New Roth IRA... Vanguard Target Retirem funds? Or only buy 1 fund this year?

[PMR_Res]

Hello All,

After going on a financial education reading binge the last few months I finally just opened a Roth IRA last month. I am a 28 year old PGY3 in a 4 year residency and my hospital does not offer a retirement account for residents. I plan to max out my Roth IRA every year (including this year). For asset allocation I am planning on 70/30 stocks/bonds  with about 20-40% of the stock international, and I was planning to buy Vanguard funds-- ideally Total Stock Index Fund (VTSMX) , Total International Index Fund (VGTSX), and Total Bond Market Index Fund (VBMFX). However aside from the Target Retirement funds it seems all the funds have a $3k minimum investment and the annual max contribution for Roth IRA is $5500;

-do you recommend I stick with the the Target Retirement fund until my portfolio grows enough before I can buy all 3 funds?

-Or for this year just buy VTSMX and next year buy the other 2 since next year is only a few months away?

-Or just buying VTSMX for this year in my Roth IRA (max it out for $5500) AND open a taxable account to buy VGTSX, and in January buy VBMFX for my Roth IRA (and keep VGSTX in the taxable account)?

-Or should i look at ETF and non-vanguard funds that have smaller investment minimums?

Thanks in advance for any feedback!

 

 

 

 

Thanks for the advice!

[jfoxcpacfp]

For asset allocation I am planning on 70/30 stocks/bonds

Click to expand...

You are only 28. I can think of no good reason to flatten out your potential growth with bonds unless you plan to begin liquidating your Roth within the next 5 years.

The problem you have run into is one reason I am not a fan of Vanguard.

VTSMX and VGTSX are fine to begin, maybe add a 15% REIT component.

You might want to read this 2-part series on PoF: Part 1 and Part 2.

[DMFA]

Why not ETFs?

[Docbeans]

I'd go with ETFs too.

[PMR_Res]

I thought a lot about ETF's... Since there are commission-free ETF's why do Bogleheads and Bernstein seem to strongly advocate mutual funds are usually better? I looked at the Vanguard Total stock market & total bond ETF's, the expense ratios are even lower than the mutual funds, but why is the price much higher?

[PMR_Res]

I went with the age in bonds rule from Bogleheads for the asset allocation...

[DMFA]

PMR_Res wrote:

I went with the age in bonds rule from Bogleheads for the asset allocation…

Click to expand...

I love Bogleheads as they have tons of useful information, but I disagree with that.  I think the linear relationship really only applies once you hit your 40s, and even then many would argue 40% would be too much for someone who is still 20 years away from retirement.  It's probably a sigmoid curve...

If you're very rich, you can afford the risk if your equity holdings lose value.  The same argument can be made for the exact opposite approach: if you're very rich, you don't even need to risk it in the first place.

If you don't have much to lose, you're early on in your investing life, and your earning (and therefore investing) power will be reliably and significantly higher (as is with many doctors), may as well go with a near-complete equity portfolio.  Conversely, if you're not going to be making much more (like the average American) than you are in your late 20s, you can't afford that loss and might need to have more bonds.

You're decades away.  Your portfolio is small.  You should have a very high risk tolerance at this point.  Seeing as the point of bonds is stability (yes, this is an oversimplification), you should have little (10%) to no bonds in your portfolio since if you lost half your savings at this point, it's small potatoes overall.  And if you do have that little 10% in bonds with a small portfolio, it won't provide very much stability anyway.

 

Vanguard (founded by Bogle) seems to agree with that sentiment, as evidenced by their target date funds.  Let's say you retire at 60ish.  [figures rounded for simplicity]

• If you're 30 (2045, VTIVX): 55% US stock, 35% int'l stock, 10% bond


• If you're 40 (2035, VTTHX): 50% US stock, 30% int'l stock, 20% bond


• If you're 55 (2020, VTWNX): 35% US stock, 25% int'l stock, 40% bond

So, to sum it up, it's your portfolio and you can be as bond-y as you want to be, and I know what Bogle has said in the past (he's fixed 40/60 fwiw, with his net worth in the 10+ figures afaik), but the managers of those 4-5 star, Gold-medal Morningstar-rated funds (yes, their ratings aren't everything) seem to think age = bond % isn't the way to go.

[litovskyassetmanagement]

DMFA wrote:

PMR_Res wrote:

I went with the age in bonds rule from Bogleheads for the asset allocation…

Click to expand…

I love Bogleheads as they have tons of useful information, but I disagree with that.  I think the linear relationship really only applies once you hit your 40s, and even then many would argue 40% would be too much for someone who is still 20 years away from retirement.  It’s probably a sigmoid curve…

If you’re very rich, you can afford the risk if your equity holdings lose value.  The same argument can be made for the exact opposite approach: if you’re very rich, you don’t even need to risk it in the first place.

If you don’t have much to lose, you’re early on in your investing life, and your earning (and therefore investing) power will be reliably and significantly higher (as is with many doctors), may as well go with a near-complete equity portfolio.  Conversely, if you’re not going to be making much more (like the average American) than you are in your late 20s, you can’t afford that loss and might need to have more bonds.

You’re decades away.  Your portfolio is small.  You should have a very high risk tolerance at this point.  Seeing as the point of bonds is stability (yes, this is an oversimplification), you should have little (10%) to no bonds in your portfolio since if you lost half your savings at this point, it’s small potatoes overall.  And if you do have that little 10% in bonds with a small portfolio, it won’t provide very much stability anyway.

