Vanguard ROTH IRA

[chichi52]

Getting ready to open up my first ROTH IRA. I was looking into Vanguard due to the low costs. I've browsed WCI and done some reading, but I'm still having difficulty choosing the right allocation for the funds. I'm fairly new to the game (obviously), and my investing IQ just isn't anywhere near I'd like it to be. My wife uses a financial adviser that she got from her parents, but I'm trying to get everything started on my own. Any advice on which funds to get started for an incoming intern?

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[ThoracicGuy]

Getting ready to open up my first ROTH IRA. I was looking into Vanguard due to the low costs. I've browsed WCI and done some reading, but I'm still having difficulty choosing the right allocation for the funds. I'm fairly new to the game (obviously), and my investing IQ just isn't anywhere near I'd like it to be. My wife uses a financial adviser that she got from her parents, but I'm trying to get everything started on my own. Any advice on which funds to get started for an incoming intern?

I had a real nice reply almost completed, but ended up losing it by closing the window on accident, so let me recreate:

You should look into the Bogleheads forum and wiki. They have lots of great information and advice for investments.

You need to first determine your asset allocation. This is often determined by 110 or 100 minus your age. This number will give you what your percentage of stocks should be. For instance, if you are 30, then that would give stock percentage of 70-80%. As this is money invested for the long term, I would tend to lean towards the upper number. This gives you 20-30% in bonds. Next you need to determine what percentage of your stocks should be domestic and what percentage as international. I use about 30% of my stocks as international. This would give you overall: Bond 20%, International 25%, and Domestic 55%.

You should make your asset allocation across all your retirement funds. This would include your wife's as well as this would be money that you would both be using in retirement.

I worry about her use of a financial advisor. Typically these advisors are just salesmen and they will get you stuck in high expense ratio, loads, and 12-1b fees and the like. Often you'll be in actively managed funds that underperform the passive indices long term. You also get churn where they will buy and sell frequently and cause more loads and fees, lining their pockets and not yours. Unless they are a fiduciary, they are just a salesman.

So looking just at Vanguard, I would recommend the following funds:

Bonds:
VBIIX (Investor) or VBILX (Admiral)

International:
VGTSX (Inv) or VTIAX (Admiral)

Domestic:
VTSMX (Inv) or VTSAX (Adm)

You want to keep your expense ratios as low as possible. You don't want to be in anything that has loads or 12-1b fees.

Any questions, feel free to ask.

 

[Stroganoff]

I followed the lazy/poor student's approach when starting my Vanguard Roth IRA and just went with their fund of funds: Target Retirement 2050. Maybe look into the Target Retirement 2055 and 2060 depending on your age. They include 4 index funds inside them (Total Stock Market Total International Stock, Total Bond, Total International Bond) in various asset allocations and automatically re-balance. This lets you, for the most part, "set it and forget it," and lets you focus on work and life, at least until such time that 1) you've done more reading and learning, and 2) you have more money to add to the Roth IRA to make individual investments possible. For example, many Vanguard funds have a $3,000 minimum initial investment, which isn't possible with a $5,500 contribution for one year. You'd need at least a few years' worth of contributions to be able to buy 3-4 individual funds.

 

[ThoracicGuy]

Indeed.

As well, starting out, I would put money into the Domestic stock Total Index Fund first. Once you get to $10k, you can move to the Admiral funds for even lower expense ratios.

 

[Stroganoff]

Indeed.

As well, starting out, I would put money into the Domestic stock Total Index Fund first. Once you get to $10k, you can move to the Admiral funds for even lower expense ratios.

Curious: Do funds automatically convert to Admiral class once they've hit $10,000, or is it a manual process? I'm gunning to move to nothing but Admiral eventually.

 

[ThoracicGuy]

Curious: Do funds automatically convert to Admiral class once they've hit $10,000, or is it a manual process? I'm gunning to move to nothing but Admiral eventually.

Supposedly they auto convert when periodic reviews are done and the funds are noted to be a high enough amount. You can manually do it as soon as you hit 10k, though, so that if the market goes down and your value goes lower, you're still in the admiral funds.

 

[chichi52]

Thanks for the advice. I'll definitely keep that in mind. As far as the adviser is concerned, through a longstanding arrangement from other family members, the adviser gets no commission or no AUM. The only fees that are paid are the usual transaction fees.

I definitely can't put into the admiral funds at this time. I'll have to find the funds that are the$1000 minimums.

 

[ThoracicGuy]

Thanks for the advice. I'll definitely keep that in mind. As far as the adviser is concerned, through a longstanding arrangement from other family members, the adviser gets no commission or no AUM. The only fees that are paid are the usual transaction fees.

