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Saturday, November 20, 2010

Getting On the Yellow Brick Road

If your child (rising DIY investor) made more than $5,000 and less than $105,000 in 2010, he or she can contribute $5,000 to a Roth IRA. This can be done by opening a Roth IRA account at a discount broker before 4/15/2011.

One idea would be to buy 170 shares of VTI. This is Schwab's broad stock market exchange-traded fund. The commission is zero. This exchange-traded fund tracks performance of the Dow Jones U.S. Broad Stock Market Index, comprised of approximately 2,500 companies.

If your child is 18 and this fund achieves an 8%/year average annualized return, it will have increased to $181,160 by the time he or she is 65 years old. At that time 65 will be the new 45, with the advances in plastic surgery, medicine, exercise know-how and what all.

For what it's worth, a conservatively invested portfolio over the past 20 years earned slightly more than 8%/year - even with the weak performance of the past 10 years.

In addition to getting started on retirement savings, your child will gain knowledge about retirement savings vehicles, something that 90% (my own poll) of American teenagers are clueless about.

Full Disclosure: I am not affiliated with Schwab and I do not own VTI.


  1. Don't you mean Vanguard?

    Question: According to Google Finance, the P/E of VTI is around 7.7. But I thought the market as a whole was around 22 or so. Can you explain what's going on?

  2. You are exactly right - my bad! I was thinking about Schwab's broad stock etf SWTSX and put down the vanguard etf. To me it doesn't matter. Over the long term I expect them to perform pretty close.
    The P/E for Vanguard you cited was for the past 4 quarters. Sometimes people use 3 years normalized earnings, 12 month predicted earnings etc. This accounts for the different p/e s you cite, I believe.
    Thanks for catching my error.