Some friends of The Panelist, a couple, took my suggestion and opened their IRAs. They checked with their accountant and figured out what plan would be best for them.
They choose a Traditional IRA for each one of them and moved $4000 each from their joint brokerage account into two separate IRA accounts. They asked for an easy portfolio to put the money to work right away. They are about my age, 41 so their main concern is beating inflation since retirement is many years away.
Remember that this is a tax deferred account, so I thought I'd start out with some broad-based low cost ETF's. That way, they can ultimately sell them and switch into individual stocks.
I also didn't want to give them a big complicated portfolio to start since they would be adding money to the account every year. So I thought about starting with group of four ETFs. Then, this time next year we could pick some individual stocks.
THE INFLATION ANCHOR:
(TIP – $100.35) – iShares Lehman TIPS Index – A high interest paying fund of U.S. treasuries indexed to inflation. This creates a nice anchor for a portfolio that will outperform U.S. Consumer Price Index by about 2.5% (at current prices).
THE NON-US EXPOSURE:
(VPL – $69.83)- Vanguard Pacific Index (low 0.15% fees) Nice exposure to the developed countries in Asia. This fund will also do well if the dollar continues to fall. And if the dollar rises, the export oriented economies of this region should also do well.
DOMESTIC EXPOSURE:
Here you can choose any U.S. based fund. There are many socially responsible indices from KLD, Domini or otherwise. One advantage of investing in U.S. stocks directly is that you can use your power as a shareholder. If I had to choose one US stock, it would be General Electric (GE) because it is the most diverse single equity, has a high dividend and is trying to move into more environmentally friendly businesses. (see other writings at The Panelist on GE)
If you don't care about voting proxies and want some broad value-based exposure, you could pick a fund whose largest holding is GE but it much more diversified. (DLN – $58.83) – Wisdom Tree Large Cap Dividend Fund. Since they don't have enough cash to cheaply build a portfolio of large cap US stocks (which would be my preference) this Wisdom Tree Fund holds many of the value oriented large cap US stocks I'd like them to hold. Next year we'll pick a couple stocks based on what's cheap in the world.
When buying ETF's, I recommend using limit orders. Choose a limit order that is about half way between the bid and offer of the ETF.
Disclosure: I own TIP (my largest exchange traded holding). I am short June 98 strike puts and short June 101 strike calls against a small portion of my position in TIP. I own VPL. My initials are DLN but I do not own the Wisdom Tree Large Cap Dividend Fund – DLN. My personal portolio has many of the names that comprise the top holdings of DLN (Among the top holding I will not own are Altria (MO) and Exxon (XOM)). I own and have been accumulating GE. I may buy more GE.
See an accountant or other investment professional about what type of retirement account is right for you.
Disclaimer: I do not give investment advice. Do your own research. Do not rely on anything in this weblog to make investment decisions. I do not log all my trades here. I only describe or mention those that I think might be interesting. Consult an investment professional familiar with your specific financial situation before buying or selling any security. Options may be for me but they are are not for everyone. Futures are highly speculative. You can lose more than your initial investment in futures.