Roth IRA Allocation Suggestions

[Mman]

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Okay… so you think people should be buying bonds rn? Cant say I agree with the logic you posted being applied that way. Does it matter that your bond is stable if its yielding 5-7% less than your annualized return on index funds? I would say probably not…

you do you. I'm not talking about the timing of anything right now, although bond yields vs equity yields is something that would certainly suggest you should not ignore them. I'm saying mathematically you can have a lower returning investment in your portfolio and it can INCREASE your portfolio rate of return compared to going all in on the higher returning asset that has more volatility. It is not intuitive. It is difficult to wrap your head around. But it is important to understand if you are trying to construct a portfolio that will maximally return value to you over several decades.

I can't call it investing 101, maybe it's a 200 level course. But it's important to understand the math and why it applies to your portfolio. Simply jamming in the things with the highest predicted return is not the way to end up with the most money in the end. So to answer your question....yes it does matter if the bond is stable even if it is returning less than the annualized return on an index fund. The thing with an index fund is we don't know what it will return over the next 10 or 20 or 30 years so trying to pin down what percent more it will be than a bond or bond fund is inexact at best.

 

[sevo00]

diversification with uncorrelated assets can lead to higher overall returns by lowering volatility of your portfolio overall.

The graph you posted is meaningless. What do we know that A B and C even mean

 

[Mman]

The graph you posted is meaningless. What do we know that A B and C even mean

it is a mathematical example of how portfolio volatility can impair long term returns. If you want to end up with the most money in the end, having less volatility in your portfolio is helpful. Simply finding the highest returning assets you can is not necessarily the optimal portfolio allocation.

 

[triggermaster]

it is a mathematical example of how portfolio volatility can impair long term returns. If you want to end up with the most money in the end, having less volatility in your portfolio is helpful. Simply finding the highest returning assets you can is not necessarily the optimal portfolio allocation.

That shows that a 30% drop in year 2 is hard to recover from. It’s more of a sequence of returns risk graph applied only to the volatile option. It’s unrealistic that a diversified but aggressive and volatile portfolio will be down 30% in a year that a traditional, less-volatile portfolio is up.

All that shows is that it’s mathematically possible to get worse returns. Okay, but it’s unlikely to happen in the real world and even less likely if the chart extends to longer term returns.

 

[Mman]

That shows that a 30% drop in year 2 is hard to recover from. It’s more of a sequence of returns risk graph applied only to the volatile option. It’s unrealistic that a diversified but aggressive and volatile portfolio will be down 30% in a year that a traditional, less-volatile portfolio is up.

All that shows is that it’s mathematically possible to get worse returns. Okay, but it’s unlikely to happen in the real world and even less likely if the chart extends to longer term returns.

I simply cut and pasted the chart from the first google link I could find. The details on it are irrelevant to the mathematical concept and why volatility matters to your portfolio returns over 30 or 40 years.

Don't focus on the exact numbers on the chart. Use it as an example of why you should devote more time researching it so you can understand it and how it applies to you. It's similar to understand the difference between geometric returns of your portfolio vs arithmetic returns or time weight vs money weighted.

 

[TeslaCoil]

I simply cut and pasted the chart from the first google link I could find. The details on it are irrelevant to the mathematical concept and why volatility matters to your portfolio returns over 30 or 40 years.

Don't focus on the exact numbers on the chart. Use it as an example of why you should devote more time researching it so you can understand it and how it applies to you. It's similar to understand the difference between geometric returns of your portfolio vs arithmetic returns or time weight vs money weighted.

I dont understand how that matters if you’re getting a solid 10-15% CAGR pretty consistently…

 

[pgg]

I dont understand how that matters if you’re getting a solid 10-15% CAGR pretty consistently…

Because past performance is no guarantee of future results.

These days a lot of people seriously underestimate risk because they've only known 10+% annual returns, with no significant losses for any significant period of time ...

If you've got an hour or two to kill, read the first few chapters of Ferri's book All About Asset Allocation. It will explain why SOME bond allocation is probably wise, even in very aggressive portfolios. It's got its own set of assumptions, but it's worth understanding.

 

[aneftp]

Because past performance is no guarantee of future results.

These days a lot of people seriously underestimate risk because they've only known 10+% annual returns, with no significant losses for any significant period of time ...

