Best Place for Teen's (Very Aggressive) Roth IRA

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boglesmkcents
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Best Place for Teen's (Very Aggressive) Roth IRA

Post by boglesmkcents »

Our 18 year old son son will have a summer job with income of about $2500. We plan to aggressively match a modest contribution by him so he can max out a ROTH IRA up to his income level (with the strong suggestion to not touch it until he retires). I'd like to encourage him to put into a very aggressive fund (thinking small cap value, emerging market, etc.), etc.

We have a strong bias towards Vanguard funds, but the only option below $3000 seems to be something like Target Retirement 2060. I'd prefer that he go with something even more aggressive, but not sure if there are any funds/families that would be a good fit with lower fees, indexing, etc. I realize he could transfer to a different fund once over $3K, so not a bad choice, but I'd feel better about an even more aggressive play given his very long runway.

So bottom line is that Target 2060 is the current front-runner -- I would appreciate any alternate suggestions for a very low fee and aggressive equity fund outside of the Vanguard family?
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ObliviousInvestor
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Re: Best Place for Teen's (Very Aggressive) Roth IRA

Post by ObliviousInvestor »

What about an IRA at Vanguard or TD Ameritrade using a commission-free Vanguard ETF (e.g., Vanguard Small-Cap Value ETF)?
Last edited by ObliviousInvestor on Sat May 31, 2014 6:58 pm, edited 1 time in total.
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awval999
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Re: Best Place for Teen's (Very Aggressive) Roth IRA

Post by awval999 »

What's wrong with an ETF?
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boglesmkcents
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Re: Best Place for Teen's (Very Aggressive) Roth IRA

Post by boglesmkcents »

I've steered clear of ETFs (all our money in mutual funds) -- did not realize ETFs are not subject to the same minimums. Sounds great. So with 1 share minimums, looks like he can even set up his own little portfolio of emerging mkt, small cap value, etc. -- even better!

One question, looks like he will need to set up a settlement acct with $3000 - can that be outside the IRA and then he can buy funds for his IRA up to his total income amt ($2500) from the settlement acct?

EDIT - just realized looks like there may be no minimum for a brokerage balance - the $3000 was just suggested as that is the minimum for most mutual funds. Thank you for the advice - ETFs look like the perfect vehicle!
livesoft
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Re: Best Place for Teen's (Very Aggressive) Roth IRA

Post by livesoft »

One does NOT need a settlement account with $3,000. For a Roth IRA, a settlement account has to be in the Roth IRA.

My oldest opened a Roth IRA at Fidelity with less than $500 and used ETFs. An issue is that one needs to buy an integral number of shares, so any cash settlement account may end up with a cash turd. For example, $2500 will buy 22 shares of IJS at Fidelity commission-free for about $2454. That leaves $46 leftover which one can find an ETF like VEA or VWO that is less than $46 a share.

Another possibility is ETFs at TDAmeritrade where many Vanguard ETFs are no-commission.

I found it useful to make my child go into the local Fidelity office in order to interact with the customer service rep in person. I did not go with them. Some young people are afraid to interact with adults in person and prefer to do everything online or by texting. It is a good opportunity to make them get out of any internet shell they may be locked into.

And don't forget to discuss who will be the beneficiary of the Roth IRA in case they die.
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Pocket Cruiser
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Re: Best Place for Teen's (Very Aggressive) Roth IRA

Post by Pocket Cruiser »

Remember he can only contribute what he has in earnings. So if 2500 is all he earns this year, thats all he can contribute
livesoft
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Re: Best Place for Teen's (Very Aggressive) Roth IRA

Post by livesoft »

Pocket Cruiser wrote:Remember he can only contribute what he has in earnings. So if 2500 is all he earns this year, thats all he can contribute
And perhaps not all $2500 if some of the income is 1099 income that he pays FICA/medicare taxes on. This tripped up my child who had both W-2 and 1099 income.
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DSInvestor
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Re: Best Place for Teen's (Very Aggressive) Roth IRA

Post by DSInvestor »

I'd go with a Target Retirement with 90/10 AA for now. It's an aggressive AA. If he earns more money next year and makes another contribution or if account balance grows past $3000, he can always exchange to another mutual fund with $3000 minimum initial investment. Once the account balance gets to that $3000 level, pretty much every mutual fund at Vanguard is available.

