by Archie M. Richards, Jr.
November 13, 2006

Joe writes, "I'm really confused about investing. Every year, I max out my Roth IRA. Otherwise, I put as much as I can into CDs paying more than 5 percent. I always thought all Roths were the same, but a friend told me I could be doing a lot better. He mentioned words like "loads" and "4 & 5 star" investments, which are jibber-jabber to me. He said that with the mutual fund I'm invested in at American Funds, I own a little of a lot, but that my particular fund is not aggressive enough. He added that I'd find a better Roth IRA at Vanguard.com and would be able to transfer the money to it. (There'd be a fee, I presume.) Well, Vanguard.com is more confusing than my ex-girlfriend's head. Since I'm only 24, should I be going for the most aggressive investments? How do I know which ones they are? What books would explain investment words?

Your letter's a barnstormer, Joe! Good going on investing as much as you can. Here are my comments:

As you already know, Roth IRAs are terrific. The money you invest is not deductible. But the earnings aren't taxable, either when they're accumulating in the Roth or (as long as the money's in there for 5 years and you're 59½ ) when you withdraw them. For more about Roths, see the 6/26/06 column, "The Best Kind of IRA: The Roth."

Here's my most important point: It makes little sense to put a big chunk of money into Certificates of Deposit, whose prices don't fluctuate at all, and another chunk into aggressive investments, whose prices fluctuate too much. Instead, forget about CDs and invest all your investment money conservatively in index funds, as follows:

• 30 percent U.S. stocks
• 30 percent foreign stocks
• 20 percent REITs
• 20 percent long-term U.S. government bonds

The value of this portfolio will fluctuate some, but not a lot. Overall, you'll have the same degree of safety as you have now, but you'll have better long-term growth.

For more information, visit "Suggested Portfolios" in my website mentioned above.

You're correct about all Roth IRAs being the same; they're just IRS rules that provide tax advantages. With the American Funds Roth, you must use American Funds investments. With Vanguard's Roth, you must use Vanguard investments. Both groups are good.

But American Funds offer only "load" funds, meaning that you pay extra to compensate a salesman. Vanguard is a "no-load" organization. No salesman calls you. You must take the initiative to call Vanguard yourself. But your writing to me shows that you have initiative galore. Call Vanguard. It offers more variety than American Funds, and all of your money goes into the investments, with none to a salesman.

Your friend is correct about a mutual fund offering "a little of a lot." All funds are huge portfolios of stocks (and in some cases, bonds). The shares you hold represent ownership of a tiny portion of the entire fund.

Sorry you find the Vanguard website confusing. (Sometimes, I can't figure out my wife's head, either.) Anyway, call Vanguard's Retirement Department at 800-205-6189. The service representatives are very helpful, and they cost you nothing.

Vanguard also charges nothing for bringing money over from American Funds. No "no-load" fund group charges for such a transfer.

4 and 5 stars apply to the ratings of mutual funds by Morningstar, an investment newsletter. The ratings are useless. 5 star funds, supposedly the best, do no better than the others. Disregard those ratings altogether.

A good investment book is "The Only Investment Guide You'll Ever Need," by Andrew Tobias. My favorite book, if you'll pardon me, is my own, entitled "Understanding Exchange-Traded Funds." It includes considerable material besides exchange-traded funds and an extensive glossary of investment words. Unfortunately, McGraw-Hill won't release it until March 2007.

www.wikipedia.com contains a good glossary. As a test, I searched in that website for "load funds" and found a helpful explanation.

Good luck, Joe. You're going to be an investment winner!