Hi all,

Last year I started a Roth IRA with the Vanguard STAR Fund. I am currently 24. I maxed it out in 2010 and plan to do the same this year. According to Vanguard, I have $5700 in contributions, and $293 in investment return. Is this good? Bad? Should I look at other options?

I also am considering making an additional contribution to my company's 401k. They will match 50 cents on the dollar up to 6%, so basically they will contribute up to 3% of my salary vesting 100% after 4 years. How do I know if my company's 401k is a good investment choice and that I wouldn't be better off investing my money somewhere else?

I look forward to hearing your advice. I'm not exactly an investment guru, so any help is appreciated. Thanks!

What are your risk tolerance? The Star Fund isn't a bad choice, but it has too high a percentage of bonds for my taste.

As for the 401(k) you need to find out what your investment options are. Usually it is good to contribute up to the maximum match your company will give (free money), but in some extreme cases the investment options can be bad enough to justify not contributing at all.

I agree on all counts. At 24, the OP should be completely in equities if his risk tolerance will allow for it. At this point, I think the Total Market Stock Index Fund would be a good choice. He can add the Total International Stock Index Fund later (maybe next year).

And I also agree with finding out what the fund options are on the 401(k). And just as importantly, what the fees are. I've seen some 401(k) plans with fees so high that they essentially negate the company match after a few years.

Thank you for your advice. Apologies for the (probably) dumb question, but what specific factors make the Total Market Stock Index Fund better than STAR in my situation?

I will look into what my 401(k) options are and get back to you once I figure that out.

Thanks to both of you for your help so far!

The Total Market Index is 100% stocks. As it's name implies, it is an index of the entire U.S. stock market. It seeks to mirror the returns of the total market.

The Star fund is roughly 60% stocks and 40% bonds. The stock portion is made up of several other Vanguard stock funds and the bond portion is made up of several other Vanguard bond funds.

At your age, and assuming you can take the added risk and volatility of 100% stocks, you will have a better chance for a much higher return that with 40% bonds (which will not be as volatile, but won't return as high).

The total market index also has lower cost 0.18% for Investor shares ($3,000 minimum) and 0.07% for Admiral Shares ($10,000 minimum) versus 0.34% for the Star ($1,000 minimum it doesn't appear Admiral shares are available for the Star fund). Though both funds have very low expenses in general.

As for your risk tolerance, one question you need to ask yourself: "Can you handle seeing the value of you account drop significantly (maybe 20%) in a short amount of time without immediately pulling out of the funds? If you can, at your age, you'd be best served with a high percentage of stocks (90-100%). If such a decline would cause you to sell off the funds and just hold cash or CD's etc, stick with bonds. You'll earn a lower return, but you'll be able to sleep at night.

Once you find out your 401(k) investment options and fees, let us know. I'm sure several of us will chime in with help on selecting the right funds for you.

bpgui is spot on in his explanation of the Total Market Stock Index. I'm going to elaborate a little bit more on why it's better choice for you.

As mentioned before, you're essentially trading greater volatility in exchange for greater returns. The reason why it's right for you (and not so right for others) is your youth. The market has a long term tendency to go up faster than any other asset you can invest in. However, it has been known to underperform for years. Once example is the first decade of this millennium. Starting the with the dot com bust in 2000, recovering and then cratering again in the most recent recession, the market ended up more or less flat for a decade while wildly swinging up and down. We saw a similarly flat decade in the 1970s.

So why does it make a difference when you're young? It's because you have the timeline to wait out the downturns. If you faithfully dollar cost average (i.e. regularly make contributions no matter what the market is doing), you will automatically be buying more shares when the market is down and fewer shares when the market is up. In essence, you'll be loading up on shares when they're on sale without having to give it any thought. A person who is older and closer to retirement doesn't have the luxury of waiting out a long downturn. Being young, you should be focused on capital appreciation. As you get older, your focus will turn gradually to capital preservation. The art or science of finding the right balance for yourself is called asset allocation.

Now I'm going to refer you to a document that I recommend so often that I'm sure that the other regulars on this forum are probably tired of it. It's called The Whole Story (click on the link), it's an excellent primer on investing and it's free. It's only 53 pages and an easy read. It will cover asset allocation, fees, taxes, managed vs. index funds, etc. Read it and it will help you built an excellent foundation for your investment planning. You'll ahead of 90% of the folks out there. And it will give you some context about what we tell you here, so that what we advise you about will make some sense to you.

Thanks for the information, guys! I'm pretty risk averse, so I'll read up on this stuff a little more before I go jumping into a 90-100% stock fund. I have much to learn!

Given that the OP is starting from - no offense - a complete lack of knowledge, asking him what his "risk tollerance is" is not useful.

Retirement investing for dummies is where the OP needs to start. First things first:

- Max your 401k to the limit of your employer contribution
- Contribute to your IRA

Lets avoid the tax conversation around both accounts, and assume that at 24 - tax implecations at 65 can wait a few years. So invest in both.

