Switching Vanguard funds within a Roth IRA

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serikk85
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Switching Vanguard funds within a Roth IRA

Post by serikk85 » Thu Jan 12, 2012 10:22 pm

So I am a college student and am looking to make my first investment. I have $1000 on hand. Ideally, I would like to invest in VTSMX but the minimum investment is $3000. I was thinking about just opening a Roth and buying a fund with a $1000 minimum (VFIFX for example), contributing regularly, and then converting to VTSMX when the balance reached $3000. It would probably only be about six months or so until my contributions reach that point. I guess my question is, will I be slapped with any fees for converting? Since VTSMX is the investment I really want to make, should I just save up $3000 in cash before investing?

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ejvyas
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Re: Switching Vanguard funds within a Roth IRA

Post by ejvyas » Thu Jan 12, 2012 11:33 pm

You need to check the fees tab : https://personal.vanguard.com/us/funds/ ... st=tab%3A3
I see no fees but since you have only $1000 in Vanguard you may be subject to Account service fee.

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Kevin M
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Re: Switching Vanguard funds within a Roth IRA

Post by Kevin M » Fri Jan 13, 2012 5:33 am

Why don't you want to just stick with a Target Retirement fund, with a $1,000 minimum? You don't want 30% in international? 10% in bonds (in the 2050 fund) isn't much (most on this forum would recommend at least 20%). I would stick with a Target Retirement fund.

But, if you really want to exchange into Total Stock when you get to $3,000, there will be no fees to do so. There are no account fees if you sign up for electronic statements.

Kevin
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itslate
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Re: Switching Vanguard funds within a Roth IRA

Post by itslate » Fri Jan 13, 2012 5:25 pm

i started my vanguard roth with a target date fund at a 90/10 stock to bond split and when i found through reading and research that my ability to handle risk made a split closer to 70/30 more palatable i switched to my current target date fund. there were absolutely no issues, fees, or other problems doing so. i would recommend that you research the target date funds and consider choosing one with the allocation desirable to you, bearing in mind that it may or may not have the date you think it would in the name.

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ruralavalon
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Re: Switching Vanguard funds within a Roth IRA

Post by ruralavalon » Fri Jan 13, 2012 5:35 pm

serikk85 wrote:So I am a college student and am looking to make my first investment. I have $1000 on hand. Ideally, I would like to invest in VTSMX but the minimum investment is $3000. I was thinking about just opening a Roth and buying a fund with a $1000 minimum (VFIFX for example), contributing regularly, . . . .

Go ahead, pick a TR fund with the asset allocation you prefer and just get started. A TR fund gives you a fairly diversifired portfolio in a single fund.

Establish a savings rate as high as you can comfortably maintain, in the beginning the savings rate is more important than any other factor (that you can control) in portfolio growth: http://www.bogleheads.org/forum/viewtop ... 1291908362 .
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started

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wlpotts
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Re: Switching Vanguard funds within a Roth IRA

Post by wlpotts » Sat Jan 14, 2012 5:57 am

itslate wrote:i started my vanguard roth with a target date fund at a 90/10 stock to bond split and when i found through reading and research that my ability to handle risk made a split closer to 70/30 more palatable i switched to my current target date fund. there were absolutely no issues, fees, or other problems doing so. i would recommend that you research the target date funds and consider choosing one with the allocation desirable to you, bearing in mind that it may or may not have the date you think it would in the name....
I am in agreement with the above quoted poster"itslate" and the reasoned approach.

Many years ago, when I started my first IRA, it was extremely difficult for me to accumulate the minimum amount dollars required in order to open and invest in a Vanguard IRA account. I couldn't afford to loose much of my my initial investment dollars due to my limited resources. I remember that I had to go to extreme measures in order to come up with funds in order to make my initial investment in order to qualify for opening an IRA account. I was limited to just one fund option that was available back then.

That initial $1000.00 minimum required investment was the most amount of money that I had ever saved and committed towards my future. Remember that an IRA investment could not be touched until one reaches 59 1/2 years of age without extreme penalty. At that point of my life, $10 was a meaningful and extremely valuable amount money. Money that I needed to save in order to meet the required minimum investment. Eventually, I accumulated the funds and made the commitment to opened an IRA account with Vanguard. I didn't want to have to be eliminated for eligibility from the fund minimum qualifications or be subjected to have pay low balance penaly fees if my initial investment suffered from a negative market fluctuation.

