I’m new to investing and I currently have my IRA contributions put into 3 equities and 1 ETF. Beginner question, how do future investments work? How do I keep adding to my ETF over the years? Do I just simply buy shares at whatever the current price is?
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Do I just simply buy shares at whatever the current price is?
Generally you contribute cash to your IRA and then direct your broker to buy whatever securities you designate. Some brokers may have an automatic investment plan where, after you contribute cash, they buy securities to achieve some investment mix, but however it happens, yes, you would buy the ETF or stocks at the price at that time.
I would be cautious investing in individual equities as a beginning investor. It can be tempting to thing that the hot companies over the past year or two will continue to go up, but there's a lot of risk in individual companies. The rule of thumb is not to invest more in one company than you are willing to lose completely. That may sound extreme and you may think there's no way that a hot company will lose all of its equity, but in a market downturn individual equities tend to lose more on average than a well-diversified index fund.
D Stanley
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Thank you for all of that great info. From this point on, I plan to continue “adding” money to my current ETF. So would I be doing this Roth IRA thing correctly if I continued to buy shares (of VOO) every time I deposit money? I’m doing this through Charles Schwab on my own, without a broker. – Brad LaFontaine Mar 15 '24 at 16:13
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Well, Charles Shwab is a brokerage that is executing trades on your behalf. I am not familiar with their mechanisms (if any) to auto-invest. It may show up as cash in your account and then you can make a trade from there. You'd need to talk with their client support to see what options you have for aujto-investment. – D Stanley Mar 15 '24 at 16:27
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Ok, thank you so much! – Brad LaFontaine Mar 15 '24 at 16:37
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»but in a market downturn individual equities tend to lose more on average than a well-diversified index fund« – What is your definition of "average" here? I'd expect an index fund to mirror exactly some average of the many individual equities contained in that index. – Paŭlo Ebermann Mar 16 '24 at 00:06
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@PaŭloEbermann If the individual equities where divested similar to a fund yes. But there are two main differences: 1) individual equities tends to mean a strategy with more invested in less equities, which puts you at a greater exposure to sudden loss events like bankrupcies. And 2) individual equities tends to have correlations in the underlying investments which lead to a greater chance of all the investments suffering similar issues in downturn, again putting you at more risk of larger downwards movements. – user1937198 Mar 16 '24 at 15:04
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@PaŭloEbermann a portfolio of 25 equities is more risky (has more downside and more upside) in general than a basket of 500 equities. – D Stanley Mar 16 '24 at 19:55
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@DStanley if there is a "market downturn" (i.e. where many stocks are losing), then the "average" of all individual equities will lose just as much as the index containing these. And if you got 25 individual ones instead of all 500, then you can just as well have picked the ones which lose less as the ones which lose more. (I agree that having less stocks means more risk, but I don't agree with the "will lose on average more" – maybe replace this with "can lose more"?) – Paŭlo Ebermann Mar 17 '24 at 08:45
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@PaŭloEbermann which is why I said "tend to lose more on average". Certainly you can get lucky... – D Stanley Mar 18 '24 at 13:27
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@BradLaFontaine If you're using Schwab, you should use their S&P500 mutual fund SWPPX. It tracks the same as VOO but you can set it up to auto-invest. – Nosjack Mar 18 '24 at 15:50
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@DStanley I think that the "on average" gives some wrong impression here, as "on average" that's exactly the same loss. But I'll stop now, it's your answer. – Paŭlo Ebermann Mar 20 '24 at 14:31