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Subject:  Re: Roth IRA + Individual Stocks Date:  4/5/2001  6:59 PM
Author:  TheVlad Number:  28932 of 88501

<<<Would you mind expouding on your thinking here? It makes intuitive sense, and the upside is pretty strong, but I'm sort of skittish about the downside. I mean, if whatever aggressive fund I pick ends up in the tank for a while, don't I lose a lot of the benefit of compounding? I'd feel pretty silly if I ended up taking a writeoff in my TAX-FREE roth account (assuming i'm even allowed to do that)...>>>

From the point of view of the classical asset allocation theory, I gravitate towards a higher-volatility portfolio. I have only two asset classes - equities and cash. No bonds, no real estate, no precious metals. I do actually want to branch out a bit into real estate but not at this point.

Having said that, I tend to consider myself more of a conservative skittish investor. That is, I want majority of my capital invested in equities with a low to moderate risk/average to above average reward profile. My 401(k) plan is invested only in Vanguard index funds, for instance.

However, I also like to have a smaller part of the capital invested in equities with a above average risk/high return profile.

Consequently, I decided to invest my ROTH-IRA into a fund that could potentially generate high returns for me due to its high turnover and more aggressive investing style. Yes, it does carry more risks but I am risking a small portion of my investments and I think those risks are moderated by the tax-free nature of this account.

It doesn't mean, however, that I am willing to jump into any super-aggressive fund. I want to be conservative as much as possible here, too.

When you look at funds' returns what you really want to see is the consistency of their high returns over a long period of time. At least, 10 years. Preferrably, more. When you flip a coin, say 20 times, there is actually a fairly high probability that you may end up with several heads or tails in a row. If you flip it for a real long time, the probability, of course, will be very close to 0.5 for either heads or tails. What that means for the funds is that a particular fund could beat a market index handsomely for 3 or even 5 years in a row. But it could be just the same case as when flipping a coin 20 times. What is much harder to do is to beat the index consistently over the long period of time. So, when we get to 10 years or longer, now we have a reasonable chance that the manager may be onto something here rather than just being lucky.

I did my research and I was very glad when I came across BOGLX (thanks, MorningStar). It did fit very well the parameters that were important to me. The fund was investing into small cap businesses. It is more risky than investing into large businesses but it also has potential for high returns. The manager had a good track record for 10 years (9 years with Numeric Investors but using the same investing methodology). The manager intends to keep fund small to allow it to continue to invest into small caps. The investment team appeared to be very good. At least, on the level of credentials. They employ quantitative models and, thus, are less likely to make emotionally-motivated decisions.

So I hope it does shed some light on my thinking. However, you should remember that this is my personal approach which may not be appropriate for you at all.

Good luck!


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