Help with asset allocation and investment plan as a resident/fellow

[pedsneuro]

Hello, would appreciate any input/advice. I discovered this site about 2 years ago and for the last 1.5 years my husband (who is also in training) and I have been building up our Roth IRAs and contributing to our 401Ks. Because we were just getting started and didn't have enough to buy other funds, we are currently invested in the Vanguard target retirement accounts in our IRAs (VTHRX). We could buy any of our 401K funds with any price, so those are split up between Vanguard Total Bond Market and Vanguard Total Stock Market. I am pretty risk averse and since we are new to investing in the stock market we are targeting an asset allocation of 75% stocks and 25% bonds. We now have enough saved up in these accounts ($24,700.00 between all of them) to be able to split our AA into different funds of our choosing, so I would like to do that. However, I am struggling because we don't really know what our long-term goals are. Currently my husband thinks he would like to practice a full 30 year career as an academic GI doctor. I think I would like to practice full time (academic peds neurology) for about 10 years, and then cut back to part time for another 10-15. We both still have 2.5 years of training left. But, we really have no idea how we will feel a few years into attendinghood. So, it's hard to know how much risk we need to take. I know it is important to stick to a written investment plan, but I don't feel that I can do this right now since it might change a lot once we know what our attending salaries and retirement goals will be. Any other residents feel this way? I am thinking of just splitting the equity investments into 70% Total US Stock Market, 30% International Stock Market and then splitting the bond investments into 50% TIPS and 50% Total US Bond. However, this is not based on any specific goals other than doing something reasonable with our money.

Second question - how do I understand my investment returns? When I log onto my Vanguard Roth IRA it tells me that I have an investment return of 16%, but I can't understand how they got that number. When I divide the returns by how much I've contributed, I get more like 8.5%. Sorry, I know this is a dumb question.

Thank you!

[cgossage]

I think you aren't as far off with your asset allocation and goals as you think.  Your goals change a lot in the first 10 years of your career.  For some people it's marriage, for others it's having children, and others still its early retirement or change of lifestyle.  Make your investment choices based on your current goals and then update them as life events happen.  I don't typically like to recommend asset allocations after one post over an Internet forum, but your allocation looks reasonable based on your current goals and self-described risk tolerance.  As a dual-income family early in your career you could probably afford to take on more risk if you wanted to, but I don't think you are going to miss out on significant returns by being in 75% stocks rather than 80-85%.  It's better to stick with your plan of 75% stocks than stress about your returns if you have 85% stocks.

Some small tweaks I would think about is allocating more to Total US Bond than TIPS.  I do think we could be seeing inflation again over the next five years so some allocation to TIPS makes sense.  You may also want to consider allocating a portion of your bond allocation to foreign bonds.  You may also want to think about allocating a small portion of your stock allocation to emerging markets.

As far as your investment returns, Vanguard is showing you time-weighted returns.  This is showing you the performance of your investments regardless of how much money you contributed to your account at a given time.  This is industry standard in investment performance to help compare investment management regardless of external cash flows.

[VagabondMD]

I think that you are doing great. You do not have to know what you are going to be doing 30 years from now to start investing now. 75/25 stock/bond, 70/30 US/Intl and 50/50 TIPS/US Bond are reasonable allocations (if it were me, I would tweak the fixed income closer to 25/75 or 20/80) for now and the foreseeable future. You could also make it super simple with an allocation of 50% US Stock, 25% International Stock, and 25% US Bond.

Your work status, family situation, and goals will change throughout your life, and that may cause you to further tweak these allocations, but they are solid enough to get you where you want to go and easy enough to maintain.

[ENT Doc]

Your long term goals are going to change. I'd be willing to bet that many of the people on this forum changed their long term goals since leaving residency. The point is to have some, make them somewhat bold, and to make them specific. I doubt you'll have to change a 75/25 asset allocation as a result of your goals changing, particularly since you'll be a dual physician income household - provided y'all are good at the more important aspect of long term returns (high savings rate). You do well with that and live a relatively frugal lifestyle and you'll have no problems, assuming your goals aren't to live off a 150 ft yacht out of Monaco by age 50. When your goals change, revisit your investor policy statement.

With respect to your returns, take a look at the article WCI did a while back on the XIRR function. You need to now all the cash flows with this though - investments, dividends, taxes, etc.

[Peds]

pedsneuro wrote:

we are targeting an asset allocation of 75% stocks and 25% bonds. ($24,700.00 between all of them)

I am thinking of just splitting the equity investments into 70% Total US Stock Market, 30% International Stock Market and then splitting the bond investments into 50% TIPS and 50% Total US Bond.