You should also stress other issues rather than just go for max risk:

1) The advantage of starting to save and invest at a very young age vs starting later. With a goal of say $2M by age 60, how much would he need to save a year at x%/yr if he starts at age 18, 28, 38, 48 etc? WIth a very long time horizon, modest savings rate with moderate returns can achieve incredible results. Wait 10, 20, 30 years and the savings rate needs to much higher to achieve the same goal by age 60.
Didn't Einstein say that compound interest is the most powerful force in the universe?

2) The importance of savings rate rather than maximizing risk. A $2500 contribution next year may double his portfolio from new contributions alone.
Last edited by DSInvestor on Sat May 31, 2014 7:55 pm, edited 1 time in total.
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MN Finance
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Re: Best Place for Teen's (Very Aggressive) Roth IRA

Post by MN Finance »

It doesn't make ANY difference how its investes right now, just that the money is contributed. After a year or three, he/you can change the allocation to meet your requirements.

If you insist on something more aggressive now, I've found schwab good for my kids. They have several transaction free etfs to cover most markets. No fees, no minimums. VG brokerage might be similar.
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Re: Best Place for Teen's (Very Aggressive) Roth IRA

Post by pkcrafter »

I second DSInvestor's recommendation of a TR fund. 100% small caps is simply not a good portfolio--high concentrated risk and undiversified. If you're going to help your son, steer him in the way of good investing fundamentals.

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Zabar
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Re: Best Place for Teen's (Very Aggressive) Roth IRA

Post by Zabar »

boglesmkcents wrote:We have a strong bias towards Vanguard funds, but the only option below $3000 seems to be something like Target Retirement 2060. I'd prefer that he go with something even more aggressive, but not sure if there are any funds/families that would be a good fit with lower fees, indexing, etc. I realize he could transfer to a different fund once over $3K, so not a bad choice, but I'd feel better about an even more aggressive play given his very long runway.
First, congratulations on helping your son start off at such a young age. I'm doing the same thing with my son until he turns 25.

Let me respectfully challenge your assumption about aggressive funds. If your goal is to help him become a successful, long-term investor, you may be unintentionally teaching him the wrong lesson by encouraging him to put all of his money into a single, very aggressive asset class. Since the absolute numbers here are so small, and since there's no guarantee that the aggressive asset class you choose will do well over the next few years (see http://www.callan.com/research/download ... %2F757.pdf), you may be better off encouraging him to invest in a portfolio the includes a broader range of assets, such as Vanguard's Target Retirement 2060. That's still pretty aggressive: 63% domestic equities, 27% foreign equities, 8% domestic bonds, 2% foreign bonds. But it follows the principle of balancing risk with reward.
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boglesmkcents
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Re: Best Place for Teen's (Very Aggressive) Roth IRA

Post by boglesmkcents »

Hi All,

I did not expect such broadly ranging advice (important details like 1099 vs W2 income and brokerage options TDA, Schwab, VG,etc) and great input/reminders about not missing the opportunity for learning about sound investing fundamentals. I have to admit I had lost sight a little of the teachable moment opportunity.

So, yes, will probably steer towards ETFs and Vanguard Brokerage, but also will maybe ease off of the focus on swinging for the fences, and use this as an opportunity to teach about asset allocation, starting early, diversification, efficient frontier, etc....

As always, Bogleheads Make (lots of) Cents!

Many thanks to all!
livesoft
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Re: Best Place for Teen's (Very Aggressive) Roth IRA

Post by livesoft »

MN Finance wrote:It doesn't make ANY difference how its investes right now,....
Maybe. Maybe not.

