26 Year Old- Looking to Start a ROTH Debating Which company

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Powernick50
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26 Year Old- Looking to Start a ROTH Debating Which company

Post by Powernick50 » Thu Mar 18, 2010 8:35 am

Hey All,

I come from a fairly poor family (Actually just about dirt poor) with no money whatsoever invested.

It's time to break the cycle and start a Roth IRA I've decided.

First, I don't have a lump sum laying around to dump into an account.. So that in mind I've decided on two companies to choose from-
I'm planning on investing 250/mo

Schwab vs Vanguard-

Schwab has recently reduced alot of there costs which was a major complaint I've heard..also they will take 100 deposit each month to open an account

Vanguard STAR fund has caught my eye as it has a low expense ratio and 1000 minimum deposit..so 4 months to wait to open that account.

I want to be fairly aggressive without having to be too hands on so I'm looking at perhaps MCHFX even though its expense ratio is high, it seems to do quite well.

Some educated suggestions or thoughts?

SUMMARY- 26 year old, 250 per month to invest, Schwab vs Vangard, Fairly Aggressive without too much hands on.

THANKS!

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Re: 26 Year Old- Looking to Start a ROTH Debating Which comp

Post by FoolishJumper » Thu Mar 18, 2010 9:01 am

Powernick50 wrote:I want to be fairly aggressive without having to be too hands on so I'm looking at perhaps MCHFX even though its expense ratio is high, it seems to do quite well.

Some educated suggestions or thoughts?
Sorry, but MCHFX is about as far from an educated suggestion as possible. You clearly didn't notice that it's performance from October 2007 - March 2009 was -74%. That first year's $3000 could be worth less than $800 if we have a repeat of that. Are you okay with that? Plus that is called performance chasing and is one of the best ways to perform below the general market. That fund has a 110% gain over the past 13 months. You already missed that; you can't "get" any of it by buying in now.

A better option would be a total stock market index fund or target retirement fund. You simply don't have enough money to start gambling with it, which is what you'd be doing buying into that Matthew's China Fund. SWTSX (Schwab) or VTSMX (Vanguard) are two good options for the total stock market index. Both companies have target retirement funds depending on your level of risk.

You honestly can't go wrong with either Schwab or Vanguard. Most people here would recommend Vanguard (I have my Roth IRA there), but those people aren't just starting out investing with $250. Schwab is a better company for you currently. You can get right into Schwab Total Stock Market Index (with 0.09% expense ratio) with as little as $100 and subsequent investments as low as $1 each. This also means you can branch out sooner. After you get $500 in TSM (2 months), you could put $100 into a Small Cap Value fund if you want more risk (subsequent additions being at equal weighting). Or an International Fund if you want to diversify outside the US a bit more.

Schwab also opens up the no-cost ETF option, but that's probably best to wait until you have a bit more money.

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Post by mptfan » Thu Mar 18, 2010 9:04 am

Vanguard.

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Re: 26 Year Old- Looking to Start a ROTH Debating Which comp

Post by YDNAL » Thu Mar 18, 2010 9:17 am

Powernick50 wrote:Vanguard STAR fund has caught my eye as it has a low expense ratio and 1000 minimum deposit..so 4 months to wait to open that account.

SUMMARY- 26 year old, 250 per month to invest, Schwab vs Vangard, Fairly Aggressive without too much hands on.
Nick, welcome to the Bogleheads Forum.

To contribute to an IRA (Regular or Roth) you need income - I'm sure you know that.

I would go with Vanguard STAR Fund (VGSTX) at Vanguard. In the meantime while you accumulate $1 grand, please do some reading.
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Powernick50
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Post by Powernick50 » Thu Mar 18, 2010 9:22 am

Thanks for the reading list-

Schwab would allow me to purchase stocks cheaper than Vanguard as well- I suppose I could always accumulate in the Schwab and Transfer to Vanguard?

