hi everybody! This is my first post! Yay!

I just finished paying off my credit card debt forever, and would like to get started investing for my eventual retirement, though I am a complete novice. I was wondering if some of the more experienced people here could give me a "sanity check":

1) I'm wondering about how to invest my Roth IRA contributions. Right now I have an underperforming mutual fund in a Roth IRA at a brokerage house, worth about $1500, plus $500 or so in two other taxable and underperforming mutual funds. I'd like to dump the mutual funds and contribute them all to a self-directed Roth IRA making direct investments, to keep costs low.

Since I'm just starting out (23 years old) I don't have a lot of money to invest initially, but I definitely can make the $2000/year contribution to an IRA. I'd really like to contribute to it regularly, once or twice a month, like I've been doing with my underperforming mutual fund (before I stopped to pay off my credit cards!).

I just finished reading "Investing Without a Silver Spoon", and I thought I would try direct investing through an IRA...as I've read on these bulletin boards and confirmed with my own research, this is difficult. Several people have said try First Trust. They charge $48 annually, plus 1% of the account value up to $10,000 (beyond that, the fees drop to .4%, then .3% when you're above $75,000). On my first $2000, I'll be paying $68 to the bank (3.4%)...adding another $2000, I'll be paying $88 (2.2% of a $4000 account). Does that seem reasonable to more experienced people?

I've also looked at Sharebuilder.com, which has "no-fee" IRAs, but charge $2 per monthly recurring transaction. So if I invested my $166 monthly in two stocks, I'd be paying 2.4% to sharebuilder.com...but then I'd be investing my retirement savings in only two stocks. That seems like a bad idea.

2) I'll be getting a raise soon, and would like to invest more than $2000 per year. So assuming that #1 works out, is there any effective way to purchase smaller stocks on a monthly basis? In other words, if I have $340 extra to invest after my Roth IRA contributions, what do you all recommend I do with it?

My idea is, I would like to include some growth stocks in my investments, such as "Rule Breakers" and small cap companies, because it seems like there's a lot of potential to make my money grow over the long term, if I choose well. I would like to directly invest in 4-5 "blue chip" stocks through my direct-investment IRA, and 3-4 growth stocks through something like sharebuilder.com..if I invest $340 monthly in 4 carefully-chosen stocks through sharebuilder.com, I will pay $8 in fees (or 2.3%). Does that seem like a good strategy?

The other option would be to transfer the $340 per month to a money market account and then when I've got some predetermined amount of money, add it to my portfolio, either to the currently held stocks or by purchasing additional stocks.

thanks for all of your help...this is truly a great place, and has opened my eyes to all kinds of possibilities!

-Mike

On 1) I use mutual funds that have no fees other than the expenses within the fund. I have a couple of funds that have fairly low expense ratios of .29% and .62% that seem to be fine given how they do.

2) I think you should determine for yourself if you want to pick stocks and DRiP or Pseudo-DRiP(The latter being for companies that don't do DRiPs or have excessive fees), or go with more funds.

I for example have a couple of index funds in a taxable account that I add to each month that works fine. The other issue I'd ask in your situation is have you done an emergency fund yet? Congrats on getting out of debt and welcome to the wide world of investing possibilities...

JB

Whoa, Whoa... Slow down, please. My head is about to explode! :)

Regarding the Roth IRA...
Those fees seem high to me. I established a self-directed Roth IRA with an online discount broker, SURETRADE. All I pay is $8 per stock trade. So if I make 4 stocks trades (4 $500 contributions), then I pay a total of $32 for the year. If I only invest in 2 stocks (2 $1000 contributions), then I only pay $16 for the year.

However, if you are adding to it Regularly, like a DRIP, there may be better alternatives.

