Roth funding early 2017

[Walmero]

To start: Nothing even approaching formal investment advice is expected or sought with this post. Just a general fishing expedition for feelings about funding a Roth right about now.

Foolishly(?) Roths are usually funded around here once a year right about now (post tax prep, pre funding deadline). Usually dump it all into an index fund with no plans for touching it for many years.

With all the uncertainty in the US and fairly high valuations, any takes on what to do once the money is in the Roth? Sit on it and wait for now, or just do the usual index funds as the horizon is very long term?

 

[volker]

If you spread it out over the year you I miss out when the rate goes up as well as not getting some dividends for that year. And you "win" when there is a long downward stretch. You might think that the US stock market is right now "fairly high". But people thought that one year ago and also two years ago. So they would have missed out on the upward trend. A diversified portofolio as well as balancing is the most important factor in my opinion. So much about the pro and cons.

But in the end the question comes down to "lump sum vs dollar cost averaging" and google finds a lot about this and I can highly recommend to read into this question. There are various studies about it and one is this one from vanguard: https://pressroom.vanguard.com/nonindexed/7.23.2012_Dollar-cost_Averaging.pdf
I remember a really good blog post in the past who compared it based on various investment time frames over 2 yrs based on historic data. Sadly I don't find this article right now.

 

[ukinny2000]

What I do, and again, this is just a combination of my preferences and personal situation, is I fund my Roth IRA at Vanguard in one go and deposit it into the money market account. I then set up a twice-a-month automatic exchange within the Roth IRA between the MM fund and a Target-Date Fund, so that over the course of 12 months the money I put in at the beginning of the year gets fully invested into the Target-Date Fund. I do the same with my 401k - fully fund early on and then setup automatic exchanges over the course of a year to invest the lump-sum

 

[Walmero]

That's great, never would have thought of it.

 

[volker]

What I do, and again, this is just a combination of my preferences and personal situation, is I fund my Roth IRA at Vanguard in one go and deposit it into the money market account. I then set up a twice-a-month automatic exchange within the Roth IRA between the MM fund and a Target-Date Fund, so that over the course of 12 months the money I put in at the beginning of the year gets fully invested into the Target-Date Fund. I do the same with my 401k - fully fund early on and then setup automatic exchanges over the course of a year to invest the lump-sum

Does your money market account earn more interest as your savings account?

 

[ukinny2000]

Does your money market account earn more interest as your savings account?

A smidge less. Between the IRA and the 401k, the difference is maybe a few tens of dollars, tops. However, the advantage of being able to do this funding once a year, not worry about it, and do DCA, outweighs the slight loss from the missed interest payments imho

 

[volker]

A smidge less. Between the IRA and the 401k, the difference is maybe a few tens of dollars, tops. However, the advantage of being able to do this funding once a year, not worry about it, and do DCA, outweighs the slight loss from the missed interest payments imho

I don't see a difference here between MM => index fund and savings => index fund. Especially the later can be easily automated and set in a way that vanguard should always max it out even when the amount changes.

 

[ukinny2000]

I don't see a difference here between MM => index fund and savings => index fund. Especially the later can be easily automated and set in a way that vanguard should always max it out even when the amount changes.

True, you can do it that way, and set it up with the maths so that after all the payments you never overfund. However, and I stated this in my oeuvre, it happens to be my preference. Why? Because I get a lump sum payment every year in early January, and the way I like to budget is by fully funding my retirement savings for the year and not having to worry about, putting it beyond my reach. Other factors too, but mainly that one