Volume XXXIX: Frank Armstrong, author of Investment Strategies For The 21st Century, answers questions from members of the MFI community. To submit a question to Frank, please write to us.

Questions and Responses

Should I invest in US Savings Bonds or mutual funds for my children?

How can I double my investment in five years?

What exactly is a Roth IRA?

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Should I invest in US Savings Bonds or mutual funds for my children?

from Arthur

Q: I have 3 children and would like to start investing for them. I have between 150-200 dollars a month that I can put aside for them. What would be a good long term fund to get into? I was thinking about buying them U.S. Savings bonds every month. Do you think this would be a better return than a mutual fund?

A: Savings bonds, CD's, Money Market Funds and the like don't have returns enough to provide for any real appreciation. For true growth, long term investors need to be thinking about equity investments. This will mean accepting a certain irritating amount of fluctuation in value, but it's well worth the aggravation.

I'm convinced that index funds are the lowest cost, lowest risk way for investors to capture the performance that the markets can bring. There is a list of low initial deposit index funds available at: http://www.indexfundsonline.com/lowreg.html. Call some of these funds and ask for literature and investor kits.

How can I double my investment in 5 years?

Q: What is best type of investment to turn 5,000 into 10,000 or more in 5 years time.

A: Any investment that has a 14% compound rate of return will double your funds in 5 years. The rule of 72 is a handy shortcut to make this calculation. To find the percent required to double your money in a certain number of years, just divide the number of years into 72.

Unfortunately, none of these high return investments come without a significant degree of risk. You might very well see your $5000 turned into somewhat less.

The longer your time horizon, the lower the risk of loss, and the better your "worst case" assumption becomes. But, five years is a pretty short time for high risk strategies to have a very high probability of paying off. You may want to reconsider your objective, or at least consider how well you are prepared to deal with a loss at the end of the time period. Perhaps a less risky strategy would meet your needs better.

There are a number of asset classes that have very high return potential: emerging markets, small company, small value, and foreign small or small value fall within the range you specified. But, all of them are carry lots of risk.

What exactly is a Roth IRA?

from Tom

Q: What exactly is a Roth IRA ? Is there a maximum yearly contribution ? What are the requirements for removing funds without penalty ?

A: A Roth IRA is a non deductible IRA. What makes it special is that if you comply with the requirements, distributions will be totally tax free, and are not subject to the required minimum distributions that regular IRAs encounter when the owner turns 70 1/2. There are also significant estate advantages over the traditional IRA.

Making the decision to invest in the Roth IRA is not simple. There are pros and cons. Not everyone can qualify. Not everyone should select the Roth over the traditional IRA. There is a world of information available on Roth IRA's at www.rothira.com, and many mutual fund company web sites have Roth IRA calculators to help you make the comparison.

As always, none of this discussion can replace a real tax professional, a CPA or Tax Attorney.

Copyright (c) 1998 Frank Armstrong.

Frank Armstrong is author of Investment Strategies for the 21st Century, published here, and president of Managed Account Services, Inc., a fee-only advisor specializing in global asset allocation strategies utilizing no-load mutual funds. Frank is a Certified Financial Planner (CFP) with 24 years' experience helping investors build wealth. The firm, an SEC Registered Investment Advisor currently manages in excess of $60 million for over 140 clients worldwide. Visit Frank's Managed Account Services, Inc. or call 1-800-508-8500 for more information about the Alternative to Business as Usual on Wall Street.

Copyright © 1998, Frank Armstrong.

Frank Armstrong is author of Investment Strategies for the 21st Century, published here, and president of Managed Account Services, Inc., a fee-only advisor specializing in global asset allocation strategies utilizing no-load mutual funds. Frank is a Certified Financial Planner (CFP) with 24 years' experience helping investors build wealth. The firm, an SEC Registered Investment Advisor currently manages in excess of $60 million for over 140 clients worldwide. Visit Frank's Managed Account Services, Inc. for more information about the Alternative to Business as Usual on Wall Street or call 1-800-508-8500.

Disclaimer

Investing in equities involves a serious principal risk, and no assurance can be given that the techniques described here will be successful. Returns vary and you may have a gain or loss when you sell your shares. Past performance is no guarantee of future results. Index returns shown are historical and include the change in share price, reinvestment of dividends, and capital gains. Indexes are unmanaged and do not reflect the impact of transaction costs. Transaction costs would have reduced the total returns.

International investments, especially those in emerging markets, entail greater risks (as well as greater potential rewards) than U.S. investing. These risks include political and economic uncertainties of foreign countries, as well as the risk of currency fluctuations. These risks are magnified in countries with emerging markets, since these countries may have relatively unstable governments and less-established markets and economies.

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