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Post by Downeastah » Thu Mar 18, 2010 9:36 am

Powernick50 wrote:Thanks for the reading list-

Schwab would allow me to purchase stocks cheaper than Vanguard as well- I suppose I could always accumulate in the Schwab and Transfer to Vanguard?
You don't want to be purchasing stocks, at least for right now or quite possibly never. I'm 45 and have never purchased a stock outside of a mutual fund. Stick with the mutual funds that people have suggested above and you will do fine. In the meantime, read those suggested books!
"If everybody is thinking alike, then somebody isn't thinking." George S. Patton, Jr.

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Post by FoolishJumper » Thu Mar 18, 2010 9:54 am

Powernick50 wrote:Schwab would allow me to purchase stocks cheaper than Vanguard as well- I suppose I could always accumulate in the Schwab and Transfer to Vanguard?
I wouldn't recommend stocks (at least not until you have a lot more money to invest)

But the main reason I recommended Schwab initially is because you can invest less money initially. Schwab allows $250 initial investments, and Vanguard requires $3,000! How can anyone recommend the STAR fund over a legitimate Total Stock Market Index Fund? I thought Bogleheads were all about indexing and expense ratios?

Once you build up money at Schwab for a few years, you can transfer your Roth IRA to Vanguard and will be able to buy multiple Vanguard funds at $3000 each.

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Post by wannabe_CPA » Thu Mar 18, 2010 10:12 am

IMHO:

First, good for you that's awesome.

Second, If you can sock away $250 a month, just stick it in a savings account for 12 months and you'll have $3000, then go open your Vanguard Roth IRA and stick it in a Targeted Date account (they're all pretty aggressive imho) until you have enough in there you can branch out into separate funds, if you decide to do that.

One year outside the market isn't going to matter that much with your small initial balance. I personally don't like to mess with transferring stuff, and if there's a transfer fee it will probably wipe out any gains you might make in such a short time on such a small balance. And once it's set up, you can just automatically deposit into it and wash your hands of it. Sure you'll probably want to check once a year or so but no muss no fuss.

In the meantime, Read, read, read, read. You don't have to study 20 hours a week or anything just read investing books and such at your leisure. Nice thing about retirement investing you have lots of time to learn. By the time the year passes you'll have a pretty good idea what you want to do.

But FoolishJumper's idea is perfectly okay too.

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Post by bhoy » Thu Mar 18, 2010 10:19 am

You might want to consider TRP too. No initial investment minimum if you sign up for asset builder. Only a $10/year fee a year until your account reaching 5k. Choose a Target fund and put in your $250/month until you start to build something up, or if something comes up, you can reduce it to as little as $50/month. I am fairly new to this forum, so don't have too much knowledge of Vanguards offerings, but I do remember I decided on TRP over Vanguard because of the initial investment for Vanguard.

Good luck

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Powernick50
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Thanks for the kind responses

Post by Powernick50 » Thu Mar 18, 2010 10:21 am

Thanks for the kind responses!

I'm obviously going to research this a bit more,

My Gut Feeling is to start my Roth IRA with Schwab in an ETF or Total index (maybe 50/50) and build around 6k before transferring it to 2 Vanguard funds.

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Post by Watty » Thu Mar 18, 2010 10:49 am

wannabe_CPA wrote:IMHO:

Second, If you can sock away $250 a month, just stick it in a savings account for 12 months and you'll have $3000, then go open your Vanguard Roth IRA and stick it in a Targeted Date account (they're all pretty aggressive imho) until you have enough in there you can branch out into separate funds, if you decide to do that.

One year outside the market isn't going to matter that much with your small initial balance.
That is likely incorrect. Because the maximum amount that is counted each year for the retirment contribution credit is $2000.

If the OP's income for 2010 is low enough they may qualify for up to a 50% match with the retirment savings credit.

http://www.irs.gov/newsroom/article/0,, ... 86,00.html

If the OP is in the 10% tax bracket and they qulaify for the credit then if they comtribute $2000 to a traditional deductable IRA then they would get a deduction worth $200 and a tax credit of $1000 so they could have a $2000 t-IRA for $800 out of pocket. There may also be a small reduction in the state tax that is due, if the state tax rate is 5% then there would be another $100 savings (2000 *.05) so the final out of pocket cost would be $700.