Some young people won't bother to look at the account and will not notice some things. Others will look and will notice the fluctuations. There are lessons to be learned if one is willing to learn them. For instance, one can learn that they can lose money. One can learn that risky assets fluctuate in value. One can learn that if one holds long enough, asset value can recover. If one invests in ETFs, they may learn about market orders, limit orders, integral number of shares, bid/ask, etc. If one invests in mutual fund shares, they may learn that the NAV value is set at end of day.

OK, it may not make a significant difference in the dollar value of the outcome of this early Roth, but it isn't always about the money.
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Calm Man
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Re: Best Place for Teen's (Very Aggressive) Roth IRA

Post by Calm Man »

I have 2 pieces of advice:
First, go for it dollarwise. I don't see the need for the discussion about 3K. The kid is earning 2500. Just gift the rest and put in the full 5500.
Second, he doesn't understand long runways or glide paths. This will be his only investment. People with a bunch of money don't look or care every day. He may follow it closely. So I'd let him understand the concept of asset allocation and I suggest Life Strategy either Moderate growth or growth.
Final note: this is only 5500 so it will not change his life but is a start. The more you control it, the less interest he will have.
livesoft
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Re: Best Place for Teen's (Very Aggressive) Roth IRA

Post by livesoft »

Calm Man wrote:I have 2 pieces of advice:
First, go for it dollarwise. I don't see the need for the discussion about 3K. The kid is earning 2500. Just gift the rest and put in the full 5500.
There is that little rule about having enough compensation to cover the amount of the Roth contribution.
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Re: Best Place for Teen's (Very Aggressive) Roth IRA

Post by DSInvestor »

Calm Man wrote:I have 2 pieces of advice:
First, go for it dollarwise. I don't see the need for the discussion about 3K. The kid is earning 2500. Just gift the rest and put in the full 5500.
$5500 would work if OP was not talking about a Roth IRA. Roth IRA contribution of $5500 will require $5500 of taxable compensation and the kid only has $2500. If $5500 contribution was made, that's an excess contribution of $3000. A 6% excess contribution penalty will apply on that $3000 excess every year until the excess is corrected.
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sans souliers
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Re: Best Place for Teen's (Very Aggressive) Roth IRA

Post by sans souliers »

Okay, I hate to drop this bomb on the party, but a young man of eighteen may have his own ideas about where his earnings will go, and we haven't heard from him yet.
Sometimes pessimism leaves me pretty well prepared for when things don't go my way, and pleasantly surprised when they do.
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Re: Best Place for Teen's (Very Aggressive) Roth IRA

Post by tecmage »

sans souliers wrote:Okay, I hate to drop this bomb on the party, but a young man of eighteen may have his own ideas about where his earnings will go, and we haven't heard from him yet.
It sounds like the parents would match funds or even make the contribution for him and wouldn't expect him to put the entire $2500 in the Roth himself. He just needs the earned income so the Roth can be funded.
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BL
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Re: Best Place for Teen's (Very Aggressive) Roth IRA

Post by BL »

DSInvestor wrote:I'd go with a Target Retirement with 90/10 AA for now. It's an aggressive AA. If he earns more money next year and makes another contribution or if account balance grows past $3000, he can always exchange to another mutual fund with $3000 minimum initial investment. Once the account balance gets to that $3000 level, pretty much every mutual fund at Vanguard is available.

You should also stress other issues rather than just go for max risk:

1) The advantage of starting to save and invest at a very young age vs starting later. With a goal of say $2M by age 60, how much would he need to save a year at x%/yr if he starts at age 18, 28, 38, 48 etc? WIth a very long time horizon, modest savings rate with moderate returns can achieve incredible results. Wait 10, 20, 30 years and the savings rate needs to much higher to achieve the same goal by age 60.
Didn't Einstein say that compound interest is the most powerful force in the universe?