Fortunately, the only fund availablIe at the time was the STAR Fund (65% stock/35% bond +/-) with a 1K minimum required balance. I was young, afraid of loosing money, insecure, and without assets. I wanted stability, dividend growth and appreciation (and needed) a balanced fund that was less subjected to huge market swings. The balanced fund protected me and gave me confidence to continue investing

One of the most important things I had learned from this forum is that one needs to look at all of your assets and investment vehicles as a total portfolio. Once you have an understanding of what you have and where it is located the better you'll be able to assertain your financial positions and be able develop and deploy a strategic plan.
The most important things I've learned is understanding diversification which comes in two parts, the third part is ultimately where it all happens...Implementation
1) Firstly, diversifying investments of stock/bond, domestic/international, small cap/mid-cap, developed emerging etc.
2) Secondly, what investment vehicles are available, and what priorities should you allocate monies to stategically? MM, IRA, Roth IRA, Tax Acct, 401K, 403b, etc.
3) Develop, understand and define a Personal Investment Policy Statement

Whatever you decide to do, it is ultimately up to you to make your own decisions and accept your responsibilty for making those decisions. Do your due diligence and research the topics and resources available. The knowledge and support you'll find here is not found anywhere else. If you apply the principles of what you learn here you'll become a successful investor.

Respectfully,

wlpotts
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mamster
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Re: Switching Vanguard funds within a Roth IRA

Post by mamster » Sat Jan 14, 2012 12:25 pm

Great story, wlpotts. I also started with $1000 scraped together and the STAR fund. Nowadays I'd tell people to start with a TR fund, but I bet a lot of us have fond memories of starting out with STAR when $3000 seemed like a million dollars.

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serikk85
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Re: Switching Vanguard funds within a Roth IRA

Post by serikk85 » Sun Jan 15, 2012 5:56 pm

Wow, thanks everyone for the input and advice! I really do appreciate it. Let me explain what my long-term plans are a little more fully, and you all can let me know if I'm way off base or not. I do really like the asset allocation strategies followed in the target funds. I noticed, however, that none of these target date funds have Admiral Shares. Since each of the component funds do have admiral shares, I thought I would just buy the component funds individually and essentially reconstruct the target date fund. I know this will take a long time to do, and require more management on my part to keep the funds balanced. However, I thought eventually achieving the same portfolio as the target fund, but with lower expense ratios, would pay off in the end.

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Kevin M
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Re: Switching Vanguard funds within a Roth IRA

Post by Kevin M » Sun Jan 15, 2012 8:47 pm

serikk85 wrote:Wow, thanks everyone for the input and advice! I really do appreciate it. Let me explain what my long-term plans are a little more fully, and you all can let me know if I'm way off base or not. I do really like the asset allocation strategies followed in the target funds. I noticed, however, that none of these target date funds have Admiral Shares. Since each of the component funds do have admiral shares, I thought I would just buy the component funds individually and essentially reconstruct the target date fund. I know this will take a long time to do, and require more management on my part to keep the funds balanced. However, I thought eventually achieving the same portfolio as the target fund, but with lower expense ratios, would pay off in the end.
That's a great plan. So just stick with the Target Retirement fund until you have enough to exchange into admiral shares of the underlying funds, or at least enough to switch into the investor shares of the underlying funds. This will maintain your desired asset allocation, whereas switching into Total Stock when you get to $3K (per your OP) would put you 100% into US stocks. You will qualify for admiral shares of Total Stock Market first, since that's the highest allocation. At that point, you could exchange into admiral shares of TSM, and investor shares of TISM and TBM.

Kevin
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itslate
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Re: Switching Vanguard funds within a Roth IRA

Post by itslate » Sun Jan 15, 2012 9:10 pm

that's pretty much my plan as well, serikk85. I have a 403b at work in addition to my Roth, and as my portfolio gets large enough I plan to switch some things around to lower overall expenses. Till then, like Kevin M suggests, I plan to stick with the Target Date funds in both my 403b and Roth.

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serikk85
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Re: Switching Vanguard funds within a Roth IRA

Post by serikk85 » Thu Jan 26, 2012 2:56 am

I just opened my Roth at Vanguard. I put $1000 into the 2050 Target fund. I do have one concern about breaking up the portfolio into the component funds. The Target funds invest in VTBIX, the Total Bond Market II index fund. I don't think this fund is available to personal investors. I've only been able to find it when I go onto Vanguard's institutional investors page. Would I see a difference in performance if I used the Total Bond Market index fund instead of TBMII? I know there is a difference in expense ratios. Even though TBM has a higher expense ratio than TBMII, I think the total expense ratio will still work out in my favor once I am able to get admiral shares of VTSMX. If anyone would check my math, I'd greatly appreciate it.