 

Vanguard (founded by Bogle) seems to agree with that sentiment, as evidenced by their target date funds.  Let’s say you retire at 60ish.  [figures rounded for simplicity]

• If you’re 30 (2045, VTIVX): 55% US stock, 35% int’l stock, 10% bond


• If you’re 40 (2035, VTTHX): 50% US stock, 30% int’l stock, 20% bond


• If you’re 55 (2020, VTWNX): 35% US stock, 25% int’l stock, 40% bond

So, to sum it up, it’s your portfolio and you can be as bond-y as you want to be, and I know what Bogle has said in the past (he’s fixed 40/60 fwiw, with his net worth in the 10+ figures afaik), but the managers of those 4-5 star, Gold-medal Morningstar-rated funds (yes, their ratings aren’t everything) seem to think age = bond % isn’t the way to go.

Click to expand...

It is actually worse than that.  The '100 minus age' formula has no basis in reality.  For one thing, risk tolerance is completely irrelevant - markets have their own risk setting and it does not matter how old you are - you are subject to the same risk at all times, and the longer you go, the more chances that you'll experience an adverse event that would bring the markets down, so if you are over-exposed to risky  assets, there is no saying when these assets will bounce back.  The second key point is that risk increases with time (mathematically, even for the Normal distribution, the standard deviation increases with time).  Bogle got that one wrong - he looked at the annualized returns and saw that the volatility of these returns decreases with time, but that's nonsense because over the longer term, the returns are averaged, so it is true that the volatility of annualized returns decreases with time, but not the volatility of your total return!  So some of these 'rules of thumb' came from misunderstanding of statistics, unfortunately.

Those who have lots of assets in fact should NOT have to take much risks at all.  For them, taking a large risk with a small part of their portfolio makes a lot more sense because they are limiting their exposure to the markets, and thus they become immune to the market risk.  If you have say $10M, no need to risk more than say $2M, while the rest can provide you with a constant stream of tax-exempt income, especially if that's enough to hit your income goals (and then some).  Again, this is just an example, and yes, for some who are not near $10M you might want take more risk, but up to a point.  I believe that we should always set a 'floor' in any portfolio, and rather than worry about 'age-based' investing, we should concentrate on 'risk-based' instead because that's the most prudent way to invest regardless of how old you are.

There is a concept called 'permanent portfolio' or 'all weather portfolio' and this is used by some of the top money managers, especially those who realize that market risk is often underestimated by orders of magnitude (which is actually true mathematically - S&P is capable of producing 20-sigma deviations, which is impossible if we assumed a Normal distribution for the market returns, which unfortunately is what most advisers assume).  Also, with this type of approach you rarely have to change your allocation once you reach your ideal one, and there are ways to manage this over time to 'de-risk' without having to sell assets.  One way to do it would be to have a fixed allocation in all of your accounts, and if you want to lower your stock exposure, this can be done gradually over time in your after-tax accounts for example.  I prefer this approach to anything else out there because it works regardless of who you are - setting the 'floor' is the best way to manage risk, and your asset level and goals would dictate the allocation of your after-tax accounts (which can also be invested in a tax efficient portfolio and municipal bond funds or individual municipal bonds, depending on whether you are in an accumulation or a distribution phase).

 

[conniebird]

Not to hijack my thread but for folks just getting started (my residents) - what should they buy? Some just put in 1k to get started so can only buy a target fund. I guess they can buy ETFs

[mgarf]

You may have 2 financial goals at your age. Goal #1 save for a house in a few years, Goal #2 you have a house and you need money for retirement. (btw I'm assuming you have no loans... you could make the argument to repay these first).

Goal #1:

HISTORICALLY, the market always goes up. But only after 20-30 years. If you're looking at timespans < 20 years, optimum returns are obtained with a bond component in your portfolio. Therefore, if you're saving for a short investment timespan, you can consider having a certain component of bonds. ~60% bond / 40% stocks is probably optimum for 5-10 year timespans.

Goal #2:

You just need this money in 20+ years for retirement. You should be in 100% stocks, and here's the graph to prove it:



What to buy?

Vanguard mutual funds are one of the best out there (you can also make an argument for Fidelity's offerings). You pay no transaction costs (like you would for ETFs) and their annual fees are similar to their ETF annual fees... which are the lowest out there. I would do 80% US with VTSMX and 20% world with VGTSX (these you will upgrade to the admiral funds VTSAX and VTIAX once you've reached $10,000 invested). If you want a bond component, I would choose a short-maturity bond fund like VSCSX.

If you'd like more info on the rational behind all this, check out the guide I made listed in my signature. The graph is from there too.

[litovskyassetmanagement]

conniebird wrote:

Not to hijack my thread but for folks just getting started (my residents) – what should they buy? Some just put in 1k to get started so can only buy a target fund. I guess they can buy ETFs

Click to expand...

One can use ETFs for the initial allocation until there is enough to buy into a fully allocated one.  Or one can start with a lifecycle fund (Vanguard has this option with a fixed allocation as well) or a TDF.  ETFs are a more work if you have more than a handful invested. I used to use more ETFs, but it is a bit more hassle since I use about 13 asset classes. I don't like the TDFs for the same reason described above (the allocation is age based and changes based on age, not on specific financial need).  No need for ETFs unless you have less than $3k invested - with $3k you can use one fund, and once you have $6k - two funds, and so on, depending on the type of allocation you want to use.