By: Revanche

Roth: How I picked a fund

January 7, 2007

I was good and bad when I picked my Roth. I’ve known that this was coming for weeks, duh, I blogged about it when I got my bonus, but I didn’t reallllly research too much. Tsk tsk! Seriously, 3k of my money gone in ten clicks and I didn’t research?? What the heck was I thinking? Well, anyway, I’m glad I waited because I’ve been diligently reading my WSJ and finally hit the investing pages that covered the performance of stocks and bonds. I know past performance is NOT an indicator of future performance, but I just wanted to get a feel for what sorts of bonds were out there.

I decided on a bond mutual fund through Vanguard for two reasons: simplicity’s sake because that’s where my 403(b) is, and because my 403(b) is VERY aggressive, holding 92% stocks. I need some Bond Action to even that up there. [Speaking of Bond Action, I finally caught up to the rest of the world and saw Casino Royale. I was suitably impressed, though rather puzzled by a couple things in the plot. Did anyone else see it? Like it? Dislike? ok, back to the regularly scheduled programming ….] So, bonds. Yes, bonds. I realized that the way I was looking at bonds through Vanguard’s site was leading me to a bunch of junk bonds [well, they’re below investment grade, which are referred to as “junk” bonds, I believe] and although I had read an article about junk bonds becoming more desirable, I’m not ready to go there. High investment grade for me, thanks!

I took advantage of Vanguard’s nifty notes on each mutual fund and decided against one fund because I AM still a low-tax bracket resident and not in need of a tax-exempt fund yet, and against other funds that charge a fee which is never phased out, unlike still other funds which charge $10/year until your fund contains more than $5000.

I finally settled on the fund that has me (for now) written all over it: Long-Term Treasury Fund. It’s for investors who are seeking a high and stable level of interest income, and a bond investment to balance the risks of a portfolio containing stocks. It’s not for investors who are unwilling to accept significant fluctuations in share price or seeking long-term growth of capital.

It’s not that I’m not seeking long-term growth of capital but as I said earlier, I need to balance out my heavy on the stocks portfolio.

6 Responses to “Roth: How I picked a fund”

  1. Chuck says:

    Not sure why you are concerned that you are in a low-tax bracket for a Roth choice – earnings from the Roth account are not taxable.

    That being said, a bond fund is the least tax-efficient choice out there – so a good one for a tax shielded account.

  2. Hi Chuck,

    I wasn’t specifically concerned about being in a low tax bracket, it was more that I didn’t think there was a compelling reason to choose a tax-exempt fund for a vehicle that should already be tax-exempt.

    I must be missing something, or just not as familiar with bond funds as I should be, I’m not sure I understand why bond funds are the least tax-efficient choice? In any case, it seemed like this choice balances my portfolio, albeit with a different type of vehicle which may not be the wisest choice, but it’s just a starter while I learn more about investing.

  3. Chuck says:

    Well, I guess I mean there is really no reason to chose a tax-exempt fund in a tax-exempt account because you will get no benefit from it.

    Bonds aren’t tax efficient because they generate dividends at your normal tax rate instead of the lower dividend rate or long-term capital gains tax rate.

    If you want some more information you can check out the forums over at diehards.org – they have a great deal of information about tax efficiency, and specifically with Vanguards funds as well.

  4. Anonymous says:

    Tax exempt bonds usually pay less interest tahn taxable ones and are only useful for people in the 35% tax bracket in a taxable account. Federal government bonds are actually exempt from state tax and so are slightly more tax efficient than corporate bonds.

    Bonds perform best in recessions. I don’t own them when I think the economy will be strong. With the current inverted yield curve I am very heavy on bonds. From 1981 to the present bonds did well because inflation was falling. It will be hard for inflation to fall more in the future given it is now low I think so outside recessions they won’t be such a good choice for the long-term IMO.

  5. Anonymous says:

    how did you go about your research into selecting funds for your ROTH? i did it kinda blindly … just choosing the SP500 index because i was confused. i admit that wasn’t the brightest idea … but i’ve earned a dividend so far so that’s got to be a good sign.

    that’s interesting you chose the fund based on your tax bracket. that’s a smart move. how do you research that? did you go to vanguard’s site?

  6. ~Moom~ Thanks for that info. I was picking bonds mostly to balance the heavy stock holdings in the 403(b) but because I was reading the WSJ about this inverted curve. I haven’t really formed my opinion about it but ultimately, until I more fully understand how economics work, I’ll try to use common sense to keep growing the retirement money!

    ~Cal~ Sorry for the late reply, I’ve been swamped! Essentially I couldn’t dedicate as much time as I wanted so I felt very clueless. I did some superficial research reading the WSJ (I don’t pretend to fully understand everything I read there) and read the fund descriptions in the quality categories I wanted carefully: High investment grade and Long term. Also, I kept in mind that I wanted to keep costs down (no index funds). Nothing terribly smart, I just tried to be mindful. So I guess we’ll see how this fund fits me!

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