Friday, February 12, 2010

My Roth IRA Plans for 2010

After seeing yesterday's promotion from ShareBuilder, I went looking for options for my Roth IRA contribution this year. I wanted to invest my $5k (over 55 get to invest $6k) and where I could do it and not be charged an annual fee, and be able to invest in a fund that didn't have an upfront sales fee, an enormous expense ratio, etc. I was pretty excited about trading free for a year with ShareBuilder and wanted to try out a real automatic investing, dollar cost averaging approach for a year and see how it went.

Then, yesterday I found an ad from Fidelity that made me look twice via one of my favorite personal finance blogs - MyMoneyBlog. Fidelity is offering free trades on 25 different iShares ETF's.

The ETF Book: All You Need to Know About Exchange-Traded FundsI was pretty stoked by the idea that I could put my full contribution straight into ETF's (exchange trade funds).  ETF's are almost like index funds. There is a slight difference, but I won't go into that here.
SO, what am I suggesting? Well, MyMoneyBlog wrote a short paragraph explaining it better than I could. So, quickly go here for more information on asset allocation with ETF's.

Finally, I also found out that Fidelity is just playing catch up. Apparently, Schwab has been doing this for a few months with their own brand of ETF's. Fidelity is also playing catch up in their pricing because there are several online trade houses that have been offering very low trade commissions for a few years. I guess the pressure has finally pushed them to react and drop their own pricing. Competition is great for that.

And looking at the last link, the important thing to notice is the focus on expense ratios, because the higher the expense to own the fund, the better it has to do to actually return you any money. For example, your China fund that you own currently, might have returned a nice 10% this year, but it costs you 2% a year to own - so effectively you only earned 8%.  Had you just simply bought a foreign index fund or ETF that only earned the average 8%, and only cost 0.1%, you would have earned 7.9%.   It works more in your favor during losing years because then you add the expense to your loss and make it worse of a loss.

So, should you run out and open a Fidelity account? Well, not quite yet. I am almost convinced, but I want to look one last time at Vanguard - the best of the best out there for what I have heard. However, because I already have an open account at Fidelity - I might just open my Roth IRA with Fidelity for the easiness factor.

Well, that is my plan. Thought you might be interested to know as well.
What are your plans?  Share them below in the comments.

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