VFIFX:
0.18(0.63) + 0.26(0.27) + 0.12(0.10) = 0.1956

Component portfolio w/ VTSMX Admiral shares and VBMFX instead of VTBIX:
0.07(0.63) + 0.26(0.27) + 0.22(0.10) = 0.1363

This expense ratio advantage would obviously improve as I am able to convert all of the funds to admiral shares. But are there any other differences between TBM and TBMII that I should know about or can I substitute one for the other without worry?

Thanks again for your help. This forum is a terrific place for beginners like me.

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Kevin M
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Re: Switching Vanguard funds within a Roth IRA

Post by Kevin M » Thu Jan 26, 2012 5:05 am

serikk85 wrote:Would I see a difference in performance if I used the Total Bond Market index fund instead of TBMII?
I would've thought the answer is no, assuming that they're really the same under the hood. To my surprise, the performance seems to be somewhat different lately. You can compare them on Morningstar (growth chart), Google Finance (price chart), or some other finance site. However, over longer term, the performance difference is insignificant. I wouldn't worry about it.
serikk85 wrote: I know there is a difference in expense ratios. Even though TBM has a higher expense ratio than TBMII, I think the total expense ratio will still work out in my favor once I am able to get admiral shares of VTSMX. If anyone would check my math, I'd greatly appreciate it.

VFIFX:
0.18(0.63) + 0.26(0.27) + 0.12(0.10) = 0.1956

Component portfolio w/ VTSMX Admiral shares and VBMFX instead of VTBIX:
0.07(0.63) + 0.26(0.27) + 0.22(0.10) = 0.1363
Looks correct to me. The expense ratios are so low it's not going to make much difference anyway.

Again, I wouldn't worry about it. I think you're fine sticking with the Target Retirement fund as long as you want, and only switching into the individual funds if the extra complexity is worth it to you to save a few bucks (once you qualify for Admiral shares).

The only other reason to use the 3 funds might be if you eventually have investments in a taxable account, in which case you want to start thinking about tax efficiency. Some also might prefer to control the rebalancing themselves, but again, it's questionable if the extra complexity is worth it.

Kevin
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KyleAAA
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Re: Switching Vanguard funds within a Roth IRA

Post by KyleAAA » Thu Jan 26, 2012 9:31 am

The savings are going to be negligible. I would just invest in the target fund UNTIL you have enough money to own admiral shares of ALL the funds. That way you are fully diversified at all times, whereas if you wait to do things piecemeal you will have a very undiversified portfolio for years at a time. Once you get $30,000 or so, then just transfer everything out at once. You might pay, what, like $5 extra over 40 years by doing that? No big deal.

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Re: Switching Vanguard funds within a Roth IRA

Post by Exige » Thu Jan 26, 2012 12:49 pm

I opened mine with the 1k minimum last year in the target 2030. I am now at about 3500$ I have been considering the moving mine to the life strategy now which has the same AA but a lower expense ratio. The ratio is hardly a factor since I would save almost nothing with my small amount. however I do not plan to change my AA any time soon and the life strategy keeps the AA instead of slowly becoming more conservative.
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Re: Switching Vanguard funds within a Roth IRA

Post by Kevin M » Thu Jan 26, 2012 2:24 pm

KyleAAA wrote:The savings are going to be negligible. I would just invest in the target fund UNTIL you have enough money to own admiral shares of ALL the funds. That way you are fully diversified at all times, whereas if you wait to do things piecemeal you will have a very undiversified portfolio for years at a time. Once you get $30,000 or so, then just transfer everything out at once. You might pay, what, like $5 extra over 40 years by doing that? No big deal.
Yes, the savings are going to be small, but I don't think it's correct that he would be undiversified if he switches over once he qualifies for Admiral shares of Total Stock Market. At that point he would be able to meet the minimum $3K investment for investor shares of Total International and Total Bond, so could maintain same AA as the TR fund (as discussed earlier in thread).

I believe the savings will be about $6/year on $10K = $60/year on $100K (ER reduction of about 6 basis points), so yes, pretty negligible.

Kevin
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