If you've got an hour or two to kill, read the first few chapters of Ferri's book All About Asset Allocation. It will explain why SOME bond allocation is probably wise, even in very aggressive portfolios. It's got its own set of assumptions, but it's worth understanding.

I do agree past performance is no guarantee. It took nasdaq 13 years to return to peak stock levels in 2000 It took the sp 500 6-7 years to return to peak stock level in 2007 (from 2000 peak)

However if you intend to work for 8-10 more years. Just roll the dice and be aggressive. Because your earning potential will make up for any market losses. I don’t think someone who isn’t retiring in the next 2-4 years should be invested in any bonds at this point

Just my take.

I do have some bonds has I’m around 3-5 years from really slowing down.

 

[nimbus]

I do agree past performance is no guarantee. It took nasdaq 13 years to return to peak stock levels in 2000 It took the sp 500 6-7 years to return to peak stock level in 2007 (from 2000 peak)

However if you intend to work for 8-10 more years. Just roll the dice and be aggressive. Because your earning potential will make up for any market losses. I don’t think someone who isn’t retiring in the next 2-4 years should be invested in any bonds at this point

Just my take.

I do have some bonds has I’m around 3-5 years from really slowing down.

If you continue DCAing diligently into a dropping market, your portfolio will go on rocket fuel when the market eventually turns around. In the short term it will feel painful but you’ll win over the long term. People forget that saving is as important as market returns. DCAing means you load up while the market is down.

I have bonds too and I love them because they reduce volatility and help me sleep.

 

[Mman]

I dont understand how that matters if you’re getting a solid 10-15% CAGR pretty consistently…

if you get 10-15% every single year forever, that is an extremely low volatility portfolio. That would be ideal. But do you have assets in that portfolio that are guaranteed (or even extremely likely) to get that 10-15% every year? It's when you start throwing 25% down years in there along with 50% up years that the portfolio returns can stray far from what the mean returns would suggest.

 

[Hoya11]

If you continue DCAing diligently into a dropping market, your portfolio will go on rocket fuel when the market eventually turns around. In the short term it will feel painful but you’ll win over the long term. People forget that saving is as important as market returns. DCAing means you load up while the market is down.

I have bonds too and I love them because they reduce volatility and help me sleep.

why bonds over a HYSA or CD?

 

[TeslaCoil]

Because past performance is no guarantee of future results.

These days a lot of people seriously underestimate risk because they've only known 10+% annual returns, with no significant losses for any significant period of time ...

If you've got an hour or two to kill, read the first few chapters of Ferri's book All About Asset Allocation. It will explain why SOME bond allocation is probably wise, even in very aggressive portfolios. It's got its own set of assumptions, but it's worth understanding.

Haha I know that, but Ive got 25 years to go and my risk tolerance is higher. I definitely understand risk. That doesn't mean Im about to pigeon hole myself into buying bonds rn just because they’re “safer”. If the S&P isnt doing well, it usually means nothing is doing well. Except maybe gold. Bonds are just eh. They’re always just eh.

 

[TeslaCoil]

if you get 10-15% every single year forever, that is an extremely low volatility portfolio. That would be ideal. But do you have assets in that portfolio that are guaranteed (or even extremely likely) to get that 10-15% every year? It's when you start throwing 25% down years in there along with 50% up years that the portfolio returns can stray far from what the mean returns would suggest.

Okay then the next question is- historically, how often have those events occurred and for how long? 2008? Covid? What else?

Are you expecting WW3? Armageddon?

 

[Mman]

Okay then the next question is- historically, how often have those events occurred and for how long? 2008? Covid? What else?

Are you expecting WW3? Armageddon?

how often does a single down year happen? The S&P 500 has returned -5% or worse 6 times this century (so nearly 25% of the time) and 26 times in the last 100 years.

The mathematical reason of why volatility in your portfolio (larger swings up and down, like a 5% or larger drop when you were expecting a 10% rise) is more painful than you would expect is that it takes bigger up swings in the future to make up for a downswing now. If your $1,000,000 portfolio drops 20% in a year to $800,000, you need a 25% rise the next year to just get back to even. A 50% drop would need a 100% increase to break even. The bigger or more frequent the deviations from your expectation, the worse your portfolio returns over time even if you have similarly unexpected large increases in other years.