As your income rises above certain levels the credit may be reduced. One nice thing is that contributions to a deductable IRA also reduce your income so you may be able to qulify for a larger credit by using a deductable tradtional IRA instead of a Roth.

There is a big pitfall though in that this tax credit is not refundable, meaning that if less than $1000 tax is owed then the the credit will be reduced. (This is different than the federal tax withheld from your paycheck, you might have had $900 withheld from your paycheck, if the tax form says the tax due is $1200 you would normally have to pay the missing $300. If you qualifed for the full $1000 credit then you would get a $700 refund instead beccause the tax due was greater than $1000 (1200-1000-900= -700)

If you are married then your spouce can qualify for and additional credit just like this. If your spouce does not have earned income, then they can still likley make an IRA contribution if your combined income was high enough.

Greg

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Re: 26 Year Old- Looking to Start a ROTH Debating Which comp

Post by YDNAL » Thu Mar 18, 2010 10:56 am

FoolishJumper wrote:How can anyone recommend the STAR fund over a legitimate Total Stock Market Index Fund? I thought Bogleheads were all about indexing and expense ratios?
FJ,

The best thing for a young investor starting from $0 is to:
- Increase the savings rate.
- Choose STAR to begin.
- AFter $3000, move to a Target Date fund with the right % Bonds.

That's why anyone would recommend the STAR fund for beginning investors with limited resources.
Landy | Be yourself, everyone else is already taken -- Oscar Wilde

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Taylor Larimore
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Vanguard STAR fund

Post by Taylor Larimore » Thu Mar 18, 2010 10:59 am

Hi Powernick:
Vanguard STAR fund has caught my eye as it has a low expense ratio and 1000 minimum deposit..so 4 months to wait to open that account.
Congratulations for making the decision to "break the cycle" and become an investor.

STAR was our first Vanguard fund purchased in 1986. It was a great investment. As I am sure you know, STAR holds eleven Vanguard funds with varying investment styles and strategies, and with a mix of stocks, bonds, and short-term investments. It has great diversification (lower risk) and is the only Vanguard fund with a $1,000 minimum.

There is no need to go through a broker. Buy direct from Vanguard HERE. Later, if you decide to exchange to another Vanguard fund, you can do it easily, and without cost.

"Spend more than you earn--misery. Spend less than you earn--happiness."
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Re: Thanks for the kind responses

Post by anthau » Thu Mar 18, 2010 11:04 am

Powernick50 wrote:I'm obviously going to research this a bit more,

My Gut Feeling is to start my Roth IRA with Schwab in an ETF or Total index (maybe 50/50) and build around 6k before transferring it to 2 Vanguard funds.
Use caution with this approach: Schwab charges a $50 fee for a full account transfer. Scottrade is one of the few brokers that doesn't charge an exit fee (I believe that a couple of the new brokers also don't, but this is the minority practice).

Disclosure: I am not affiliated with Scottrade, though i have an IRA with them.
Best, | | Anth

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Re: 26 Year Old- Looking to Start a ROTH Debating Which comp

Post by Boglenaut » Thu Mar 18, 2010 11:10 am

Powernick50 wrote:
I come from a fairly poor family (Actually just about dirt poor) with no money whatsoever invested.

It's time to break the cycle
With that attitude, I predict you will succeed. It takes time, but is quite possible to go from living in the projects to being a millionaire. Hang out here, make wise decisions, be frugal and patient, and you will break that cycle.

Good luck to you!

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Post by wannabe_CPA » Thu Mar 18, 2010 3:39 pm

Watty wrote:That is likely incorrect. Because the maximum amount that is counted each year for the retirment contribution credit is $2000.

If the OP's income for 2010 is low enough they may qualify for up to a 50% match with the retirment savings credit.

http://www.irs.gov/newsroom/article/0,, ... 86,00.html

If the OP is in the 10% tax bracket and they qulaify for the credit then if they comtribute $2000 to a traditional deductable IRA then they would get a deduction worth $200 and a tax credit of $1000 so they could have a $2000 t-IRA for $800 out of pocket. There may also be a small reduction in the state tax that is due, if the state tax rate is 5% then there would be another $100 savings (2000 *.05) so the final out of pocket cost would be $700.