Good luck, all
the hendrys

)" I'm wondering about how to invest my Roth IRA contributions. Right now I have an underperforming mutual fund in a Roth IRA at a brokerage house,"

Hey! Nothing the matter with mutual funds. When you have just a few thousand dollars, and while you are getting up to speed on interpreting financial reports so you can pick your own stocks better than the pros, that is the way to start.
Now there are a couple of things. Your mutual funds are underperforming WHAT? Last year was a really bad one for mutual funds, as well as the individual stocks they owned. Give 'em a break!
A brokerage house is NOT where to buy mutual funds. Particularly not proprietary mutual funds. At a brokerage house, particularly a large, full-service brokerage house, they will sell load funds, and may have their own family. These are notoriously poor performers. With that size account, you want to go with Vanguard, possibly T Rowe Price, something of that sort. Fidelity isn't that bad. You want to transfer your Roth to a different custodian, preferably one that won't charge an annual fee, at all.
First Trust is a bank. The fees you quote are way too high. They may let you buy individual stocks, but you are paying two layers of fees--to the custodian and to the broker they select.

)" I'll be getting a raise soon, and would like to invest more than $2000 per year. So assuming that #1 works out, is there any effective way to purchase smaller stocks on a monthly basis? In other words, if I have $340 extra to invest after my Roth IRA contributions, what do you all recommend I do with it?"

Er....mutual funds. Again, NOT load funds and NOT from a wirehouse brokerage. Go look at www.vanguard.com and look around.

"The other option would be to transfer the $340 per month to a money market account and then when I've got some predetermined amount of money, add it to my portfolio, either to the currently held stocks or by purchasing additional stocks."

Right. When you have $10000 think about individual stocks. Start with mutual funds. And think about your emergency fund so you don't have to raid your small investment account if the car needs brakes.
Best wishes, Chris

Wow! Thanks for the fast replies. This is interesting. You are advising me to get a mutual fund, but that contradicts everything I've seen written on this web site and in the Motley Fool books. My mutual funds did worse than the S&P 500, so I don't feel they're worth my time. I could probably find a fund that did better.

I'm also intrigued by the henrys strategy to make quarterly buys of stock...that's a little closer to what I'd like to do. I am going to go check out the suretrade site!

"Go look at www.vanguard.com and look
around."

I have had a lot of success with VFINX (Index 500). It is down now, but from Nov 97 until Sept 2000. I got a little over 17% per year from it (438 to 712). I think that vanguard might be good for you. I recommended VFINX to my Son who is 26. Good luck. Glad to hear that you are starting early. I did not start until 36. Time is on your side.

Mike

Well the Fool doesn't recommend most mutual funds, true. I do however disagree but that is because I do my homework and I found a fund that works for me and I know all the ups and downs going in which I think makes it Foolish rather than foolish. Also, Step 4 of the Fool's School does recommend an index fund: Vanguard's 500 Index which is one of my funds and did good for what it was supposed to do last year in beating its index for the 3rd straight year(Notice this fund doesn't get much respect in Fool articles where individual stocks seem to be highly suggested in a way).

JB

I am a novice at investing in stocks, therefore the bulk of my retirement savings is in treasuries and index funds; "For the index fund makes for a brainless and respectable choice, it is our first-stop recommendation to investors of all kinds, novice and experienced. ..." Page 14 of The Motley Fool's - 13 steps to Investing Foolishly.

'Underperformance,' of course only means relative to the market. Last year was a bad year for the market as a whole, so if you really want to know if your funds are 'underperforming', you must compare them to the appropriate market index. Last year was also anomalous in that a larger than normal number of mutual funds outperformed the market indexes, but this is the exception, not the rule. With retirement investing you need to find long-term winning strategies.

To track the actual returns of the market, choose a low-expense index mutual fund - i.e. Vanguard. If you think you can do better than the market by picking individual stocks, you are free to do so, but the major drawback is that without a large capital stake, you are not going to be able to achieve anything close to a decent diversification. With buying small amounts of individual stocks, you also run into the problem of high expense relative to total amount invested.

You suggest that you might accumulate assets in a money market account and then transfer to individual stocks. The concern there would be the opportunity cost of being out of the market. There's no reason why you can't start contributing to an S&P 500 or total market index fund immediately, and plan to get into individual stocks later when you have more of a stake built up.

There's a board on index funds here on the Fool that you might want to check out.

EditorialWe

I hear what you're saying, E.W. I'm starting to get a better picture of where me and my small stake fit into the picture! Index funds aren't as bad as I perceive!

At what size do folks recommend turning away from index funds? Someone here suggested $10,000. Is that a reasonable figure?