2) The importance of savings rate rather than maximizing risk. A $2500 contribution next year may double his portfolio from new contributions alone.
+1

This fund is aggressive but has all the characteristics that are important to contain:
It is diversified.
It is simple.
It includes the basics of Total Stock Market, Total International, and bonds, which are most important in future investing. Shooting for the moon could be successful but is more like encouraging gambling behavior.

If son has his own preferences already, then it is his money so he has the final decision there.
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Re: Best Place for Teen's (Very Aggressive) Roth IRA

Post by LowER »

Just did this. Would only fund up to what has been made by him that is documented for that year. 2065 is what my #1 offspring chose, and I'm so proud. It looks like our others are right there too. ER is a bit high but simplicity trumps that, for now.
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Re: Best Place for Teen's (Very Aggressive) Roth IRA

Post by letsgobobby »

another vote for Target Retirement 2060 fund. We use that for our kids' UTMA accounts.
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bertie wooster
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Re: Best Place for Teen's (Very Aggressive) Roth IRA

Post by bertie wooster »

boglesmkcents wrote:I've steered clear of ETFs (all our money in mutual funds) -- did not realize ETFs are not subject to the same minimums. Sounds great. So with 1 share minimums, looks like he can even set up his own little portfolio of emerging mkt, small cap value, etc. -- even better!
I don't think having a bunch of ETF's of a few hundred dollars is very wise. It will be complex, difficult to manage, and you will have trading costs and bid ask spreads to deal with that will increase your costs. And, as others have said, you're trying to teach your son. I don't think this will do it.

Stick it all in one fund to start. Target Retirement 2060 is outstanding. Once you get above $3k if you don't want any bonds then switch to Total World if you are so inclined (though you should get your son invested so he is making decisions like that).

Good Luck!
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Re: Best Place for Teen's (Very Aggressive) Roth IRA

Post by placeholder »

If it's all in one account it won't be hard to manage and TD Ameritrade and VBS will have no transaction costs on most ETFs so you're way over blowing the "problems".
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BL
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Re: Best Place for Teen's (Very Aggressive) Roth IRA

Post by BL »

Suggest he come to this site and ask for himself. That would also be a learning experience. He can look around the Wiki and watch some videos as well.
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Re: Best Place for Teen's (Very Aggressive) Roth IRA

Post by SJCX »

I wish my parents started me on this path when I was 18.

I'd just start an Vanguard Roth and get an ETF that tracks small caps or the entire market. Then I suggest him to educate himself, listen to some audio books and read this site etc.....

Starting at 18 with compound interest you are talking about some serious tax free money at retirement
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Re: Best Place for Teen's (Very Aggressive) Roth IRA

Post by dickenjb »

I match both my son's earnings dollar for dollar. 20 year old is in TR2050. 17 year old in TR2055.

You don't want to overthink these things.

I am amazed how many parents I know do not take advantage of this wonderful opportunity.
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Re: Best Place for Teen's (Very Aggressive) Roth IRA

Post by Imdeng »

Its a good opportunity to teach the kid about low cost investing, rebalancing, risk/reward, different investment types etc. If I were in your shoes, I will do the following;

1. Open a Roth IRA at a place like Fidelity that has no fees and access to several great ETFs at zero commission
2. Build a simple and easy to track portfolio (for example - US Total Mkt, Ex-US Developed Mkts, EM, Long Term Treasuries - each 25%). Discuss the portfolio - why you have each element - what do they mean - how do they behave etc.
3. Ask the kid to manage the portfolio him/her-self. This will include rebalancing every quarter, buying new shares with each new contribution etc.
4. I think it is more important at this stage to instill the discipline of responsible investing rather than the actual AA of the investment.
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boglesmkcents
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Re: Best Place for Teen's (Very Aggressive) Roth IRA

Post by boglesmkcents »

This thread is exceeding all my expectations -- I really like and appreciate all the advice to use this as a learning opportunity, so not just creating a potentially very valuable retirement account.