As your income rises above certain levels the credit may be reduced. One nice thing is that contributions to a deductable IRA also reduce your income so you may be able to qulify for a larger credit by using a deductable tradtional IRA instead of a Roth.

There is a big pitfall though in that this tax credit is not refundable, meaning that if less than $1000 tax is owed then the the credit will be reduced. (This is different than the federal tax withheld from your paycheck, you might have had $900 withheld from your paycheck, if the tax form says the tax due is $1200 you would normally have to pay the missing $300. If you qualifed for the full $1000 credit then you would get a $700 refund instead beccause the tax due was greater than $1000 (1200-1000-900= -700)

If you are married then your spouce can qualify for and additional credit just like this. If your spouce does not have earned income, then they can still likley make an IRA contribution if your combined income was high enough.

Greg
A very good point if this applies to him.

But as someone whose effective tax rate is much closer to 10% than 15%, even I don't even qualify for the retirement savings credit (and if it's not for younger adults in lower paying jobs trying to save so as not to be a burden in later years, who is it for?). Pub 590 covers some tests you have to pass to qualify besides making a certain amount of income.

Most people who could benefit from it and who are interested in it can't take it because they fail one of the tests.

Granted I am working with a biased sample. The OP could be an exception.

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Post by Powernick50 » Thu Mar 18, 2010 3:54 pm

I make 35k a year..wife makes 50k yearly

(Ph.D heh...sucks to be a post doc)

At any rate-

Current Plan-

Impatient and Want to open an account with Schwab to get the ball rolling on a Target Retirement 2040.

Once that gets some steam going (6k+) Transfer over to Vanguard at 75/25 Allocation between a Target fund and something more risky.

(Uneducated decisions that will be rectified with further reading)

Step 1 is currently going to be in motion which is opening the Schwab Roth.

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Re: 26 Year Old- Looking to Start a ROTH Debating Which comp

Post by honkeoki » Thu Mar 18, 2010 4:03 pm

Powernick50 wrote:I come from a fairly poor family (Actually just about dirt poor) with no money whatsoever invested.
Me, too. Welcome!
Powernick50 wrote:It's time to break the cycle and start a Roth IRA I've decided.
Great decision!
Powernick50 wrote:I'm planning on investing 250/mo
Wow -- I started with only $50/mo.

Listen: you've got a lot of good advice here but I feel moved to contribute my two cents, since I started in the same place not too long ago.

Consider T. Rowe Price. Their expenses are higher than Vanguard but they do have these compensating virtues:

- they'll accept a minimum $50/mo. direct deposit (they call it "asset builder")
- they have the best customer service of any company I've ever dealt with, hands down
- They have a wide range of funds.

I highly recommend T Rowe Price for those reasons -- also, you can get started immediately. with $250/mo. it won't take you long to build up the minimum $3k you need to roll your Roth over to Vanguard. Alternately, you can start dollar-cost averaging into 5 different asset classes (!!!!) with T. Rowe Price immediately.

Congratulations on starting your journey so early! Good luck to you.

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Post by monkey_business » Thu Mar 18, 2010 4:17 pm

Personally, if you will want to invest with Vanguard in the near future, I would start with Vanguard from day one. The reason? Transferring IRAs is not a big deal, but can be a hassle, does take weeks to process, and introduces the potential for errors/mistakes (i.e. headaches for you to resolve). Also, as others have noted, you will most likely pay an exit fee when you transfer from another institution to Vanguard.

So, if you want to go with Vanguard, save $1,000, open an IRA with the STAR fund. Then, when you have $3k, transfer to a target retirement fund. Then, as your account grows, if you want, branch out to other funds. I think this approach will involve the fewest hassles for you.

Just as an FYI, I recently transferred a Roth IRA from ETrade to Vanguard, and it was not as smooth as I would have liked. Nothing major, but I did have to call both ETrade and Vanguard several times to resolve some issues. Not to mention the fact that the transfer took well over a month to complete. If I had to do it all over again from day one, I would have followed the approach I outlined in the previous paragraph.

