3 funds now, or start off with 2?

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Aces&Aces
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3 funds now, or start off with 2?

Post by Aces&Aces » Sun Aug 12, 2018 12:09 am

Hypothetical: you are convinced of the wisdom of the 3 fund portfolio. You have $20k in a Roth IRA to invest. (You also have no debt and 4 months' expenses saved in cash, and a small 401k from your part time job that maxes out around $1500/yr, invested in a target date fund-- you've been there 2 years.) Do you go the full 3 fund route to start, or with this amount of money is it better to start off with just US stock/bond and add international stock later (and at what approximate dollar amount)? Roth IRA is with Fidelity and you contribute the full $5500 each January.

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ruralavalon
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Re: 3 funds now, or start off with 2?

Post by ruralavalon » Sun Aug 12, 2018 9:46 am

Welcome to the forum :) .

Aces&Aces wrote:
Sun Aug 12, 2018 12:09 am
Hypothetical: you are convinced of the wisdom of the 3 fund portfolio. You have $20k in a Roth IRA to invest. (You also have no debt and 4 months' expenses saved in cash, and a small 401k from your part time job that maxes out around $1500/yr, invested in a target date fund-- you've been there 2 years.) Do you go the full 3 fund route to start, or with this amount of money is it better to start off with just US stock/bond and add international stock later (and at what approximate dollar amount)? Roth IRA is with Fidelity and you contribute the full $5500 each January.
If convinced of the wisdom of the three-fund approach approach, then go right ahead.

If your part-time job pays $1,500 per year, how are you eligible to contribute $5,500 per year to an IRA?
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started

RadAudit
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Re: 3 funds now, or start off with 2?

Post by RadAudit » Sun Aug 12, 2018 9:50 am

View all the separate accounts (401k, Roth) as one account when determining your desired asset allocation. You now have 20k and invest 7k per year - if I can add correctly.

Either of the two or three fund approach is OK. A single target date fund is OK, too. The key is to start. But within two or three years, you can probably go to three funds in the Roth and lower your ERs.
FI is the best revenge. LBYM. Invest the rest. Stay the course. - PS: The Calvary isn't coming, kids. You are on your own.

mortfree
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Re: 3 funds now, or start off with 2?

Post by mortfree » Sun Aug 12, 2018 10:00 am

How old is this imaginary person?

Age 22: 100% Total US Stock (and somehow managed to save 20k in a Roth in their youth)

Age 30: 90:10, Total US Stock:Fixed Income

Age 55: 70:30, US: fixed income, late start

student
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Re: 3 funds now, or start off with 2?

Post by student » Sun Aug 12, 2018 10:02 am

I agree with others that you can start the 3 funds now. Fidelity has no minimum so you can start investing right away.

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Vulcan
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Re: 3 funds now, or start off with 2?

Post by Vulcan » Sun Aug 12, 2018 10:20 am

Consider Vanguard Total World Stock Index (MF or ETF) as a single zero maintenance stock holding.

MotoTrojan
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Re: 3 funds now, or start off with 2?

Post by MotoTrojan » Sun Aug 12, 2018 10:22 am

I’d use a target retirement or similar account that meets your AA until you start building taxable assets.

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welderwannabe
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Re: 3 funds now, or start off with 2?

Post by welderwannabe » Sun Aug 12, 2018 10:26 am

Aces&Aces wrote:
Sun Aug 12, 2018 12:09 am
Hypothetical: you are convinced of the wisdom of the 3 fund portfolio. You have $20k in a Roth IRA to invest. (You also have no debt and 4 months' expenses saved in cash, and a small 401k from your part time job that maxes out around $1500/yr, invested in a target date fund-- you've been there 2 years.) Do you go the full 3 fund route to start, or with this amount of money is it better to start off with just US stock/bond and add international stock later (and at what approximate dollar amount)? Roth IRA is with Fidelity and you contribute the full $5500 each January.
Now that the Fidelity index funds have no minimum to get the 'premium' version with the lower ER, I see no reason not to go out of the gate with a 3-fund portfolio.
I am not an investment professional, but I did stay at a Holiday Inn Express last night.

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vineviz
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Re: 3 funds now, or start off with 2?

Post by vineviz » Sun Aug 12, 2018 10:32 am

MotoTrojan wrote:
Sun Aug 12, 2018 10:22 am
I’d use a target retirement or similar account that meets your AA until you start building taxable assets.
Me too.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

retiredjg
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Re: 3 funds now, or start off with 2?

Post by retiredjg » Sun Aug 12, 2018 10:43 am

Do whatever you like because it will not matter one bit in the long run.

