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  • New Roth IRA Portfolio

    I'm a graduating M4 helping my fiancé set up her Roth IRA & have some questions regarding what to invest in to create a balanced portfolio. She had ~$1600 sitting in her Roth IRA from 2020 that wasn't invested & we just maxed out her 2021 contribution with an additional $6k for a total of $7.6k in the account. I'd like to get the money invested ASAP, but we're both very new to investing so I don't want to make a mistake in which index funds/ETFs we invest in. We're also planning to max out our Roth contributions for the next 5-6 years while I'm in residency/fellowship.

    Her Roth IRA is with Fidelity & I understand the general concept of a three-fund portfolio (US total stock market fund + international stock market fund + US bond fund). With her being at Fidelity, I think this would equate to FSKAX + FTIHX + FXNAX. Should I just split her $7.6k into thirds & invest ~$2.5k in each of these funds? Would it be better for us to have a more diverse portfolio with REITs, TIPS, small cap/emerging market funds, & precious metals thrown in? I feel like TIPS may be good to include given current inflation.

    If it's helpful, we're both 25 years old, she makes ~$60k/yr, & I'll make $60-70k/yr during my 5-6 years of training. I'm going into a well-paying surgical subspecialty & the plan is for her to stop working after my training.

    Thanks in advance for your advice! I've been doing a lot of reading on the topic but just want some reassurance that I'm not making any rookie mistakes.

  • #2
    You’re both young. You’re only talking about $7,600. FZROX and call it a day.

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    • #3
      Throw it in one fund and call it a day. You can also move money in your Roth around in the future without tax consequences (at least for now).

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      • #4
        Thank you both for your advice!

        When should I start worrying about having a more diversified portfolio? Do I just stick with just FZROX or FSKAX until after residency? I know I’m talking a small sum of money now, but I just want to have the fundamentals down for when the account balances increase over the years.

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        • #5
          Read a bit more, develop a written investment policy statement, then invest in accordance with your written plan. See: https://www.whitecoatinvestor.com/ho...nal-statement/

          See also: https://whitecoatinvestor.teachable....ancial-advisor

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          • #6
            Originally posted by Hank View Post
            Read a bit more, develop a written investment policy statement, then invest in accordance with your written plan. See: https://www.whitecoatinvestor.com/ho...nal-statement/
            See also: https://whitecoatinvestor.teachable....ancial-advisor
            "When should I start worrying about having a more diversified portfolio? Do I just stick with just FZROX or FSKAX until after residency? I know I’m talking a small sum of money now, but I just want to have the fundamentals down for when the account balances increase over the years."
            Total Market
            Intl
            US Bond index
            Nothing wrong with setting up a process, especially for contributions. However, the tax efficiency determines what specific account and what is available. So your placement is based on overall AA and tax efficiency. Pretax , Roth and taxable. That is not your question. You will need this when you become an attending and filling up the buckets. Your question is Roth, which the answer is highest growth. That means no bonds in Roth. If you want to get a head start, put no more than 5-10% in bonds just to see how they work. The most important thing is the contributions and making a long term plan. What you will find is Roth is all equities.
            Split it if you wish. At most Intl 1/3 and US 2/3.

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            • #7
              Thanks for the info on IPS! I will sit down with my fiancé & work on our IPS tonight.

              I also think I see your all's point now -- because Roth earnings are not taxed, I should invest all Roth money in equities that will likely yield higher returns than bonds. Based on this strategy & the fact that we're young & dealing with a relatively small amount of money, shouldn't I tilt the Roth towards small cap & emerging market funds rather than FZROX/FSKAX? Or, do the small cap/emerging market funds carry so much more risk than FZROX that the potential increase in earnings can't be justified in the same way that the risk/earnings ratio makes FZROX more favorable than US bond funds?

              Sorry if that's a naïve question or if I totally misinterpreted your point; I'm just trying to get some framing for how to approach this stuff.

