Investing Account Options

Question

I am new to this SE community so please inform me if there are ways I can edit or improve this question, a more appropriate place to post it, or better tags and title.

My grandmother is beginning to gift away money to her grandchildren to be used for investing. I was contacted by a family member and told to choose a bank / investment account / investing platform that I would like my money to be deposited into. The amount is small ($2,500), but I believe she intends to redeposit the same amount every 1 - 3 years.

My knowledge of investing is rather minimal, when I was 14 (circa 2007, I am currently 25) I became interested in investing and opened a Roth IRA through an Edward Jones. Since I had a small amount of capital (I opened with an initial $1000) I mostly researched mutual funds, but I also contributed $100 monthly to buy shares of what I decided was a relatively stable 'blue chip' stock (Proctor & Gamble) on a dollar-cost-averaging system. Through this process I learned some elementary investing terminology and concepts - diversification, volatility, etc.

Towards the end of high school and through college I became engrossed in academics to the point that I did not contribute to the account and was no longer learning more about finance or investing. Now that I am trying to research how I would like to restart investing, I am having difficulty finding good sources of information - everything I find seems to be incredibly laymen or incredibly advanced.

I don't have a specific investing goal currently, so I supposed an important factor to me would be for the bank / account to not be 'limiting' - that is, as I begin to become more savvy in investing and finance I would not like the account to make it difficult to switch to a different account, or restrict me to investment options that don't allow for more advanced strategies. Even though I knowingly drifted away from investing during my stressful school years, I always planned to return because I understand the value of beginning good financial habits / saving / investing earlier in life. Now that I am 25 and done with school, I am ready to return to planning a good financial future for myself.

Now, with all that explained, my specific question(s) that I would like answered:

1) Does anyone have advice for someone in my shoes - good sources of information for how to choose an account, important things to consider when choosing an account, a good account to get my money in perhaps temporarily while I learn more about choosing a better long term account?

My degree is in mathematics so please feel free to provide information or resources that require mathematical competency.

Answer 1

1. Immediately move your Roth IRA out of Edward Jones and into a discount broker like Scottrade, Ameritrade, Fidelity, Vanguard, Schwab, or E-Trade. Edward Jones will be charging you a large fraction of your money (probably at least 1% explicitly and maybe another 1% in hidden-ish fees like the 12b-1). Don't give away several percent of your savings every year when you can have an account for free. Places like Edward Jones are appropriate only for people who are unwilling to learn about personal finance and happy to pay dearly as a result. Move your money by contacting the new broker, then requesting that they get your money out of Edward Jones. They will be happy to do so the right way. Don't try and get the money out yourself.

2. Continue to contribute to your Roth as long as your tax bracket is low. Saving on taxes is a critically important part of being financially wise. You can spend your contributions (not gains) out of your Roth for any reason without penalty if you want/need to. When your tax bracket is higher, look at traditional IRA's instead to minimize your current tax burden. For more accessible ways of saving, open a regular (non-tax-advantaged) brokerage account.

3. Invest in diversified and low-cost funds. Look at the expense ratios and minimize your portfolio's total expense. Higher fee funds generally do not earn the money they take from you. Avoid all funds that have a nonzero 12b-1 fee. Generally speaking your best bet is buying index funds from Fidelity, Vanguard, Schwab, or their close competitors. Or buying cheap ETF's. Any discount brokerage will allow you to do this in both your Roth and regular accounts. Remember, the reason you buy funds is to get instant diversification, not because you are willing to gamble that your mutual funds will outperform the market. Head to the bogleheads forum for more specific advice about 3 fund portfolios and similar suggested investment strategies like the lazy portfolios. The folks in the forums there like to give specific advice that's not appropriate here.

4. Be fully diversified across all asset classes. Invest in domestic and international equity in all sectors and both risky and investment-grade bonds. The more assets you have, the better your gains from diversification. Although the theory behind them is a bit squirrely, the cheaper target date index funds do a reasonable job at this. Remember, being invested in a few blue chip companies is much riskier than being invested in all the available tradeable assets, including those that may be individually "riskier".

5. If you use a non-tax-advantaged account for investing, buy and sell in a tax-smart way. At the end of the year, sell your poor performing stocks or funds and use the loss as a tax write-off. Then rebalance back to a good portfolio. Or if your tax bracket is very low, sell the winners and lock in the gains at low tax rates. Try to hold things more than a year so you are taxed at the long-term capital gains rate, rather than the short-term.

6. Only when you have several million dollars, then look at making individual investments, rather than funds. In a non-tax-advantaged account owning the assets directly will help you write off losses against your taxes. But either way, it takes several million dollars to make the transactions costs of maintaining a portfolio lower than the fees a cheap mutual/index fund will charge.