 

[emergentmd]

I am sure most on here have been approached many times by financial advisors and unless they have access to exotics that you really want to be involved in then there is no reason for a financial advisor unless you want a complete detachment from your investments. Paying someone 10-20K on a $1M portfolio makes zero sense if they are just investing in a sector or broad index. Sure, their 5 year performance have beaten the market by 5%, but it has zero predictive value on the next 5 yrs.

Studies have shown that the vast majority of "active" managers perform poorly against the S&P or some other index. If I remember right it was at 10% or less and I have no idea if this number even accounts for their fees. If not, then that 10% is probably less than 5%.

My strategy, which is not for the faint of heart, is to do the Mag 7 or some variant. I think in the long run, they have and will continue to outperform the market. I am also in some other exotic investments but not any better than picking a number on the roulette. If it hits, it will be a significant amount. If it doesn't, and most do not, then its money I don't even worry about. I am talking about start up energy and crypto companies I have invested in.

For most, just throw it in the index or some similar and you will be fine.

 

[Mman]

However if you intend to work for 8-10 more years. Just roll the dice and be aggressive. Because your earning potential will make up for any market losses. I don’t think someone who isn’t retiring in the next 2-4 years should be invested in any bonds at this point

I tend to agree with Ben Graham on the topic of portfolio allocations that you should always be between 80/20 and 20/80. There just isn't a mathematical reason to go beyond those. Even 80/20 gives you nearly all the upside of 100/0 but with significantly less downside. I mean if you have 25+ years til retirement it doesn't really matter because you don't have anything saved yet, but once you get within 10-15 years of retirement you need to be more careful IMHO. If you were 5 years from retirement and saw a 25% portfolio drop, you probably need to work 18 months extra beyond your planned retirement just to break even.

 

[emergentmd]

Diversify allows you to be aggressive. Investments in different vehicles allows you do be more risky. I have thrown about 20 risky darts in my life. 1 was a big winner (100x) with significant yearly cash flow, 3-5 was a good (3-10x) with yearly cash flow, 5-7 that was OK (2x), and the rest were duds/worthless.

 

[TeslaCoil]

Diversify allows you to be aggressive. Investments in different vehicles allows you do be more risky. I have thrown about 20 risky darts in my life. 1 was a big winner (100x) with significant yearly cash flow, 3-5 was a good (3-10x) with yearly cash flow, 5-7 that was OK (2x), and the rest were duds/worthless.

Alright. So I have a completely diversified 401k. But here we’re talking about a Roth. And I want to take a shot at growing it “fat as a tick” as they say. My understanding is that you typically want to be more aggressive with a roth, no? So with that in mind and considering the time horizon, what do you think of 70/30, VOO/VGT?

And actually now that Im thinking about it, the roth will actually have an extra 5ish years minimum to grow since I will likely preferentially draw from the 401k initially. That makes it more like a 30 year time horizon…

I also have real estate and crypto.

 

[nimbus]

why bonds over a HYSA or CD?

The uninteresting answer is that I don’t really have a choice. Our CBP is 75% total bond market index/25% total stock market index.

 

[emergentmd]

It does make more sense to be aggressive in the Roth, which I have done also. For a 25 yr timeframe, I think your VOO/VGT ratio gives you a lean towards being aggressive. VOO is S&P and VGT is essentially a safer Mag 7.

If the mag 7 tanks, VGT will likely tank. Msft/NVDA/Appl makes up about 45% of VGT.

For me, I prefer to take more risks and not pay the albeit small expense ratio. Past doesn't represent future returns but the Mag 7 in the past 10 yrs has had a 37% Yearly return vs about 11% for S&P. 10K initial investment would be about 28K in S&P vs 230K with the Mag 7.

I have learned from many mistakes that past doesn't represent future performance. I am looking at you ARK.

But I am quite confident that the Mag 7 are the best position to lead the future. Their MOAT is just huge for some other startup to enter.

I plan on putting 100K Monday into the Mag 7 Monday given the recent drop. Every time Trump doesn't something dumb to spook the market, I will be buying more.