I definitely can't put into the admiral funds at this time. I'll have to find the funds that are the$1000 minimums.

Just make sure the funds he is putting her in aren't high cost ones. If he's not making money off commission or AUM, maybe there is a kickback via the fees somehow. There shouldn't be any usual transaction fees.

As for the funds, the Vanguard STAR fund allows a starting investment of $1000. You can add to that until the point you get the minimum for one of the other funds ($3000) and then move it over. The STAR fund is 60% stock, 40% bond (VGSTX).

 

[Incis0r]

VTSMX (Inv) or VTSAX (Adm)

Great advice, Dr.

I will add, however, that VTI is the ETF cousin to VTSMX and VTSAX.

https://personal.vanguard.com/us/funds/snapshot?FundId=0970&FundIntExt=INT

I highly recommend going into VTI since it carries a 0.05% Expense Ratio (matching that of VTSAX, but you don't need the $10K minimum contribution to get in).
VTSMX has a 0.16% expense ratio.

I'm currently 100% in VTI (whereas the age rule would suggest I should have at least 20% bonds). Oh well. I've got decades ahead, and I'm willing to ride the market roller coaster up and down.

 

[ThoracicGuy]

Great advice, Dr.

I will add, however, that VTI is the ETF cousin to VTSMX and VTSAX.

https://personal.vanguard.com/us/funds/snapshot?FundId=0970&FundIntExt=INT

I highly recommend going into VTI since it carries a 0.05% Expense Ratio (matching that of VTSAX, but you don't need the $10K minimum contribution to get in).
VTSMX has a 0.16% expense ratio.

I'm currently 100% in VTI (whereas the age rule would suggest I should have at least 20% bonds). Oh well. I've got decades ahead, and I'm willing to ride the market roller coaster up and down.

ETFs are definitely an option as well, though I was just working on keeping it simple. At Vanguard, you can buy Vanguard ETFs without a fee, but it'd cost you at other places, so that's one thing to watch out for.

I was 100% into VTSAX for about 15 years before I started diversifying.

 

[Incis0r]

ETFs are definitely an option as well, though I was just working on keeping it simple. At Vanguard, you can buy Vanguard ETFs without a fee, but it'd cost you at other places, so that's one thing to watch out for.

I was 100% into VTSAX for about 15 years before I started diversifying.

100% agreed. Vanguard is fantastic.
You're right- asset allocation is something to think very carefully about, and bonds should eventually make their way into a portfolio to give it some stability.

 

[chichi52]

100% agreed. Vanguard is fantastic.
You're right- asset allocation is something to think very carefully about, and bonds should eventually make their way into a portfolio to give it some stability.

Thanks for the advice. I'm definitely spending some time on my asset allocation. I feel like my personality tends to be a little more conservative and I may run with a 70/30 stocks to bonds.

As I'm still doing "my homework." Could you clarify the functional differences between a Vanguard index fund vs. an ETF?

 

[Incis0r]

There are quite a few differences- this article spells them all out pretty well: https://www.bogleheads.org/wiki/ETFs_vs_mutual_funds

 

[chichi52]

Will check it out. As I am just starting out and can only put the max 5500 max, would it be prudent to put that money into an all in one target fund
Or 100% in the US stock fund like vtsmx. Putting 3k into US wouldn't leave me with much to put towards the other funds as almost everything has a 3k minimum.

 

[ThoracicGuy]

Will check it out. As I am just starting out and can only put the max 5500 max, would it be prudent to put that money into an all in one target fund
Or 100% in the US stock fund like vtsmx. Putting 3k into US wouldn't leave me with much to put towards the other funds as almost everything has a 3k minimum.

You don't have to get it all in at one time. I would start with Domestic stock funds. Once you get to Admiral shares, then consider a good bond fund. Once that's where you want it, then think about the International fund.

 

[Stroganoff]

You don't have to get it all in at one time. I would start with Domestic stock funds. Once you get to Admiral shares, then consider a good bond fund. Once that's where you want it, then think about the International fund.

I'm not sure I agree with this approach for a Roth IRA. It could take years before the desired asset allocation is reached following this approach, taking on unnecessary risk (leaves out both bond exposure and more importantly international exposure to diversify away from the USA) just to save a few bucks on expense ratios. You're advocating 100% domestic stocks first, followed by gradually adding in the next index fund. Kind of contradicts your initial [excellent] advice on determining one's risk tolerance and desired asset allocation.

