IRA Guide: You Don’t Have to Know Everything to Have an IRA Account

My answer is: No, nobody needs to be an expert in order to open and invest in an IRA account.

The biggest obstacle from I can see is not whether you know investing or not, but whether you are determined to save for your own retirement. If you make tons of money, you probably don’t need that $5,000 a year (2008 IRA contribution limit) stacked away for your future. But if you are in the working class like me facing an uncertain future of the social security and with no pension to rely on, then you probably will have to take care of your retirement life yourself. One way of achieving that is investing in an IRA account.

Where to get an account?

Once you decide to have an retirement account, the next thing is to find a custodian to open an account. Setting up an IRA account is simple. As long as you have taxable earned income, you are eligible for making contributions to an IRA account. But there are hundreds of places you can open an IRA account, which one to chose?

A general rule I have for investing, not just in IRA accounts but also taxable accounts, is to keep cost low to get the maximum return. For an IRA account, you can get an account either from a broker or from a mutual fund company, depending no what you want to invest. If you want to buy stocks in your IRA account, then look for discount brokers such as Zecco ($0 commission), TradeKing ($4.95 commission), Firstrade ($6.95 commission), and Scottrade ($7 commission). Since trading stocks usually involves commissions, the lower the commission, the more you get to keep with your money. And before getting account, make sure the broker you choose offers No Fee IRA!

Personally, I don’t buy individual stocks in my IRA account because individual stocks are usually volatile. Plus, I want my IRA investment in the set-and-forget mode. What I have are mutual funds. Though brokers like those mentioned above (the so-called mutual fund supermarkets) also offer thousands of mutual funds, buying funds from them will add unnecessary cost because they charge fees, usually much higher than commissions for trading stocks, for buying and selling mutual funds. Discount brokers have funds in their no-transaction fee category, but it’s likely that the fund you want to buy is not included, meaning you have to pay fees to buy the fund you like.

On the other hand, no mutual fund company charges extra fees to buy funds they offer (you do have to pay for the fund’s own fee though, which is the case no matter where you buy it) . So investing directly with the fund company makes sense in the long-term. The only drawback I can think of for this method is that if you buy several funds, all from different companies, you will have multiple IRA accounts to manage instead of just one. If you plan to buy only a couple of funds, then it’s manageable. With fund supermarkets, you have only one account, but that convenience comes with a price.

If you want to have an IRA account, but don’t know much on how to select a fund company, a good place to start are reputable companies such as Vanguard, Fidelity, and T. R. Price, etc. With them, you can find a full line of products at relatively low costs.

What to invest?

Getting an IRA account is simple. Investing in it is not much complex either. In fact, you don’t have to know everything about stocks, mutual funds to start to invest for your retirement. Even if you know absolutely nothing, there are simple choices to let you start right away: just buy two funds while you are educating yourself about investing:

• A total stock market fund
• A total bond fund

at a 80/20 ratio. Quite simple, right? Indeed, as John Bogel, founder of Vanguard, advised investors that the the long-term winning strategy in investing is “simply buy all the stocks in the U.S. stock market and hold them forever,â€? which means that you don’t really have to know a lot about investing to just get started. The best thing about this investment strategy is that by owning the entire stock market, you are exposed to all asset classes. Though the mix of each asset class in a total stock market fund may not give you the return you are looking for, it’s a simple and safe strategy.  To make your life easier, those fund companies also offer lifecycle funds, a single fund consisting of both stocks and bonds that is managed by professionals who will determine the right mix of the two based on your time frame!

Once you know enough about stocks, mutual funds, ETFs, and investing and no longer satisfy with the two-fund portfolio, you can start to add other elements into your investments bases on, for example, asset allocations suggested by model portfolios when you feel confident about making your own choices on what to buy.

So, do you have an IRA account? If you don’t, then what prevents you from having one?

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