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Post by honkeoki » Thu Mar 18, 2010 4:45 pm

monkey_business wrote:Personally, if you will want to invest with Vanguard in the near future, I would start with Vanguard from day one. The reason? Transferring IRAs is not a big deal, but can be a hassle, does take weeks to process, and introduces the potential for errors/mistakes (i.e. headaches for you to resolve). Also, as others have noted, you will most likely pay an exit fee when you transfer from another institution to Vanguard.
I recently rolled my Roth and traditional IRAs from TRP to Vanguard with 0 issues, 0 phone calls, 0 hassles. That's really only a limited sample of experiences of course -- and I think generally it's a good idea to minimize the numbers of these sorts of accounts you have open -- so I think you'll be okay with Monkey's advice or my own. Or anyone's.

You're starting way ahead of the game. Again, kudos to you.

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Post by kiaseduniai » Thu Mar 18, 2010 4:56 pm

I come from a fairly poor family (Actually just about dirt poor) with no money whatsoever invested.

It's time to break the cycle and start a Roth IRA I've decided.
Congratulations ! I was exactly there couple of years ago.

You will get great advice in this forum. I would recommend starting a ROTH right now wherever you can (Schwab/T Rowe). Moving to Vanguard later will be a hassle, but the satisfaction you will get from contributing to a ROTH right now is worth a lot. For individual investors, psychology effects return more than the market.

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Post by tim1999 » Thu Mar 18, 2010 6:18 pm

I'd say starting with the Vanguard STAR fund would be a solid choice. It's sort of a "gateway drug" to the rest of the Vanguard funds with $3,000 minimums.

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Post by The Dude Abides » Thu Mar 18, 2010 7:24 pm

Welcome to the forum.

Like you, my family struggled, and I'm really the first one to make saving for retirement a priority, so I commend your efforts. In fact, I'm 28 and only started saving in November, so we're kind of in the same boat. I chose Schwab for the same reasons you cited. When you're ready to start investing, the last thing you want is to have to delay that first purchase just to meet an arbitrary minimum investment. The important thing is to get started, if only for the psychological benefit. Schwab is a better option for young investors, IMO. Invest with Schwab now, then switch to Vanguard later when your income grows.

I like SWTIX .

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Post by Ilovevolleyball » Thu Mar 18, 2010 7:27 pm

Hello,

Open the Roth for 2009 if able. Deadline to do so is 04/15/2010. There are benefits to opening up one year prior, like if need to take out funds for first time home purchase...

Mike

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theac
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Post by theac » Thu Mar 18, 2010 7:41 pm

Ilovevolleyball wrote:Hello,

Open the Roth for 2009 if able. Deadline to do so is 04/15/2010. There are benefits to opening up one year prior, like if need to take out funds for first time home purchase...

Mike
Good idea. Start your Roth 5 year maturing period count down from 2009, better than 2010.
"We keep you alive to serve this ship. Row well...and live." Ben Hur...and The Taxman! hahaha

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Post by Cash » Thu Mar 18, 2010 9:01 pm

The Dude Abides wrote:Welcome to the forum.

Like you, my family struggled, and I'm really the first one to make saving for retirement a priority, so I commend your efforts. In fact, I'm 28 and only started saving in November, so we're kind of in the same boat. I chose Schwab for the same reasons you cited. When you're ready to start investing, the last thing you want is to have to delay that first purchase just to meet an arbitrary minimum investment. The important thing is to get started, if only for the psychological benefit. Schwab is a better option for young investors, IMO. Invest with Schwab now, then switch to Vanguard later when your income grows.

I like SWTIX .
I agree with this. I haven't really seen a compelling argument to choose Vanguard over Schwab in your case. Vanguard is great, but I think there are better options for people just starting out.

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Post by Scottner » Thu Mar 18, 2010 9:23 pm

If you think you might want to invest in ETFs or stocks at any point down the road, you may want to think twice about using Vanguard. Their brokerage service fees are quite high compared to other brokerage firms. Schwab is quite reasonable for trades using their ETFs (free) and normal stock trades, but if you want to invest in Vanguard funds you will find that most brokerage firm's NTFs (including Schwab) don't include Vanguard. That means you'll pay nearly $50 to purchase Vanguard through Schwab.

