I'm in my early 20s, and I'd like to get serious about how I manage the money in my Roth. It's not very much, and up until this point I've only been messing around with putting it into commission-free ETFs. So far, I'm down. Great.

As I read more and do more research, it seems to me that growth is the way to go. I have a basic understanding of how I want my portfolio to break down. But, when it comes time to actually buy funds, I find that the best ones have a $2,500 minimum.

This isn't terribly surprising, but I don't have the capital to break my portfolio down like I want and buy into the best portfolios. So, my options, as they seem to me, are as follows:

(a) Buy into worse funds now. Make money. Continue buying worse funds.

(b) Buy into worse funds now. Make money. Save it. Buy better funds later.

(c) Hold off on buying any funds. Make money. Buy better funds later.

I honestly don't like the sound of any of these, but I assume many people were once in, or are currently in, my shoes. Does anyone have any insight on which course of action is best, or if there is a different course of action I might take?

Oh and if it matters, I'm finishing my Master's degree and will start my career in September (hence the make money part of the plan).

Thanks for any advice.

  • Some fund companies have "starter" funds (you might think of them that way) - general purpose funds with reasonable middle-of-the-road goals that have lower minimums. E.g., Vanguard's STAR fund - minimum investment $1000 (with typical low Vanguard fees) while their other funds have $3000 minimums. Start with that then buy into "better" funds later when you've accumulated some capital. – davidbak Jun 16 '16 at 18:22
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    P.S. Considering "best" funds (with $2500 minimum) vs others "not best" with lower minimums - consider that with an amount of money between $1000 (say) and $2500 your return between the "best" funds and the "not best" will be different, over a period of a few years, by a few dollars at most. Just avoid the "worst" funds (those with fees, load, etc.) and also avoid volatile funds and your money will grow soon enough. – davidbak Jun 16 '16 at 18:38

Buy the minimum of one fund now. (Eg total bond market) Buy the minimum of the next fund next time you have $2500. (Eg large-cap stocks.) Continue with those until you have enough to buy the next fund (eg small-cap stocks). Adjust as you go to balance these funds according to your planned ratios, or as close as you can reasonably get without having to actually transfer money between the funds more than once a year or so. Build up to your targets over time.

If you can't easily afford to tie up that first $2500, stay with banks and CDs and maybe money market accounts until you can. And don't try to invest (except maybe through a matched 401k) before you have adequate savings both for normal life and for an emergency reserve.

Note too that the 401k can be a way to buy into funds without a minimum. Check with your employer. If you haven't maxed out your 401k yet, and it has matching funds, that is usually the place to start saving for retirement; otherwise you are leaving free money on the table.

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  • Excellent, thank you for the ideas. I agree with the quality over quantity, just needed someone to tell me it's okay to wait. Everybody makes such a big deal about starting IRAs in your 20s that it can feel like falling behind if you're not investing – Alex Chumbley Jun 16 '16 at 18:05
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    I wouldn't be worried about a Roth until after I had maxed out my employer match at work and had a decent sized emergency fund – Kevin Jun 16 '16 at 19:34
  • If you have a 401k through your employer, that's the same category as an IRA -- it may or may not be more limited depending on the size of the company and how they approach this, but it often comes with matching funds, as noted. The important thing is to try (if finances permit) to start putting aside money for retirement in some tax-advantaged savings mechanism at the earliest opportunity you can. Compound interest is a surprising effective amplifier. – keshlam Jun 16 '16 at 20:23

I like Keshlam's answer and would like to add a few notes:

  • Don't invest any more money now. Concentrate on finishing the degree, landing a job and setting up a household. Get a feel of your expenses for at least a few weeks after landing the job.
  • Do you have student loans or other debt? You can make a nice guaranteed return by taking care of those ASAP.
  • Before ROTH investing on your own you may want to take advantage of any 401K match you can get at your employer. Again guaranteed return. Sort of echoing Keshlam for the importance of this point.

While your enthusiasm to invest is admirable learning patience is a key aspect of wealth building and keeping.

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  • Thanks for the additional comments, and I agree with what you said. I'll start with loan debt. There is a max income for the ROTH, so I just want to take advantage while I'm below that. Also, no household to set up for many, many.. many years – Alex Chumbley Jun 16 '16 at 18:04
  • @AlexChumbley "There is a max income for the ROTH..." If you hit the $116k cap [for a single person this year] in the near future, then the trivial return on $2.5k over a few years will be meaningless to you. Don't starve yourself from cash today because you are afraid you will be rich tomorrow. – Grade 'Eh' Bacon Jun 16 '16 at 20:42
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    I've always wondered why "ROTH" is sometimes presented in all-capitals? It's proper name is "Roth", after Senator William Roth who sponsored the legislation that created it – user662852 Jun 17 '16 at 3:20

If you are comfortable picking individual stocks and can get into Robinhood you only need $1000 to get started. This means buying one stock of this, two stocks of that, etc. but it works.

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