Now, what to buy. This is pretty easy. Target Retirement 2040 or Target Retirement 2050 funds are a perfect place to start your retirement savings. Over time they become more conservative, and generally track a prudent route to retirement savings.

This you can start today.

Tomorrow, you need to start years of research with one question: When I buy x investment, what do I own?

That will take you some time to trully understand. Everything else stems from that.

Good luck

It certainly is useful. If the OP cannot handle volitility, a high percentage of stock is not going to be a good recommendation for him.


VinTek already covered that with the document he linked to.
he needs to findout the fees and investment options on his 401(k) before a deciding to contribute to the plan. It is rare, but some 401(k) plans have extremely high fees and/or horrible investment options, that it makes it better not to contribute.


the target date funds might be a good choice, except the OP indicated he was rather risk adverse.

The grand assumption you make, is that the OP understands his risk tollerance. He doesn't. Every other part of your argument is based upon his understanding of his own risk tollerance, and therefor is projection on your part.

For example:
-Do you think the OP understands that a savings account earning 1% actually loses 1.5% of its purchasing power per year due to inflation?
- Do you think the OP understand WHAT he is buying when he buys a stock? A bond? A ETF? A Mutual fund? He doesn't.

So, if he doenst know what he is buying. And standing still loses purchasing power through inflation.... what is his risk tollerance? How can he answer: "What will you do if your portfolio loses 20% of its value?" HE DOESN'T KNOW. Any answer he gives is a guess.

If you really want to help him, then understand that his level of knowledge is at this point, useless. Guide him into the mainsteam thinking (Target Funds) to get him started. Then provide research material.

Anything beyond that and you are on the slippery slope of providing a strategy that is entirely based upon a GUESS by your OP. Not a good idea....

You are correct. Hence the need for him to educate himself.


I respectfully disagree. Putting him into a Target Retirement Fund (which at his age would be 90% stocks anyway) would expose him to risk that he unprepared for. He's currently risk adverse and owns the STAR Fund, which is very conservative for his age. He needs to understand what he's doing before entering a different fund, even a Target Retirement Fund. A lot of people were disillusioned and bailed on Target Retirement Funds during the recession precisely because they weren't prepared for the risk. They essentially bailed by selling low, which is the exact opposite of what we want people to do.

So your solution is just to throw him in the target date fund without any attempt to learn if it is right for him? I disagree.

I also disagree with advising him to blindly contribute to a 401(k) without knowing the investment options or fees.

There is an old phrase, "paralysis by analysis," that comes to mind. Let's agree on this:

- OP doesn't know his risk tollerance, and likely wont for some time
- OP cannot project tax burden he will face 30 years from now
- To start saving now, is better then to wait to save until OP does understand these things.

The sage advice you have to understand options in a 401k is great. But how will he be able to accurately calculate the impact of high expense fund options... or even know they are "high expense?" How can he do an analysis of IRA vs 401k without a detailed understanding of current and projected (30 years hence) tax liabilities? Paralysis by analysis for a newbie.

Most 401k's today offer target retirment funds, as well as total allocaiton funds - such as the one he is in today. My "Target Retirement" suggestion was a projection based on another thing I think we agree on:

- His current fund is more conservative then the typical asset allocation for a person of his age

Frankly, he could sit tight with what he owns and do the research you guided him towards. He should start with a goal of being able to explain, to a finance novice, what he owns and why.

Think we agree here.

I agree with the second and third, but only somewhat with the first. I don't think he, as a beginning investor, can quantify his risk tolerance, but I think he would have a good idea what seeing a huge drop in his portfolio would do to him psychologically.
Which is why we asked him to find out and let us know so we could offer advice.

I never said anything about projecting tax liabilities.

Most probably do, but we do not KNOW that his does.

I agree with that (that his fund is more conservative than typical for his age), but if he has already stated he is risk adverse, he shouldn't be in a more aggressive fund until he's done the research and determined whether or not he is comfortable with the higher volatility.


That, yes.

OK... I'm back. Haha. Here are my options for 401(k) plans. Any recommendations or plans I should completely avoid? Thanks again.

• Diversified Stable Pooled Fund ()
• PIMCO Total Return Inst Fund (PTTRX)
• BlackRock Inflation Protected Bond Instl Fund (BPRIX)
• PIMCO High Yield Instl (PHIYX)
• MFS Value R3 (MEIHX)
• Transamerica Partners Instl Stock Index Fund (DISFX)
• American Funds Growth Fund of Amer R3 (RGACX)
• Goldman Sachs Mid Cap Value Fund Instl (GSMCX)
• Vanguard Mid Cap Index Fund (VMISX)
• Nuveen Mid Cap Growth Opp Fund (FISGX)
• Lord Abbett Small Cap Value (I) (LRSYX)
• Vanguard Small Cap Index Fund (VSISX)
• T.Rowe Price New Horizons Fund (PRNHX)
• Nuveen Real Estate Securities Fund (FARCX)
• American Funds EuroPacific R5 (RERFX)
• Oppenheimer Developing Markets Fund (Y) (ODVYX)