I started a Roth IRA a little while ago, contributing ~$5,000, and I'd like some guidelines on how I should diversify my investments. Should I invest in stocks or bonds or mutual funds or ETF? What percent should I contribute to these investments? Additionally, I'm 30 years old, how might my age factor into diversification?

I understand that this is a very subjective question but any suggestions are greatly appreciated.

  • This question is too broad. Roth means it's a retirement account, long term, we hope, but it's really 'how should a new investor allocate funds.' If this remains open, providing more details will help. Is this your first money set aside, or just first Roth? How old are you? How much did you put in? Jan 20, 2013 at 0:11
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    There are some good guides here, but I linked to a couple of super fast online resources too money.stackexchange.com/a/7663/91
    – MrChrister
    Jan 20, 2013 at 9:37

3 Answers 3


If you have just started an IRA (presumably with a contribution for 2012), you likely have $5000 in it, or $10,000 if you made a full contribution for 2013 as well. At this time, I would recommend putting it all in a single low-cost mutual fund. Typically, mutual funds that track an index such as the S&P 500 Index have lower costs (annual expense fees) than actively managed funds, and most investment companies offer such mutual funds, with Fidelity, Vanguard, Schwab, to name a few, having very low expenses even among index funds. Later, when you have more money in the account, you can consider diversifying into more funds, buying stocks and bonds, investing in ETFs, etc.

Incidentally, if you are just starting out and your Roth IRA is essentially your first investment experience, be aware that you do not need a brokerage account for your Roth IRA until you have more money in the account to invest and specifically want to buy individual stocks and bonds instead of just mutual funds. If you opened a brokerage account for your Roth IRA, close it and transfer the Roth IRA to your choice of mutual fund company; else you will be paying annual fees to the brokerage for maintaining your account, inactivity fees since you won't be doing any trading, etc. The easiest way to do this is to go to the mutual fund company web site and tell them that you want to transfer your IRA to them (not roll over your IRA to them) and they will take care of all the paper work and collecting your money from the brokerage (ditto if your Roth IRA is with a bank or another mutual fund company). Then close your brokerage account.

  • Isn't the 2013 IRA limit $5,500, so shouldn't the two year total be $10,500? (Sorry I can't edit because not enough characters)
    – jstim
    Jan 22, 2013 at 23:00

Others have made excellent suggestions; one thing I would add - and this cannot be understated - is to assess your risk tolerance. We tend to think of investing as a purely rational and financial decision, yet myself and so many others, when times get tough, make emotional decisions. Doing a risk tolerance test (as honestly as possible) will help you recognize what you can and can't handle.

On top of that, consider how well you face adversity or celebrations in other areas of life; I've found many similarities in the ways that we handle a gain in our investments to the way we celebrate a raise (same thing with adversity). Once you know this, you can begin the process of elimination on funds.

[Added: the point above this, does not consume a lot of time and could end up saving you a great deal of money and emotional agony, so it's well-worth it.]

  1. Look at the expense ratios of ETFs, mutual funds as well as the trading costs of buying them plus stocks or bonds. This will be key.
  2. Look at the fees you'll be charged for anything outside of trading, like maintenance, annual fee, etc.
  3. Depending on your experience (if it's high, you can begin researching stocks, if it's low, start with mutual funds and ETFs), begin your research on what you want. If you want ETFs, research them. If you want mutual funds, research them. Etc.
  4. As far as what's best, you will find that depends on the person answering; I tend to like ETFs and stocks (low expense ratios, easy to trade, I keep my dividends). However, you can find anyone with a different answer and a different reason.
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    +1 for risk tolerance discussion, and openmindedness about other's opinions. Hope to see you here more often, really. Jan 20, 2013 at 22:23

If you are a novice investor and want to diversify, I'd recommend looking into targeted mutual funds. They couldn't be easier. You just put your money in the fund with the year that you anticipating needing to take the money out and the fund manager handles diversification and adjusting the risk appropriately over the life of the fund based on the remaining time horizon.

The only downside is that the annual expenses tend to be higher on these than if you just invested in the underlying securities/funds, but you are pretty much paying them to manage it for you.

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    from thestreet.com/story/11676158/1/… - The average expense ratio of the target funds is 0.72%, according to BrightScope. A decent S&P ETF runs as low as .05%, 1/14.4th the expense. Sorry, I'm not a fan of Target Date funds. +1 for the idea, and I hope the fees drop, cause the idea is good. Jan 20, 2013 at 6:08
  • I hear ya on that. I love the idea, but I can never get past the expense. Another option that requires a little more work is to go on an investing site and look at the portfolio of these funds and manually build your own to mimic them.
    – JohnFx
    Jan 20, 2013 at 6:11
  • I did a targeted retirement fund when I had to rollover money from an old job. Once I learned a little more I got some just a few broad market ETFs and other simple and cheaper, options. If @cdemaskey has to decide soon, should they invest with a higher cost then re-balance and re-shop later, or wait and pick a good portfolio from the start?
    – MrChrister
    Jan 20, 2013 at 9:33
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    If one is starting out in life with a new IRA and a lifetime of additional contributions to come (one hopes!), a targeted fund can be built up on one's own by, say, putting, say, 70% of the money in a stock index fund and 30% in a bond index fund in the first few years and then changing the proportions, diversifying into other investments in later years, etc. The fees in targeted funds will likely not drop because they are actively managed funds but with the restriction that investments are purely in select mutual funds. You pay fund expenses plus management fee. Thanks but no thanks. Jan 20, 2013 at 13:34

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