Q: I know that many index funds, like the Vanguard S&P 500 fund (VFINX), focus on the U.S. stock market. But which ones will expose me to the rest of the world?
A: There are many, such as funds based on the Vanguard European Stock Index (VEURX), Vanguard Pacific Stock Index (VPACX), Vanguard Emerging Markets Stock Index (VEIEX), Fidelity Spartan International Index (FSIIX), and iShares MSCI EAFE Index (EFA).
You can diversify into bonds, too, with funds such as the Vanguard Total Bond Market II Index (VTBIX).
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Are you contributing to a Roth IRA? If not, you might consider looking into it, as the Roth offers potentially massive tax breaks. There are some important issues to consider first, though.
Like other IRAs, the Roth lets you accumulate money for retirement and enjoy some tax advantages at the same time.
While traditional IRAs are tax-deferred, Roth IRAs are designed to be tax-exempt. Traditional IRAs permit you to contribute pretax dollars; Roth IRAs accept only already-taxed dollars.
Imagine that beginning at age 40 you invest $5,500 of your post-tax income into a Roth IRA each year. You earn an average 10 percent annual return for 25 years until you retire at 65. By then, your contributions would top $540,000. With a Roth, that’s your take-home pay, tax-free.
If those investments had been made into a regular IRA, you’d owe taxes on any withdrawals, paying $81,000 or so, assuming a 15 percent tax bracket during retirement, or $135,000 if you’re in a 25 percent bracket.
So far, this makes a great case for the Roth. But remember that if the $5,500 had gone directly into a traditional IRA, you would have reaped about $1,375 in tax savings each year at a 25 percent tax rate (more, with a higher tax rate). If that sum were also invested, the total difference between the Roth and the regular IRA would become slimmer.
Still, the Roth is a very compelling proposition for many investors. You may be able to roll over, or convert, your traditional IRA into a Roth by paying taxes on it, counting the entire value of the account as income. You can also roll over a 401(k) account into an IRA when you change jobs.
There are more benefits and limitations to consider before you decide whether the Roth is for you. Get details at irs.gov
or from a tax professional.
Dear Fool: My worst move was listening to expert advice. After experiencing some losses, I decided to use the services of a fancy private banking stock service. On the advice of my “stock expert,” I sold positions that were winners because I was too heavily loaded on them.
I had 20 percent of my $500,000 portfolio in Apple stock at an average cost of $44 and was persuaded to sell around $88. I refuse to calculate what 2,100 shares at around $500 apiece would be worth today.
I also had $60,000 in a small mining company. He made me liquidate and keep just 10 percent of that. My remaining $6,000 was sold for $104,000 a year later.
The Fool responds: It’s true that many so-called experts may not be too smart or may have conflicts of interest, not always keeping your best interests in mind.
Still, it is sensible to not have too much of your portfolio riding on any one stock, as even solid companies can falter. And if that small mining company was a penny stock, as many are, that’s very risky, too.
The power of dividends is underappreciated by many investors. Solid, consistent dividends often result in market-beating returns for patient investors. Below are five dividend payers likely to keep it up for a long time:
• 3M (NYSE: MMM) makes everything from Post-it Notes to protective films for smartphones. Its recent yield of 2.1 percent is better than you can get from five-year Treasurys, and it has been paying its dividend for 97 years.
• Colgate-Palmolive (NYSE: CL), making staples such as toothpaste and pet food, is growing and profitable. Recently yielding 2.2 percent, it has paid a dividend for 118 years.
• Procter & Gamble’s (NYSE: PG) “50 Leadership Brands” include Bounty, Charmin, Gillette, Crest and Tide. It recently yielded 3 percent and has been paying dividends for 123 years.
• DuPont (NYSE: DD) is a giant in chemicals and agriculture. The maker of plastics and other engineered materials recently offered a 3 percent yield and has been paying dividends since 1904.
• Stanley Black & Decker (NYSE: SWK) recently yielded 2.6 percent and has been paying dividends for 137 consecutive years. It’s poised to benefit from an upturn in the housing market.
These companies are not the fastest growers around, but they can reward you over time with their reliable and growing dividends.