Roth IRA investment advice

[DSM]

This is the first year, I am doing backdoor Roth for myself and my spouse. What would be the good investment option for this 11K fund?

 

My other retirement money (tax deferred and taxable) is in Vanguard target retirement fund.

[RetiredERdoc]

Nothing wrong with continuing the tr fund. As it is your first year, I suppose that means you only have 5500 in each Roth. Most vanguard funds have a 3 k minimum, so it will take a few years before you can do a 3 fund portfolio.

you might reconsider having tr funds in taxable, as you lose out on tax loss harvesting, and depending on tax bracket you might be better off using municipal bonds for the bond portion.

[AZdoc68]

DSM wrote:

This is the first year, I am doing backdoor Roth for myself and my spouse. What would be the good investment option for this 11K fund?

 

My other retirement money (tax deferred and taxable) is in Vanguard target retirement fund.

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The same as with your entire portfolio--your best options are low-cost, diversified index funds commensurate in allocation with your age.  Since I imagine you are a young doc, I'd be 90-100% in stock index funds/ETFs that are LOW COST.

Rinse and repeat with yearly savings and contributions.

[DMFA]

Equity funds. Total stock, total int'l, small cap/extended market, etc. Remember this is tax-free, so you want your higher gainers in it. Also if you plan to hold any REIT in your portfolio, Roth is a good place to put them since their dividends are not qualified and their gain is usually greater than bonds.

See: https://www.bogleheads.org/wiki/Tax-efficient_fund_placement

[fevrdoc]

I see VTSAX or VTSMX most often recommended... Or try out VTI if you want to put in a smaller amount

[DSM]

Thank you all!

I am personally thinking about REIT as I didn't see any of that in my existing target date fund (total stock + total international stock+ total market bond)

 

Is tax loss harvesting not possible in a target date fund?

[AZdoc68]

DSM wrote:

Thank you all!

I am personally thinking about REIT as I didn’t see any of that in my existing target date fund (total stock + total international stock+ total market bond)

 

Is tax loss harvesting not possible in a target date fund?

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Total US stock market funds contains REITs in small amounts.  I'm a big fan of owning them as an independent asset class so I maintain a 10% allocation position dedicated solely to REITs.  6% is in SCHH (US REIT index) and 4% in VNQI (Foreign REIT index).  If you want to own them as a separate asset class, an IRA or 401k is the place to do it because they tend to be high yielding and the dividends are ordinary rather than qualified, which means they would be taxed at regular rates as opposed to cap gains rates if not held in a tax-deferred account.

TLH is possible in any liquid investment security as long as it's held in a taxable account.  The fund itself doesn't really matter.  I'm not a fan of target date funds myself because many of them charge higher fees than you'd easily be able to replicate yourself using a handful of cheaper index MFs or ETFs (I use Schwab's which are the cheapest out there currently).  If your Vanguard fund is low-cost and its allocation meets your goals and risk-tolerance, that's fine though.  TDFs are geared for the "set it and forget it" type of saver who wants his/her allocation managed for them and is (often) willing to pay extra for that service.

[DSM]

@ AZdoc68: Thank you.

 

Last week was the first time that I invested money in a taxable account. I am attending for last 3 years with a retirement account in TIAA 2045 TDF( it is a 403b/457) which has around 175 K. Our institution decided they would move it to a Vanguard TDF later this year.

I was saving money in my saving account to buy a house which I bought last year. Now, I had around 100K in my bank for investment. I thought about buying different index funds to build my portfolio. But, I had a hard time figuring appropriate allocation.  So, ultimately I put that money also in the Vanguard TDF. I found their expense ratio is low @ 0.15. Maybe almost similar to index funds? They have stock/bond allocation at 90/10.

I am not sure if that was a stupid move on my part or not. I am now trying to read some books, blogs, and forum postings to understand the disadvantage of the TDF if the expense ratio is low for a person who likes to be only passively involved.

I am hoping to save around 60K/ year going forward in a taxable account and would like to be advised regarding building a portfolio with different index funds vs just adding money in the TDF? I will appreciate if the experienced members can explain this like AZdoc68 to help me understand better.

[AZdoc68]

DSM wrote:

@ AZdoc68: Thank you.

 

Last week was the first time that I invested money in a taxable account. I am attending for last 3 years with a retirement account in TIAA 2045 TDF( it is a 403b/457) which has around 175 K. Our institution decided they would move it to a Vanguard TDF later this year.

I was saving money in my saving account to buy a house which I bought last year. Now, I had around 100K in my bank for investment. I thought about buying different index funds to build my portfolio. But, I had a hard time figuring appropriate allocation.  So, ultimately I put that money also in the Vanguard TDF. I found their expense ratio is low @ 0.15. Maybe almost similar to index funds? They have stock/bond allocation at 90/10.

I am not sure if that was a stupid move on my part or not. I am now trying to read some books, blogs, and forum postings to understand the disadvantage of the TDF if the expense ratio is low for a person who likes to be only passively involved.

I am hoping to save around 60K/ year going forward in a taxable account and would like to be advised regarding building a portfolio with different index funds vs just adding money in the TDF? I will appreciate if the experienced members can explain this like AZdoc68 to help me understand better.

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No, I don't think that (the Vanguard TDF) was stupid at all.  An ER of 0.15% is pretty low and reasonable.  Vanguard is well-known for its index approach and modest fees.  And a 90/10 aggressive allocation seems appropriate for you given that you are only 3 years into practice and early in the accumulation phase.