I'd suggest looking at Scottrade. NTF mutual funds are free of charge, and if you want to invest in Vanguard, the fee is only $17 for the initial purchase. You can setup systematic purchases of that same Vanguard fund for $2 per purchase from that point on. Stocks and ETFs are only $7 per trade. Their customer service is very good. Disclaimer: I'm a satisfied customer of Scottrade, not an employee.

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Powernick50
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Post by Powernick50 » Fri Mar 19, 2010 8:52 am

Schwab has won the day for now-

I'll start investing earlier...and eventually switch to Vanguard if needed.

SWTIX has a very low expense ratio (For however long that waiver lasts)

Should I just put my entire allocation into that for awhile?

I could probably do a 50/50 split at the start.

(Again this is for a ROTH)

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Post by FoolishJumper » Fri Mar 19, 2010 9:45 am

Powernick50 wrote:Schwab has won the day for now-

I'll start investing earlier...and eventually switch to Vanguard if needed.

SWTIX has a very low expense ratio (For however long that waiver lasts)

Should I just put my entire allocation into that for awhile?

I could probably do a 50/50 split at the start.

(Again this is for a ROTH)
Although some here may not agree with your choice, you certainly are not making a poor choice, and are starting on a good road. Now you just need to keep it up for 30-40 years and you're good to go! :shock:

Most people here suggest having a minimum of 20% in fixed income (i.e. bonds), as historic data as shown that you don't get increased return from going 100% equity, but you do get decreased risk from going 80% equity & 20% fixed income.

As such, you could use the following:

Month 1
$150 - SWTSX (I believe Schwab re-tickered SWTIX to SWTSX) (66%)
$100 - SWLBX (Schwab Total Bond Fund) (33%)

Month 2
$250 - SWTSX ($400 - 80%)
$0 - SWLBX ($100 - 20%)

Month 3 and later
$200 - SWTSX ($600 -80%)
$50 - SWLBX ($150 - 20%)

That will keep you on a constant 80% equity and 20% bonds. Once per year you can rebalance if one does better than the other. Once you build up a nice pool of money in those two. Then you can read some advice here and possibly overweight towards Small Cap or International. That means adding one or two more funds to your portfolio. This may be nice if you plan to keep your eye on it and rebalance if anything gets out of line, but if you want to leave and forget, then I'd keep the above two funds with a once per year rebalance.

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Powernick50
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Post by Powernick50 » Fri Mar 19, 2010 10:01 am

Thank you very very much for all the advice thus far.

My thinking now for Scwab is that I could have everything all in one package there.

Currently have an account with 5/3 and have absolutely no incentive with staying.

I could have a 2% cashback card that rolls into my index funds through Schwab.

My IRA's

ETF trading fund

etc..etc.

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Powernick50
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You guys have brainwashed me...

Post by Powernick50 » Mon Mar 22, 2010 7:59 pm

I've been brainwashed with the bogleheads book I'm halfway through!

must...chose...vanguard...*drools*

Seriously though.

Seems like the Vanguard Lifestrategy Growth fund looks like a good one for a newbie to start with after graduating from the STAR fund.

Would you guys call that "Good" for now. Notice I didn't say BEST (meaning I don't have alot of cash to play with to do my own allocations)

Saving 1k until I can get into the Vanguard STAR fund.

Then at 3k for my Roth switching to the Lifestrategy Growth fund.

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Taylor Larimore
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Target Funds vs. Life Strategy Funds

Post by Taylor Larimore » Mon Mar 22, 2010 8:25 pm

Hi Nick:

In my opinion, Vanguard's Target Retirement Funds are a significant improvement over their earlier Life Strategy Funds for these reasons:

* 11 choices instead of 4.

* More diversification including international.

* No Asset Allocation Fund so you always know what you've got.

* Target funds automatically become more conservative with age.[/i]
"Simplicity is the master key to financial success." -- Jack Bogle

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