 

[TeslaCoil]

It does make more sense to be aggressive in the Roth, which I have done also. For a 25 yr timeframe, I think your VOO/VGT ratio gives you a lean towards being aggressive. VOO is S&P and VGT is essentially a safer Mag 7.

If the mag 7 tanks, VGT will likely tank. Msft/NVDA/Appl makes up about 45% of VGT.

For me, I prefer to take more risks and not pay the albeit small expense ratio. Past doesn't represent future returns but the Mag 7 in the past 10 yrs has had a 37% Yearly return vs about 11% for S&P. 10K initial investment would be about 28K in S&P vs 230K with the Mag 7.

I have learned from many mistakes that past doesn't represent future performance. I am looking at you ARK.

But I am quite confident that the Mag 7 are the best position to lead the future. Their MOAT is just huge for some other startup to enter.

I plan on putting 100K Monday into the Mag 7 Monday given the recent drop. Every time Trump doesn't something dumb to spook the market, I will be buying more.

Nice.

Is there a Mag 7 etf? Or do you have to buy them individually?

 

[emergentmd]

MAGS but looks like they currently hold Mag 7 and a good chunk in treasuries. I assume they do some market timing/active trading in/out of the Mag 7 thus have a good amount in US treasuries.

I just buy them individually and DCA into them when they drop.

 

[TeslaCoil]

MAGS but looks like they currently hold Mag 7 and a good chunk in treasuries. I assume they do some market timing/active trading in/out of the Mag 7 thus have a good amount in US treasuries.

I just buy them individually and DCA into them when they drop.

Hmm. I may throw some money into that.

I do think the risk there is quite a bit higher. More of a gamble.

 

[Hoya11]

The uninteresting answer is that I don’t really have a choice. Our CBP is 75% total bond market index/25% total stock market index.

Thx. I hear a lot of people talk about investing in bonds and im not sure what i am missing

 

[Mman]

im not sure what i am missing

historical 5-10% annual rate of return with very low volatility. Not great, but deserves to be part of your portfolio to some degree.

 

[triggermaster]

Thx. I hear a lot of people talk about investing in bonds and im not sure what i am missing

There’s no mathematical benefit. There’s arguably a behavioral benefit that if your bonds hold value during a crash you’ll be less likely to sell equities at the bottom which is about the worst thing that can happen to your portfolio.

 

[TeslaCoil]

There’s no mathematical benefit. There’s arguably a behavioral benefit that if your bonds hold value during a crash you’ll be less likely to sell equities at the bottom which is about the worst thing that can happen to your portfolio.

Right now I would call it a poor choice of investment. You know what time it is when the US fed holds a bond auction and nobody shows up. Not a soul. Then the fed prints up a few tens of billions to buy their own bonds.

 

[rowsdower88]

Argument for some bond exposure:

Suppose you plan on buying a house in a timeline of 2-5 years. You could save that money in a highly liquid, FDIC insured savings account making north of 4% interest. Downside is that all of that interest is being taxed at your marginal rate at the state and federal levels. Alternatively, you could get a lower interest rate (maybe 3.5%) with slightly higher risk (not FDIC insured) by keeping that money in a municipal bond fund. The main benefit being tax exempt status from the federal government, with some funds providing state specific exemption.

High income individuals would be achieving higher returns on this part of their portfolio overall, with marginally higher risk.

 

[triggermaster]

Argument for some bond exposure:

Suppose you plan on buying a house in a timeline of 2-5 years. You could save that money in a highly liquid, FDIC insured savings account making north of 4% interest. Downside is that all of that interest is being taxed at your marginal rate at the state and federal levels. Alternatively, you could get a lower interest rate (maybe 3.5%) with slightly higher risk (not FDIC insured) by keeping that money in a municipal bond fund. The main benefit being tax exempt status from the federal government, with some funds providing state specific exemption.

High income individuals would be achieving higher returns on this part of their portfolio overall, with marginally higher risk.

Every time I’ve looked at municipal bonds, their after tax yields are lower than taxable bonds. I looked into this as an investment for my kids’ tuition that’s due every 6 months or so. I went with a HYSA.

 

[aneftp]

Every time I’ve looked at municipal bonds, their after tax yields are lower than taxable bonds. I looked into this as an investment for my kids’ tuition that’s due every 6 months or so. I went with a HYSA.

