Newbie Investment Question: Un-invested money in an IRA.

Sorry. Completely new to investing. I opened a ROTH IRA with my credit union which put money into an account that I then buy stocks from. I spent all the money on stocks, but now I have extra money that isn’t enough for any shares that I am interested in. It’s about a hundred and change. Is that normal? Is that how it’s supposed to work; just always having extra money in there? What happens with that money? Does it collect a small amount of interest? Like a savings account?
Of course I’ll eventually put more money in there, and buy more stocks, but it seems there will always be some amount of un-invested money in the account. Am I doing it wrong?

Yes, it accumulates money for various reasons, one of the most common being that stocks you bought payed dividends. You can often choose to automatically reinvest dividends for something you’ve invested in - whether you want to do that is up to you. Most brokerage accounts pay some interest on the cash balance (a very low rate, these days), and they may have a so-called “Sweep Fund” (usually a money market fund) that they automatically “sweep” your cash into at the end of the day, and withdraw from it when you trade. At any rate, yes, it’s normal that you have a cash balance in there which is available for buying new securities.

Most CU’s will sweep money into a money market account paying interest depending on the balance which will be tiny - like 0.001% for your extra money.

Most CU’s will have an option to automatically reinvest your dividends from stocks/bonds into new shares of the same stock/bond - this keeps that pesky cash from not being put to use. This option should be free and should be definitely used.

For the extra money lying around - I’d recommend an Exchange Traded Fund (ETF) like SDY or SPY (symbols for the S&P dividend aristocratic and general stock ETFs). Or a preferred stock fund like JPS or PFF. I like JPS because the low price per share doesn’t leave much spare change in the account and it pays around 7% annually (and pays the 1/12 dividend monthly).

Disclaimer - I am not a financial adviser in real life, nor am I your financial adviser. I may not be an actual person.You are merely experiencing photons exciting retinal cells transmitting impulses to your brain’s optical center.

Yes, that’s normal. You could have 100% of your IRA money in cash if you wanted.

And since you’re asking this particular question, I’d like to mention that a newbie should be investing in a simple index fund like the S&P 500. These funds often provide good returns and lose very little for management costs. Quite often, newbies (not necessarily you) are directed to more exotic funds which have more volatility and are much more costly because of management fees.

What funds are you investing in with your IRA? You say you’re going through your credit union. Often banks, credit unions, financial companies, etc direct you to their own funds that have a relatively high management fee which takes away from any potential gains you might see.

Two things, first, when I set up a Roth IRA (but it would be the same for an IRA) I was surprised that I had to pick stocks/ETFs/funds. I guess I didn’t know what to expect, but when was constantly told to open one, I didn’t realize that there would be so much risk involved. I guess I thought it was like some kind of special savings account.

Second, you have to remember that “cash” is a position. It’s no different than any other fund or stock out there. In the long run (a really long run) it will generally lose value due to inflation, but in the short run it’s a good position to have when the market is falling apart. Something you may want to keep in mind as you get closer to retirement. I had a few friends think they were going to retire about 10 years ago that are still working because their retirement funds got wiped out.

BTW, someplace on the broker’s web site for your account there should be a way to look at history, “recent transactions” or something like this. This should tell you where the money came from. Of course, if you are getting paper statements from them every month, it will also be on those.

I didn’t do any funds. I bought 9 shares of Google, 8 of Orbital ATK and the rest in Deutsche Telecom.

Lucky for me, my actual retirement does not depend on this IRA. I have a great pension lined up and will be able to retire in less than a decade. Hopefully these stocks at least maintain their value long enough for me to actually figure out what I’m doing.

Thanks for the help, everyone.

Did your friends sell on the bottom? My accounts got hit 10 years ago, but they have long since more than recovered.
Cash (or less volatile investments like dividend oriented stock and bonds) are goo things to diversify into when the market is high and you can lock in some of your gains. They are terrible things to diversify into after the market has crashed since you lock in your losses,

Good luck with your new IRA!

