on some of the returns you posted on another thread, we should all be asking you for help.

Given how successful you have been, my advice would be....do more of the same!

 

[ladelfina]

Ha Ha! 

I know, but I gather I've been doing it "wrong"! Now I'm starting to worry since signs are that the future is not going to be such smooth sailing as the recent past. When I was working, I could be heedless... now I'm thinking I should be more conservative.

I didn't feel so successful seeing my accounts lose almost $40k in the last couple weeks, either!

I already have the extra burden of worrying about exchange rates so I am hoping to 1.) diversify more, 2.) simplify where I can, and 3.) do it in a 'sensible way' w/r/t taxes.

I could come up with an arbitrary asset allocation that I am comfortable with, but even with that as a road map I think it could take me years to get all the ducks in the right rows, since I'd have to sell off stocks to re-invest elsewhere. That is a painful prospect. When you are talking about selling a few % here or a few % there to re-balance between funds it's much different from selling stocks you've held for 20 years.

Given the exch.rate "wild card" I have dealt myself by moving abroad maybe this is all an exercise in futility...

Have any of you ETF and fund-holders sold off individual stocks en masse to consolidate?

Thanks for your opinion, 2B. Things are indeed too complicated. I have been eyeing DODFX and like the looks of it. I guess a dollar-cost averaging strategy may be in order to get out of the Latin telecom biz and into something more balanced.

 

[Nords]

I didn't feel so successful seeing my accounts lose almost $40k in the last couple weeks, either!

Gotta do more math.  I hope everyone looks at their portfolio gains/losses in terms of percentages, and at their annual spending/expense ratios in terms of dollars.

Losing $40K in an early retirement portfolio could arguably be 4%.  In the long term that's a fart in a hurricane.

Paying 1% to a financial advisor looks pretty tiny, too, until you consider that's $10,000 out of your $40K annual withdrawal.  That's HUGE!

Here's another example for the mathematically infatuated.  HECO informed me last week that this month's cost of generating electricity has risen in the last year from 15 cents/KWHr to over 20 cents/KWHr.  That doesn't sound like much until you convert it to its 35% increase.  So this month our photovoltaic array has dropped our electric bill from $85/month to $25/month.  That doesn't sound like much, either, until it's expressed in terms of its current dividend rate of 6%.  As the tax credits kick in, even if generation costs don't rise, by 2009 that dividend will be over 10% of its cost basis.  Admittedly that's only a $14,500 up-front cost, but by 2009 the tax credits will have busted that down to just over $7000 capital expense on a system generating at least $60/month with a conservative lifespan of 25 years.

The solar water heater added another $920 capital expense to the PV numbers. I haven't quantified its KWHr savings (didn't log the data) but its savings are in addition to that $60/month.

Life is hard.  If people can't do math, it's impossible.

 

[ladelfina]

I hear ya, Nords.. yep, 4% alright-y.

At 45 my 'long-term' suddenly became 'short-term'. The relatively big gains I've seen could turn into relatively big losses and my 85% equity portfolio could look reckless in ER hindsight (?) The good thing is, so far, I haven't been paying 1%, or even .1% to let my portfolio get all wild & overgrown. But now maybe it's time to pay the gardener for some strategic pruning.

That's great about your solar system! I'd try it here but the roof is mostly covered with trees (although that means no need for a/c even in the blazing heat of summer). Geothermal seems relatively popular, and I'm starting to look into it. Finding a reliable contractor, however, could be an issue.