Second question – how do I understand my investment returns? When I log onto my Vanguard Roth IRA it tells me that I have an investment return of 16%,

Thank you!

Click to expand...

Hi,

1) 75:25 is perfectly fine. its actually what we are and we are (probably? most likely?) slightly older than you (a few years out of training for me, spouse still in residency).

2) congrats. 25K during residency is no small feat.

3) 70:30 US:Intl is fine. we are the same. Anywhere between 0-50% intl is acceptable (crazy I know).

4) no TIPS. they are for UN-expected inflation. you have 30+ years to fend off inflation. skip them. they are better for your parents who dont have time/risk on their side.

5) returns are not just simple "I put in this much and it went up this much". time is involved. read up on WCI blog post on XIRR (https://www.whitecoatinvestor.com/how-to-calculate-your-return-the-excel-xirr-function/). you are forgetting time basically. money sitting in the market longer has more time to go up (and down).

 

good luck!

[Sneezy]

I echo those who note you are doing great

I would consider just sticking with the Target Date funds.  You state you are risk-averse and clearly still thinking about long-term goals/plans

While there are some small downsides to Target Date funds they represent what some smart folks at Vanguard think someone your ages asset allocation should be.  This way you can just put money away and not worry.  The returns are likely to be very close to the more detailed plan you give above (or those suggested by others)

[pedsneuro]

Thank you so much to everyone for your input! And thank you for referring me to the WCI post on XIRR function. I knew something like that must exist I just couldn't find it. I do have a desire to do something other than the Target Date funds because I want some experience making my own decisions as I might get more into it later on in my career and have a more complicated portfolio. But I appreciate the input on not having as much allocated to TIPS, I will definitely take that into account and might just leave them out. Happy New Year!

[nachos31]

You're doing awesome! Your stock/bond split and proposed US/Int'l split are both fine. I'm not sure I'd do TIPS until closer to retirement, if even then, but that's me. Your best inflation protector is your 75% allocation to stocks.

I'd do what VagabondMD suggested: 50% Total US Stock, 25% Total International Stock, and 25% Total US Bond as it gets you the 75/25 and gets you 67% US/33% Int'l which is close to what you were thinking and is slightly easier percentage-wise.

Let us know what you decide.

[Zaphod]

I think 75/25 is too conservative an allocation especially for a couple that is so young with plans to mostly both work full careers. You're not risk averse. You're averse to a specific risk you've identified and understand. What we talk about a lot less is the other risk you are assuming to avoid the first risk. Thats decreased returns/opportunity cost. You'll be paying to avoid that risk.

Each others jobs and massive monthly cash flow are your bonds and stability for now. You've already demonstrated an ability to do the hard stuff, no reason to think you wont continue to in the future.

In regards to your asset allocation, its hard to do so but you have to put everything into a longer term overall conceptual framework. Other wise you'll miss the forest for the trees. Heres what I mean. Just throw 100% into stocks today, some say thats risky, etc...blah. But its 25k, or, put another way only 25% of what your bare bones goal of investing each and every year should be as attendings. That means even if you were to do a 50/50 portfolio, it would still only be half of your yearly allocation to equities anyways. Just put things into perspective.

Your goals when young are to stuff this account, as hard and fast as possible so that compounding can do its thing. In its first decade, though it will be everything to you, it is going to be (one hopes) an overall small amount of money to what you will have near retirement. By then, even if you did the first 10 years all stocks, a 70/30, etc...will likely still have far more money in equities than you did at that time.

Since equities are the riskier side of things, it is actually better to diversify your exposure over time. This means you'd be better off getting that exposure earlier and bigger than usual, otherwise you end up with a big chunk of equities mostly gained during the last ten years of working and your increasing your risk.

Basically, dont worry about it, the moneys too small for it to really matter, its a drop in your eventual pool.

[pedsneuro]

Thank you (a little late) for everyone's excellent advice. We did decide to stick with 75% stocks, 25% bonds. If we make it through our first bear market we may adjust to something more aggressive. We decided to leave out the TIPS, and actually decided to add in a small amount of the REIT index fund once we talked a bit more about what we want our long term investing plan to look like. The final breakdown ended up being: 25% bonds - all invested in Vanguard Total US Bond. 75% stock - 55% of this in Total US Stock, 30% in Total International Stock, and 15% in Vanguard REIT Index Fund. Thanks again, I'm so grateful for this valuable resource and all of your time!