I mean, with a $5,500 2016 contribution, this can all go towards either a Target Date fund or LifeStrategy fund and get 4 index funds diversified, immediately. Only downside would be barely higher expense ratio. ~0.16% is still really good.

Only after 3 years x $5500 (assuming it doesn't increase to $6000+ soon) and assuming the value doesn't drastically go down soon in the next correction, we'll have $16,500 contributed. Then it makes sense to do-it-yourself and get 3 or 4 funds to shave off a tad in fees. But even then it's extra manual work.

 

[ThoracicGuy]

I'm not sure I agree with this approach for a Roth IRA. It could take years before the desired asset allocation is reached following this approach, taking on unnecessary risk (leaves out both bond exposure and more importantly international exposure to diversify away from the USA) just to save a few bucks on expense ratios. You're advocating 100% domestic stocks first, followed by gradually adding in the next index fund. Kind of contradicts your initial [excellent] advice on determining one's risk tolerance and desired asset allocation.

I mean, with a $5,500 2016 contribution, this can all go towards either a Target Date fund or LifeStrategy fund and get 4 index funds diversified, immediately. Only downside would be barely higher expense ratio. ~0.16% is still really good.

Only after 3 years x $5500 (assuming it doesn't increase to $6000+ soon) and assuming the value doesn't drastically go down soon in the next correction, we'll have $16,500 contributed. Then it makes sense to do-it-yourself and get 3 or 4 funds to shave off a tad in fees. But even then it's extra manual work.

Your method isn't bad either. Don't forget, though, his wife had investments too and it should really be considered all together.

 

[bc65]

For your first contribution, you should stick to one fund only until you reach the Admiral level. I would start with the Total Market Index Fund.

A target date fund will give you a more diversified portfolio, with some exposure to international funds, real estate funds, and eventually some bonds, but will have slightly higher expenses. If you want a "set it and forget it" solution, that's probably it.

However, I am not a big fan of target date funds because someone more than 5-10 years from retirement probably shouldn't have any bonds at all. Some would say that many people won't ever need bonds at all, if you can live off the 1.9% dividend you get from the index funds, plus your social security. Others say that you shouldn't bother with international funds either, because you have exposure via US stocks.

However, that discussion is best left for another day. I think it's best to start with the Total Market fund, and stick with that for a few years. If you decide that you want more diversification, either use new money to buy the index funds that you want ( lower expenses that way), or if you don't want to do the work, start buying a target date fund in a few years. You can adjust the percentage of bonds to your liking by using a target date that is later than your expected retirement ( to decrease the percentage of bonds) or earlier ( to increase the bond % )

 

[chichi52]

Great posts! A lot to think about and I appreciate the differing points of view.

 

[MrWonderful]

Hi there. Here is the best allocation for "long term growth" and is considered "highest risk". This allocation is best suited for somebody who wants to let it sit until retirement.

50% Large Cap Funds
25% International (NON-US) Funds
25% Small Cap Funds

 

[The White Coat Investor]

There is no "best" allocation. There are plenty of reasonable asset allocations, and that's all you need.

http://whitecoatinvestor.com/150-portfolios-better-than-yours/

 

[Psai]

This thread is exactly what I was looking for, thanks to everyone who contributed, especially thoracicguy

 

[Mman]

I'm currently 100% in VTI (whereas the age rule would suggest I should have at least 20% bonds). Oh well. I've got decades ahead, and I'm willing to ride the market roller coaster up and down.

While obviously you are free to make the best decisions for you, part of the reason for having a bond allocation (even if only 10-20%) is that it helps make the roller coaster not have so many potential big drops and helps prevent you from making a bad decision to change your allocation without having any material negative impact on long term returns.

It's like insurance against losing your nerve in a big downturn. It's one thing to claim you will just ride out the ups and downs, it's another when you log into your account and see it has a much lower value than it did the last time you peeked at it and every headline you read talks about how much farther it will drop.

 

[Incis0r]

While obviously you are free to make the best decisions for you, part of the reason for having a bond allocation (even if only 10-20%) is that it helps make the roller coaster not have so many potential big drops and helps prevent you from making a bad decision to change your allocation without having any material negative impact on long term returns.

It's like insurance against losing your nerve in a big downturn. It's one thing to claim you will just ride out the ups and downs, it's another when you log into your account and see it has a much lower value than it did the last time you peeked at it and every headline you read talks about how much farther it will drop.

You're right- insightful comment. this is something that has been on my mind too.
I am taking multiple steps to guard against a knee-jerk reaction to sell, but I will revisit the idea to add some bonds too.