Sep 23

Question by Set: Where is the best place to put Roth IRA money with objective of preserving capital?
Regarding a Roth IRA investment; does buying a Tax Exempt Bond make sense over a Taxable Bond Fund? At this time, which is better; Short, Long, or Intermediate Term? Do you have any specific recommendations within the Vanguard family of funds? Right now everything is in a money market fund. Thanks in advance.

Best answer:

Answer by richard t
the roth is tax pay going tax coming out…………… exempt is not for you…………you do not say what your time horizon is………………preservation of capital…the safe way is treasury bills, bonds and notes……………don’t buy anything with more than a 2year maturity and buy some every couple of months to hit the average………….If you have a lot of time till retirement. you might want to risk a bit more,,pick up ”the little book that beats the market’… sets you thinking…………..

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3 comments so far...

  • zygote222 Said on September 23rd, 2011 at 6:51 pm:

    It makes no sense whatsoever to put Roth IRA money into a tax exempt bond. The Roth IRA is already fully tax sheltered.

    Short, medium, and long term bond funds all have advantages and disadvantages. But your question asks how to invest “with the objective of preserving capital”. No bond fund will achieve this objective as well as a money market fund or bank CD. So, if that’s really your objective, you should leave your money in the money market fund and forget about trying to get a better return in a bond fund.

  • muncie birder Said on September 23rd, 2011 at 7:35 pm:

    The obvious but perhaps incorrect answer is a money market fund. It is obvious because generally speaking the fund is liquid, but there is a chance that the some of the assets of the fund might fail. Another obvious answer is CDs and T-bills. Both are guaranteed by the U S government, but there is a big catch. Inflation and the value of the dollar. As you have been informed munis make zero sense in a tax free Roth IRA.

    To preserve your capital, you actually have to take some risks. That is just life, I guess. Inflation is running at about 5% annually, maybe even more. The government lies about the inflation rate so do not believe their figures. In addition to that the U S dollar is loosing value at about 5% annually, so investing in T-bills or CDs are eroding your capital at about a 5% annual clip.

    Vanguard does have a very good mutual fund that might be a good vehicle for presrving your capital. The Global Equity Fund. VHGEX. Currently only 35% of its investments are in U S dollar securities so you are somewhat protected against a drop in the value of the dollar and a 10 year annual return of better than 12%. However, it is never a wise strategy to count on just one investment to safeguard your assets or to grow your assets.

    My thought is that one can not go too wrong investing in energy investments and Vanguard has a find one. VGENX. It has a 10 year annual return of about 16%. 44% of this fund is in non-dollar investments.

    As the dollar sinks in value, that is actually good news for some U S companies. Those being the mega-internationals that considerable business overseas such as Boeing and Catapiller and Microsoft and IBM. So an investment in a fund that has a large holding of these type companies also might prove worthwhile. VAAPX is such a fund. Also VLACX.

  • Uncle Leo Said on September 23rd, 2011 at 8:34 pm:

    If you mean short term preservation of capital, a money market fund or Treasury bills would be fine.

    If you mean long term preservation of capital, think in terms of something like a lifecycle or target date retirement fund. These funds have some exposure to stocks, to help you keep up with inflation. But they also invest in bond funds and sometimes even a bit in money market funds. So they are fairly conservative, but are reasonably likely to help you preserve the long term buying power of your savings.

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