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              • #8
                Total stock market funds get you market capitalization weighted exposure to mid cap and small cap companies. You potentially can add an additional small cap tilt as a small part of your portfolio once you have more invested. (This also runs the risk of looking at your portfolio and trying to rebalance too frequently and potentially falling into bad behavioral finance choices.). There’s a lot of good to be said for simplicity, automation, “set it and forget it”.

                As a resident, you won’t have much to invest. Save as much as you comfortably can. If you can maximize your Roth IRA contribution every year, great. If you’re offered an employer match to a 403(b), take it. Once you’re an attending, then save 20% of gross income towards retirement. Until then, studying and training should be your top priority, not screwing around with your portfolio.

                The small cap value premium has been notably absent for the last fifteen or twenty years. Will it come back? Maybe. Large U.S. multinationals have plenty of international exposure. Developed market international stock might add some meaningful diversification, but again worry about that when you have more in retirement savings. Emerging market returns differ significantly from emerging market fund returns. Foreign investors frequently don’t reap all of the underlying returns of the emerging market economies. (Why are they “emerging” markets? Frequently due to limited rule of law. Investors in Russia got wiped out.)

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                • #9
                  "shouldn't I tilt the Roth towards small cap & emerging market funds rather than FZROX/FSKAX?"
                  No. They were not in your original plan. Now you see the purpose of an IPS. Keeps you on track when the winds change.

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                  • #10
                    Being the contrarian I am, I am going to have to go against the conventional 'wisdom' here.

                    Personally, I strongly disagree with recommending new investors go 100% equity. Especially, when one partner is helping another. I think 75% - 80% is more than sufficient to capture a significant majority of any returns.

                    Any minor lost opportunity costs due to any underperformance, will be more than offset by reduced volatility. Which I feel is far more valuable to new investor's long term investing than a few years of returns on relatively small dollars.

                    ​​​​​​​OP, consider new investing as part of your residency/fellowship. It is as much about learning by doing as it is about returns. Except, with smaller dollars it comes with lower risk.

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                    • #11
                      Fair points. I'm sure you guys are right about putting our Roth money in FZROX over small cap/emerging markets & other diversification strategies. I'm just asking these questions to get some data on how experienced investors think. I'd like to really understand why that's the right move rather than just trusting the experts.

                      I have another Roth question that I haven't been able to totally figure out on my own. I know that in theory you could use a Roth IRA as a pseudo-emergency fund since you can pull your contributions whenever at no penalty. Obviously I wouldn't want to pull my contributions unless it was a true emergency & all other funding avenues had been exhausted. My question, however, relates to an article I read that discussed using a Roth as a downpayment for a house. My understanding is that you can pull your contributions & earnings from Roth as long as the account is over 5 years old & you use the funds for a first-time home purchase. The downside is sacrificing decades of returns from your retirement.

                      From my calculations, if we max out our Roths for the next 5 years + the $7,600 we have in now, it'll be worth ~$408k when we're 60 years old (assuming 6% annual returns). By comparison, if we pulled the contributions & earnings after the 5 years & used them for a downpayment on a house, we'd only have ~$78k. So, we'd be losing ~$330k. It seems like a no brainer to just use a physician loan without a downpayment for our first house in 5 years & funnel our savings over that time towards the Roth for retirement. Am I thinking about that right? Why would anyone want to use Roth earnings for a downpayment?

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                      • #12
                        Originally posted by AMN View Post
                        Why would anyone want to use Roth earnings for a downpayment?
                        Stupidity.

                        IRA = individual retirement arrangement

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                        • #13
                          Also--and this is just my opinion--skip the bonds.

                          Volatility is irrelevant if you aren't touching the money for >30 years.

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                          • #14
                            The Roth at your age should be 80-100% Total Stock Market Index Fund-its that simple
                            The Roth should always be your most aggressive acct as usually its the last to be distributed from in retirement

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