Tax exempt muni bonds if u live in California yield around 3.5% so that may be better than hysa.

But u need immediate cash to pay tuition so hysa works as well

 

[rowsdower88]

Every time I’ve looked at municipal bonds, their after tax yields are lower than taxable bonds. I looked into this as an investment for my kids’ tuition that’s due every 6 months or so. I went with a HYSA.

Assuming you're at the highest income bracket. You have to have a savings account interest of >5.5% to beat a tax exempt route of just 3.5% (could factor in state tax exemptions as well if they apply to your municipal bond fund of choice). If you found a HYSA offering that, kudos.

Tax Equivalent Yield Calculator

Bankrate.com provides a FREE tax equivalent yield calculator and other TEY calculators to view the yield of your municipal bonds.

www.bankrate.com

Maybe this calculator is off?

 

[rowsdower88]

Tax exempt muni bonds if u live in California yield around 3.5% so that may be better than hysa.

But u need immediate cash to pay tuition so hysa works as well

Could invest in something like VTEC. Not as liquid as HYSA, but you can sell quick enough if your only transaction is once a semester.

Not sure how much will be in the account for that purpose, so the dollar benefit might not be worth the added risk compared to FDIC insured HYSA either.

 

[triggermaster]

Assuming you're at the highest income bracket. You have to have a savings account interest of >5.5% to beat a tax exempt route of just 3.5% (could factor in state tax exemptions as well if they apply to your municipal bond fund of choice). If you found a HYSA offering that, kudos.

Tax Equivalent Yield Calculator

Bankrate.com provides a FREE tax equivalent yield calculator and other TEY calculators to view the yield of your municipal bonds.

www.bankrate.com

Maybe this calculator is off?

I think in high tax states with municipal bond funds for their state, it’s more likely to work in their favor. I don’t have that benefit where I live so munis aren’t as good as for other people. Maybe I’d benefit vs my HYSA a little bit as long as I don’t lose principal to eat away at my yield.
My after tax yield is only about 2.5% so it’s not hard to beat. It has $50k right now, but it’ll be largely depleted in December before building back up by July. If it averages 25k and a muni is 3.5% vs HYSA 2.5% (after tax) that’s $250. Not bad but not a fortune. I’ll look into it again.

 

[DoctwoB]

VTI 10 yr annualized return is 12%ish
VGT 10 yr annualized return is 21.6%ish

Despite the small overlap.

Makes sense. Tech has had outsized returns in the past decade. Historically sectors that overperform the market for a decade tend to underperform the next decade. May or may not happen here.

 

[<(^_^)>]

Optimal leverage ratio is more than 0.8x. It’s also more than 1.0x. Usually around 1.5 (depends on the decade/fund of course). It does require a lot more conviction though. It is kind of hilarious how risk-on the market/society is right now.

the jackpot age Is a kind of interesting read on the subject of risk.

I have been decidedly more risky in my Roth IRA because theoretically if I could I would contribute more to it. The fact I can’t means it makes sense to increase my exposure a bit via leverage.

Above all else the key is to not mess around with your investments when emotional. Even the actively managed funds that do beat the market the investors in those funds often still underperform. Why? They buy the funds when the funds are outperforming the market, and sell when the fund is underperforming the market.

If you put 80% of your $$$ into the sp500 and mess around with the other 20% chances are you’ll underperform 100% sp500, but you’ll outperform someone that says they’re going to be 100% sp500 but changes their strategy in response to market turmoil etc. That’s how you sell the bottom. If you thought about selling during 2020 or April you’re very vulnerable to this. I would encourage you to give in and try to beat the 80% with your 20%, but not touch the 80% under any circumstance. Good luck!

 

[TeslaCoil]

Optimal leverage ratio is more than 0.8x. It’s also more than 1.0x. Usually around 1.5 (depends on the decade/fund of course). It does require a lot more conviction though. It is kind of hilarious how risk-on the market/society is right now.

the jackpot age Is a kind of interesting read on the subject of risk.

I have been decidedly more risky in my Roth IRA because theoretically if I could I would contribute more to it. The fact I can’t means it makes sense to increase my exposure a bit via leverage.

Above all else the key is to not mess around with your investments when emotional. Even the actively managed funds that do beat the market the investors in those funds often still underperform. Why? They buy the funds when the funds are outperforming the market, and sell when the fund is underperforming the market.

