Tuesday, January 09, 2007

Opening A Roth IRA at Vanguard

Asset allocation comes up again.

I just took a shot at opening my Roth at Vanguard. The problem I encountered: apparently, each fund has a minimum investment of at least $3,000. That means, if you're only investing $3,000, you can only invest in one fund. That pretty much locks me into a target fund.

When I tried selecting four different funds to do a basic asset allocation, the bottom of the screen read:

Your minimum investment, based on the type of account and the funds selected, is $12,000.

How can the minimum contribution be three times the maximum contribution? Does this mean if I want to put, say, 10% in bonds, I have to wait until 10% is $3,000 (that is, until the balance of the account is $30,000) to do my own asset allocation? Can that possibly be right?

There's also this little note, which provides some clarification: Vanguard charges an annual $10 fee for each fund within an IRA that has a balance of less than $5,000. Not the total investment. Each fund.

This is a little disappointing.

On the other hand, Vanguard's 2050 target fund has an expense ration of %0.21, which is not to be sneezed at. So I can do the target fund, or I can take my IRA elsewhere.


Anonymous said...

That $3000 minimum for (most) Vanguard funds is part of the stingy philosophy at Vanguard. (A philosophy that I love, although it can lead to some frustrations.) The point is that it costs almost as much to service a $1000 account (say) as a $3000 account. Since Vanguard tries to keep expense ratios low they keep the minimum per fund fairly high.

In my opinion, the Target Retirement 2050 is a good choice. If you really WANT to fine tune your asset-allocation, you'll be in a position to do so in a few more years (or in a decade or so).

Chuck said...

I agree with anonymous... thats one of the ways they keep their expense ratios so ridiculously low.

If you only have $3000 in your account there should be negligible difference from the Target Retirement 2050 and fine tuning it a bit more with your own allocations anyways.

Anonymous said...

It's pretty normal to have mutual fund minima of anywhere from $2000 to $5000 (or much more). In 401k type set ups there aren't minima I think (at least not in my TIAA-CREF 403b). But regular mutual funds aren't set up with the IRA annual contribution limit taken into account.... If you set up an IRA with a brokerage you can invest less in dfferent funds by buying ETFs.

mapgirl said...

Fidelity also has fund minimums, so you might not be able to avoid this.

And if you want to change your template so it doesn't look so much like Tired But Happy's, try changing the colors for a quick adjustment. :-)

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