The reason I asked originally is because I have seen people, including my wife in her 401k before I corrected it, use TDFs that charge 0.50% or more without realizing there's no need to pay expenses that high.  TDFs are nothing more than "funds of funds" designed to produce a certain age-dependent allocation that gradually becomes more conservative as the fund-holder gets closer to the "target date" for retirement.  Any one of us can accomplish the same thing on our own using individual index mutual funds or ETFs that cost way less than 0.50%+.  For example, a simple 80/20 allocation of Total US stock and US Aggregate bonds (I use Schwab so SCHB & SCHZ would be my choices) would have a blended ER of only 0.032%!!!

Why don't you start reading about portfolio allocations here:

https://www.whitecoatinvestor.com/150-portfolios-better-than-yours/

 

[DSM]

@AZdoc68  Thank you again!

 

Thank you for the link also. I have read similar articles in the past, all recommending 60-80% stock allocation in the portfolio. I didn't know why the TDF has 90% stock. But, as I understood stocks would be better than bonds in the taxable account, I didn't mind.

 

I didn't know that Schwab has such as a low ER. It seems like these are ETF. I don't know the difference between the mutual fund and ETF and I don't think I have any ETF in my portfolio. Hope to learn more(pros and cons) about ETF and how that may be more beneficial (liked the low ER) in my portfolio.

[AZdoc68]

DSM wrote:

@AZdoc68  Thank you again!

 

Thank you for the link also. I have read similar articles in the past, all recommending 60-80% stock allocation in the portfolio. I didn’t know why the TDF has 90% stock. But, as I understood stocks would be better than bonds in the taxable account, I didn’t mind.

 

I didn’t know that Schwab has such as a low ER. It seems like these are ETF. I don’t know the difference between the mutual fund and ETF and I don’t think I have any ETF in my portfolio. Hope to learn more(pros and cons) about ETF and how that may be more beneficial (liked the low ER) in my portfolio.

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A) ETFs (exchange traded funds) are nothing more than MFs that trade intra-day like individual stocks do.  I.E., they are "marked to market" instantly and continuously during the trading day rather than just once at the end like MFs.  For the long-term index investor, take your pick.  All other things equal (tracking index, ER, etc), it really doesn't matter which vehicle you use.  I mentioned Schwab index ETFs because I am very familiar with them having used them for years, they have some of the lowest ERs out there today, AND because they charge ZERO transaction fees.  Yes, that is right--ZERO.  That means you can re-balance and tax-loss-harvest and re-buy to your heart's content every December and it costs you precisely $0.00 to do it.

B) I don't know what your investment horizon is but I'm guessing its lengthy since you're early in practice.  My 2 cents advice is to construct an equity-heavy portfolio allocation and remember to NOT sell when the next inevitable bear market takes hold.  For instance, you could do 70-75% stock/5-10% REITs/20% bonds with 1/3 of the stock portion in foreign stocks and 2/3 in US.  But, as I mentioned before, there's nothing wrong with the Vanguard TDF you are already in.

C) Asset location is a subject WCI has educated a lot of people on.  Consider reading this counter-intuitive piece:

https://www.whitecoatinvestor.com/asset-location-bonds-go-in-taxable/

I keep REITs and High yield bonds in tax-deferred accounts and Foreign stocks and muni bonds in taxable (the former to take advantage of the foreign tax credit).  After that, I fill my remaining tax-deferred space with higher-return assets (SCHA, SCHB, SCHD) and whatever is left over, including low-yielding short-term T-bills goes in taxable.

[DSM]

I am glad that you mentioned about Foreign stocks. I had some questions about this. In the Vanguard TDF, around 1/3rd is total international market stock. What is read is that it provides around 70% qualified dividends. I also think it has lower Morningstar ranking. But, I was not thinking about the foreign tax credit. Any useful link about that?

In the Vanguard TDF, around 1/3rd is in the total international market stock. What I read is that it provides around 70% qualified dividends. I also think it has lower Morningstar ranking in the after-tax category. But, I was not thinking about the foreign tax credit. Any useful link about that?

 

Thank you!

[AZdoc68]

I have a small position in the Vanguard Total Int'l Stock fund too via my wife's 457 plan and maintain a 15-20% foreign stock allocation overall which is split approx equally between SCHF, SCHC, & SCHE (dev mkt large, dev mkt small, & emerging mkt stock).  Between stocks and REITs I maintain about a 2:1 ratio between US to Foreign.

I don't pay much attention to "ratings" from Morningstar or others.  Here's what I care about:

1. Does the fund (MF or ETF) passively track an broad index of an asset class or subclass I want to own for diversification?


2. Does the fund have low (ideally zero) transaction costs?


3. Does the fund have low annual expenses?

Beyond the above, I don't care about ratings.  The US stock market has outperformed many foreign ones over the last several years so I expect that accounts for the rating difference.  Foreign stocks also are undervalued right now by traditional measures compared to their US counterparts so the performance difference will likely dissipate or even flip going forward which is of course exactly the point of owning a widely-diversified portfolio of asset classes/sub-classes that are somewhat de-correlated from each other.

As for the foreign tax credit and why I keep my foreign stock funds in my taxable account see #10 in the article below:

https://www.whitecoatinvestor.com/top-ten-reasons-to-invest-in-a-taxable-account/

There is a search bar function in the upper right corner of the WCI home page where you can look this stuff up.

[DMFA]

No TLH in IRAs or employer qualified plans, just taxable.

Only stat that matters in index funds is r² (correlation to the index) and expense ratio.

All funds within a brokerage at which you have an account *should* have no trade fees. At Fidelity all their funds have no fees, as do several non-Fidelity funds (Schwab, MSCI, Oppenheimer). All Schwab funds should be free at Schwab, all Vanguard funds should be free at Vanguard, etc.

[DSM]

Thank you all!

I am thinking about REIT for my ROTH.

Any recommendation/suggestion regarding Vanguard US vs Global ex-US fund?