If you put 80% of your $$$ into the sp500 and mess around with the other 20% chances are you’ll underperform 100% sp500, but you’ll outperform someone that says they’re going to be 100% sp500 but changes their strategy in response to market turmoil etc. That’s how you sell the bottom. If you thought about selling during 2020 or April you’re very vulnerable to this. I would encourage you to give in and try to beat the 80% with your 20%, but not touch the 80% under any circumstance. Good luck!

Thanks! Yea no way Im touching the VOO. Thats a forever hold for me.

 

[narcotics999]

Two approaches I considered for Roth are putting your highest taxed assets in (dividend stocks, REITs, etc) versus your riskiest since they have the highest growth potential. I think most people opt for riskiest, which based on your posts it would seem tech and bitcoin would be good choices.

Another consideration is that the Roth IRA is the last money you’ll touch and may very well go to your kids.

"Roth IRA is the last money you’ll touch and may very well go to your kids". This is not totally true. While Roth IRA is inherited tax-free, brokerage account is inherited with step-up basis.

 

[triggermaster]

"Roth IRA is the last money you’ll touch and may very well go to your kids". This is not totally true. While Roth IRA is inherited tax-free, brokerage account is inherited with step-up basis.

Plus the Roth should be used to dial in your marginal tax rate to whatever is most beneficial (unless your RMDs are more than your spend).

 

[Lab Lover]

"Roth IRA is the last money you’ll touch and may very well go to your kids". This is not totally true. While Roth IRA is inherited tax-free, brokerage account is inherited with step-up basis.

Except the inherited Roth $ will enjoy additional tax protection should your kids inherit it. Not as good as they used to though.

 

[finalpsychyear]

"Roth IRA is the last money you’ll touch and may very well go to your kids". This is not totally true. While Roth IRA is inherited tax-free, brokerage account is inherited with step-up basis.

Does inherited ira/roth have to be used up within 10 years now ? The step up in basis on brokeage would pass indefinetely till all funds used up?

 

[Lab Lover]

Does inherited ira/roth have to be used up within 10 years now ? The step up in basis on brokeage would pass indefinetely till all funds used up?

As far the Roth goes: If the kids are over 18…yup.

For a taxable account brokerage you get the step up. At death or alternate valuation date six months after death…but then it becomes a taxable account in the beneficiary’s name. Capital gains and losses begin to accrue.

 

[aneftp]

As far the Roth goes: If the kids are over 18…yup.

For a taxable account brokerage you get the step up. At death or alternate valuation date six months after death…but then it becomes a taxable account in the beneficiary’s name. Capital gains and losses begin to accrue.

There are so many rules to follow.

I know about the 5 year Roth rule but the Roth rule apply to the original date of the Roth account ? Or the latest date of the lastest Roth contribution ?

1. Started Roth 2017
2. Kept contributing Roth every year up to August 16 2025

Is all the Roth money tax free in inheritance? Even the money contributed in August 16 2025?

 

[Lab Lover]

There are so many rules to follow.

I know about the 5 year Roth rule but the Roth rule apply to the original date of the Roth account ? Or the latest date of the lastest Roth contribution ?

1. Started Roth 2017
2. Kept contributing Roth every year up to August 16 2025

Is all the Roth money tax free in inheritance? Even the money contributed in August 16 2025?

I don't know all the rules either, but Yes. As long as the account is withdrawn within ten yers of death your all withdrawals including growth of your account to your heirs are tax free. Until a few years ago they could have taken withdrawals over their projected life span.

 

[finalpsychyear]

As far the Roth goes: If the kids are over 18…yup.

For a taxable account brokerage you get the step up. At death or alternate valuation date six months after death…but then it becomes a taxable account in the beneficiary’s name. Capital gains and losses begin to accrue.

Yes but for a taxable brokerage for a joint couple i can take out 120-125k in gains and pay 0 percent capital gains if i have no other income.

If its half principle and half gains i could easily be at 200k withdrawal and pay 0 tax. With inflation number goes higher but my fixed costs like car payments, mortgage dont change.

Also borrow against if low rates could be a tool as well. Roth is great but less so with 10 year rule. U could convert roth to brokerage end of 10 years.