One thing I did not mention in my original post is that he currently plans to major in business economics, with a possible double major in psychology -- his leading career interest is actually financial planning (recently emerged after he read The Bogleheads Guide to Investing last summer). Although he has focused on GenEd and intro Econ/Acctg classes his freshman year at college, this investing project will be a great opportunity for him to apply some of what he learned from the book and to further assess his career interests.

BTW, although I agree TR2060 is a great turnkey solution, because of his career interest and if he is interested, I'll try to gently get him spun up on asset allocation concepts (maybe even suggesting some AA reading such as The Intelligent Asset Allocator (Bernstein) or All About Asset Allocation (Ferri) -- all while being careful not to push him too much or risk burning him out.
livesoft
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Re: Best Place for Teen's (Very Aggressive) Roth IRA

Post by livesoft »

My experience with oldest child is that she didn't want to deal with anything with investing. She is happy the money went in and on Facebook teases her friends who do not know what an IRA is. However, her Roth is truly in set-and-forget mode. I make her look at Christmas time when she comes home and help her make adjustments, but if I didn't insist, then nothing would happen.

Anyways, there is no tracking of the portfolio, no knowledge of its asset allocation, no worries about fluctuations or risk level, etc. I have patience and the time will come for all that.

I didn't even tell her that she could withdraw contributions without penalty because of the significant chance that she would do just that.

Anyways, I wonder if some of the advice in this thread comes from folks who do not have 18-22 year olds.
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Re: Best Place for Teen's (Very Aggressive) Roth IRA

Post by Zabar »

boglesmkcents wrote:This thread is exceeding all my expectations -- I really like and appreciate all the advice to use this as a learning opportunity, so not just creating a potentially very valuable retirement account.

One thing I did not mention in my original post is that he currently plans to major in business economics, with a possible double major in psychology -- his leading career interest is actually financial planning (recently emerged after he read The Bogleheads Guide to Investing last summer). Although he has focused on GenEd and intro Econ/Acctg classes his freshman year at college, this investing project will be a great opportunity for him to apply some of what he learned from the book and to further assess his career interests.
Glad we could be of help.

Of course, the problem with taking a Boglehead approach to becoming a financial planner is that it's much more profitable for the clients than for the planner--no churning, none of those luscious 12(b)(1) fees, no cut of front-end loads, no life insurance or annuity commissions. Then again, he'll actually be helping people and will be able to sleep well at night! :D

You're absolutely right that all of this will become much more real and relevant once he has his own investments, and can pay attention not only to what he thinks but to how he feels when they go up and down.
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Re: Best Place for Teen's (Very Aggressive) Roth IRA

Post by ktwalrus »

Does your son have any interest at all in "active" investing? That is, doing a lot of research and then buying stock in a few promising long term companies. I remember when I was first starting out, I read a book by Peter Lynch on successful investing in the stock market. It has made me a lot of money to have my long term money in individual stocks. But, you have to have a knack for investing and not gambling.

If your son thinks he might like to put in the time and effort to try "active" investing in US stocks, I'd suggest he open an IRA brokerage account at Schwab. Have him put half his money into SCHB (the Schwab low cost stock index ETF) and put the remaining half into 5 good stocks. Buy the 5 stocks only as his research dictates (when he finds an undervalued stock that he thinks will appreciate nicely over the next 5 years) and only put 10% of the money he put into the account into each stock. So, 50% in SCHB, 10% in Stock A, 10% in Stock B, 10% in Stock C, 10% in Stock D, 10% in Stock E.

Using this 50/50 AA (50% diversified US equity index ETF and 50% in individual stocks) will allow him to evaluate over time as to whether he has the skill to buy and sell individual stocks. At any given time, he can check the balance of the actively managed stocks against the passively managed index fund. When he adds to the account in future years, he should just buy the same ETF and individual stocks so he never has to manage more than 5 stocks and 1 ETF. If he finds that he isn't interested in "active" management of his retirement money, he can always just sell the stocks and buy ETFs.