My hunch is that you didn’t spend all the money on stocks. Most brokers will only allow you to buy whole shares of stock. You can’t spend more than you have in an IRA account (that is, you can’t borrow money against the account or go on margin). The odds that the stock that you bought totaled exactly the amount that you contributed to the account is approximately 0%. So, consistent with your instructions, the credit union probably bought as much stock as you could afford with your contribution and left the remainder invested in cash equivalents in the account. It’s probably either a credit union deposit or a money market fund that will collect a tiny amount of interest at today’s rates.

Then, as others have noted, you may collect dividends from your stock investments over time. Orbital ATK paid a dividend of 32 cents per share on November 15, 2017. These dividends will also be invested by your IRA trustee in cash equivalents.

When you say you spent “the rest” on Deutsche Telecom, I suspect the credit union bought the most Deutsche Telecom stock it could buy with your remaining funds (or perhaps it bought a round lot of 100 shares depending on your instructions to it) and then it invested the remainder of your cash in the cash equivalent for your IRA account.

I prefer to buy low-cost mutual funds for my accounts and have the dividends and capital gains reinvested. It means that I don’t wind up with these odd amounts hanging out in my accounts.

If you want to invest in stocks with your IRA, you might be better off using one of the online firms like E*Trade, Schwab, or others. That way you can invest directly and avoid the fees the CU charges.

Does anyone know how the CU gets their cut in this scenario? If Bear_Nenno bought a fund managed by the CU, the CU would get their management fee from the deal. But if he instead purchased stocks, how did the CU get paid?

I really couldn’t tell you. And come to think of it, they may be retired at this point. They’re friends of my parents, while I do know them very well, I couldn’t tell you whether or not they working at this point. But it was about 5 years before the market was back to where it started and for all I know they tossed more money at it on the way down. Don’t get me wrong, they’re certainly not destitute, they just lost their retirement money, they’re surviving just fine.

You will do much better if you invest in mutual funds directly. Fidelity, T. Rowe Price, and Vanguard are really good for newbies, and well-seasoned investors.

Follow the three funds portfolio and you should do well. I have for several years. For the year 2017, my stock funds went up 22 percent, bond funds up 4 percent (expected), and my international funds went up 25 percent. Whatever change not invested in the stock market you can leave in an associated cash reserves fund. It’s important to keep the cash reserves fund at bare minimum to keep the account active. You want the rest of your investments in the other three funds.

(Historically, if the NYSE is up the first day of trading in the new year (like today), the market will be up (in total) for the year. Then again, there is the Icarus Effect some are worried about. But the January Effect says you could do well this month.)

Pssst! Just follow the Three Funds portfolio and over the long-term you will come out ahead.

Another Three-fund fan here. My 2017 results were 18% overall. Detailed breakdown is:

21.0% US (65%)
27.5% INTL (15%)
3.5% Bond (20%)

If the Three-fund is too complicated, my daughter uses a Fidelity four-in-one fund, FFNOX, that returmed 19% in 2017. (It adds an Extended Market Index to the S&P 500 and International Index funds)

I’m a 5 fund portfolio. 36% Total US Stock Index, 18% International Stock Index, 27% Total Bond Market Index, 9% REIT Index, and 9% Federal Money Market Index. I’m in retirement right now and keep two years worth of expenses in the money market index at all times. 2017 performance was up 15.2%, I’ve rebalanced a couple of times over the year to keep things where I like them.

They charge a commission fee per trade. It’s probably too high compared to other options, but it’s a flat rate and I don’t think I’ll be make trades too often. If that changes, I might look into take the investment account somewhere else.
And it probably will change. I’ve already opened a traditional brokerage account. So now I have a TSP, a brokerage account and a retirement account. And a 50% pension upon retirement (Summer 2023, baby!!). I’m really starting to feel like an adult.