I’m in my 20s and I’m just getting started in the working world.  My employer has a 401(k) with the attached list of investment choices. I’m also looking at a Roth IRA. Is there a certain Roth you recommend? Which of the 401(k) investment choices do you recommend?

I have been reading some of your articles on your website and saw that you started your kids Roth contributions at age 14, so you might have a favorite you’ve been working with for a while now. I would love to start funding my Roth and 401(k), but I have no idea where to begin! Any advice would be appreciated.

Amy Lee

Greetings Amy Lee,

Great questions! I would be glad to help. I’m going to answer your questions in three separate blogs posts this week:

1. Which investments should I fund first?

2. Which of these 401(k) investment choices do you recommend?

3. Is there a certain Roth IRA you recommend?

IS THERE A CERTAIN ROTH IRA YOU RECOMMEND?

In our article “Getting Started With Investing” we recommend several good custodians where you could open a Roth account or a taxable account and purchase investments. Among them are Vanguard, E*Trade, TD Ameritrade, Scottrade, Charles Schwab, and Fidelity. I would make my decision based on expenses. There should be no annual account fee for the amount you are putting in, and then select the broker who charges the smallest amount for an equity trade (e.g. $7 or $10 or $12). Here are their websites:

• https://personal.vanguard.com/us/openaccount (we’ve written step-by-step instructions)
• http://us.etrade.com/
• http://www.tdameritrade.com/
• http://www.scottrade.com/
• http://www.schwab.com/
• http://www.fidelity.com/

I think Scottrade for example has $7 trades and no account fees if you have over $500 in the account.

I’ve written a series of articles on a simply starter portfolio. The “Getting Started With Investing” has just such a portfolio of five exchange traded funds. Additionally, our gone-fishing series has a number of good exchange traded funds for such a portfolio. Here is one such gone-fishing portfolio appropriate for someone in their 20s:

I have the portfolio in percentages here:

• 0.0% Vanguard Total Bond Market ETF (BND)
• 21.4% Vanguard Total Stock Market ETF (VTI)
• 10.9% Vanguard Small-Cap Value ETF (VBR)
• 8.1% Vanguard Information Technology (VGT)
• 13.7% Vanguard MSCI Emerging Markets ETF (VWO)
• 4.6% iShares MSCI Canada Index Fund (EWC)
• 13.5% iShares MSCI Pacific ex-Japan (EPP)
• 4.6% iShares MSCI Switzerland (EWL)
• 4.6% Global X FTSE Nordic Region (GXF)
• 4.6% Vanguard FTSE All-Wrld ex-US Sml Cp (VSS)
• 8.4% iShares S&P North Amer Natural Resources ETF (IGE)
• 1.4% iShares S&P Global Materials (MXI)
• 4.2% Vanguard REIT (VNQ)
• 100.0% TOTAL

If you remember from our analysis of your 401(k) choices, we were able to get the weighted expense ratio down to 0.57% by selecting those fund choices with lower expense ratios. With this exchange traded fund (ETF) portfolio listed above the weighted expense ration is 0.30%, a full 27 bps lower than the 401(k) choices. This portfolio of ETFs also has more foreign investments, which typically have higher, not lower expense ratios. And this portfolio allow you to target the countries high in economic freedom and low in debt and deficit.

When you are getting started, you would like your trading costs to be minimal compared with the amount. My rule is that your transaction costs should be well under 1% of the total amount you are investing. If an equity trade costs you $10, you want to be investing well over $1,000 in order to keep your transaction costs under 1%. If your first investment is $5,000 in a Roth IRA, you can’t buy all 13 equity positions listed above. The 1.4% of your portfolio you want to invest in MXI would be only $70 of the $5,000 you are investing. This is inefficient, and also unnecessary. Keeping transaction costs low is more important than having a balanced portfolio the first year of investing.

Therefore, in order to get started we suggest you assume you are going to be adding $5,000 to the portfolio for the next ten years. Then take a look at the ultimate $50,000 portfolio and start making your purchases one or two at a time over the next ten years. A $50,000 portfolio of the asset allocation listed above would look like this:

• $0 Vanguard Total Bond Market ETF (BND)
• $10,700 Vanguard Total Stock Market ETF (VTI)
• $5,450 Vanguard Small-Cap Value ETF (VBR)
• $4,050 Vanguard Information Technology (VGT)
• $6,850 Vanguard MSCI Emerging Markets ETF (VWO)
• $2,300 iShares MSCI Canada Index Fund (EWC)
• $6,750 iShares MSCI Pacific ex-Japan (EPP)
• $2,300 iShares MSCI Switzerland (EWL)
• $2,300 Global X FTSE Nordic Region (GXF)
• $2,300 Vanguard FTSE All-Wrld ex-US Sml Cp (VSS)
• $4,200 iShares S&P North Amer Natural Resources ETF (IGE)
• $700 iShares S&P Global Materials (MXI)
• $2,100 Vanguard REIT (VNQ)
• $50,000 TOTAL

Therefore for the first year, just invest $5,000 of any part of this target portfolio. In truth, it does not matter where. You could put the entire $5,000 in VTI or VBR or VWO or EPP. Or you could put $2,300 in EWL and $3,700 in VBR. Or you could put $2,500 in VBR and $2,500 in VWO. In truth it doesn’t matter. Time in the markets matters a lot more than timing the markets. What is important is getting started today.