I've basically followed this approach for my IRA money, and I currently have $300K in the Vanguard S&P 500 index fund and $2M in individual stocks.
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Re: Best Place for Teen's (Very Aggressive) Roth IRA

Post by Calm Man »

livesoft wrote:
Calm Man wrote:I have 2 pieces of advice:
First, go for it dollarwise. I don't see the need for the discussion about 3K. The kid is earning 2500. Just gift the rest and put in the full 5500.
There is that little rule about having enough compensation to cover the amount of the Roth contribution.
Indeed, I am a dope. But give me credit for paternal instincts.
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boglesmkcents
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Re: Best Place for Teen's (Very Aggressive) Roth IRA

Post by boglesmkcents »

Just replying to a few recent posts in this thread...

livesoft -- yes, approach w/18-22 year olds or thereabouts requires careful thought for sure!

zabar - yes, will strongly encourage fee-only route...I think there are enough issues out there to make plenty of money giving much needed advice -- i.e. do well and do good. May no scale quite as well, but as you indicate, it could be a very rewarding and fulfilling career.

ktwalrus - he may be interested in picking stocks, but I will not encourage it. If he really wants to, will not stop him. Best to figure things out and experiment now while the stakes are lower, and as you've discovered for yourself, there are many paths to success.

Loving all the perspectives and insights being shared in what I thought would be a short and targeted thread.
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Re: Best Place for Teen's (Very Aggressive) Roth IRA

Post by Watty »

Zabar wrote:
boglesmkcents wrote:We have a strong bias towards Vanguard funds, but the only option below $3000 seems to be something like Target Retirement 2060. I'd prefer that he go with something even more aggressive, but not sure if there are any funds/families that would be a good fit with lower fees, indexing, etc. I realize he could transfer to a different fund once over $3K, so not a bad choice, but I'd feel better about an even more aggressive play given his very long runway.
First, congratulations on helping your son start off at such a young age. I'm doing the same thing with my son until he turns 25.

Let me respectfully challenge your assumption about aggressive funds. If your goal is to help him become a successful, long-term investor, you may be unintentionally teaching him the wrong lesson by encouraging him to put all of his money into a single, very aggressive asset class. Since the absolute numbers here are so small, and since there's no guarantee that the aggressive asset class you choose will do well over the next few years (see http://www.callan.com/research/download ... %2F757.pdf), you may be better off encouraging him to invest in a portfolio the includes a broader range of assets, such as Vanguard's Target Retirement 2060. That's still pretty aggressive: 63% domestic equities, 27% foreign equities, 8% domestic bonds, 2% foreign bonds. But it follows the principle of balancing risk with reward.
+1

If you go with a very aggressive fund that could be pretty much a no win situation in the long run. If it does great then you have may have gotten him hooked on a bad investing style that will eventually cause problems. If it does poorly you may have scared him and made him too risk adverse.

Being young and having a long investing horizon is a double edged sword when it comes to taking extra risk. It is easy to focus on what hitting a home run will get him but if taking unnecessary risk costs him a $1,000 loss then that is $1,000 that could have doubled many times until it would have been spent 60 or more years from now.
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boglesmkcents
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Re: Best Place for Teen's (Very Aggressive) Roth IRA

Post by boglesmkcents »

Points very well-taken Zabar and Watty.

I agree that I should use this opportunity to help him understand that this is a good time to be aggressive, but maybe not totally crazy by throwing proven asset allocation mixes out the window. Good point that this is an opportunity to help him learn and understand the benefits of diversifying across asset classes, maybe even 100% stock in his retirement portfolio, but thoughtfully spread across small/medium/large, US/Intl, value/growth, etc. Given his interest in financial planning, I'm thinking a portfolio with 5-6 asset classes would be instructive for him -- although 3 asset classes could be (and I know some would say should be) enough.
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