I know that sounds offensive to a young person who is trying to get it right, but that is simply the dynamic of beginning portfolios. In fact, you could be invested in all bonds or money market the first year or so and it won't matter because almost all of your portfolio growth is coming from contributions, not fund growth. So what you actually have in the portfolio is of little consequence at this point.

If it were me, I'd pick a target fund with 80% stocks and just add money for 5 years or so. After that, I'd give it another look and decide where I want to go from there.

AE81
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Re: 3 funds now, or start off with 2?

Post by AE81 » Sun Aug 12, 2018 12:29 pm

Vulcan wrote:
Sun Aug 12, 2018 10:20 am
Consider Vanguard Total World Stock Index (MF or ETF) as a single zero maintenance stock holding.
+1

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ruralavalon
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Re: 3 funds now, or start off with 2?

Post by ruralavalon » Sun Aug 12, 2018 1:19 pm

Aces&Aces wrote:
Sun Aug 12, 2018 12:09 am
Hypothetical: you are convinced of the wisdom of the 3 fund portfolio. You have $20k in a Roth IRA to invest. (You also have no debt and 4 months' expenses saved in cash, and a small 401k from your part time job that maxes out around $1500/yr, invested in a target date fund-- you've been there 2 years.) Do you go the full 3 fund route to start, or with this amount of money is it better to start off with just US stock/bond and add international stock later (and at what approximate dollar amount)? Roth IRA is with Fidelity and you contribute the full $5500 each January.
How old is your hypothetical person? Any dependents?
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started

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joe8d
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Re: 3 funds now, or start off with 2?

Post by joe8d » Sun Aug 12, 2018 11:01 pm

Just Total Stock Mkt. index for now.
All the Best, | Joe

Aces&Aces
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Re: 3 funds now, or start off with 2?

Post by Aces&Aces » Mon Aug 13, 2018 8:53 am

Thanks so much for all of the replies. To answer questions: Age 43, no dependents, unmarried but live with girlfriend (rent). Yes, my 401(k) contribution is about $1500/yr (income is around $18k-$22k-- it's bartending, so it varies a bit).

lostdog
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Re: 3 funds now, or start off with 2?

Post by lostdog » Mon Aug 13, 2018 9:07 am

Vulcan wrote:
Sun Aug 12, 2018 10:20 am
Consider Vanguard Total World Stock Index (MF or ETF) as a single zero maintenance stock holding.
+1

When you're ready to add bonds at some point in your life, you can go with Vanguard's Total World Bond index.

The rational two fund portfolio.
Vanguard Total World Equity Index - The rational portfolio

3funder
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Re: 3 funds now, or start off with 2?

Post by 3funder » Mon Aug 13, 2018 9:11 am

You might wish to start with two stock funds (total US and total international), as this is after-tax money. That said, if you want to include bonds, that's fine too.

JW-Retired
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Re: 3 funds now, or start off with 2?

Post by JW-Retired » Mon Aug 13, 2018 10:14 am

Aces&Aces,
Is there the slightest chance that you will freak out and sell all your stock funds if/when the stock market drops 50% or whatever? IMO, given you haven't been tested of course there is! Plenty of people did exactly that in 2008/09. They sold near the bottom and didn't get back in until years later. :oops:

I think you need to have some bonds to cushion that first bad stock market you encounter..... maybe 20% minimum. It will happen sooner or later.
JW
Last edited by JW-Retired on Mon Aug 13, 2018 11:31 am, edited 1 time in total.
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ruralavalon
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Re: 3 funds now, or start off with 2?

Post by ruralavalon » Mon Aug 13, 2018 10:52 am

Aces&Aces wrote:
Sun Aug 12, 2018 12:09 am
Hypothetical: you are convinced of the wisdom of the 3 fund portfolio. You have $20k in a Roth IRA to invest. (You also have no debt and 4 months' expenses saved in cash, and a small 401k from your part time job that maxes out around $1500/yr, invested in a target date fund-- you've been there 2 years.) Do you go the full 3 fund route to start, or with this amount of money is it better to start off with just US stock/bond and add international stock later (and at what approximate dollar amount)? Roth IRA is with Fidelity and you contribute the full $5500 each January.
Aces&Aces wrote:
Mon Aug 13, 2018 8:53 am
Thanks so much for all of the replies. To answer questions: Age 43, no dependents, unmarried but live with girlfriend (rent). Yes, my 401(k) contribution is about $1500/yr (income is around $18k-$22k-- it's bartending, so it varies a bit).
At age 43 I suggest around 30% in bonds. This is expected to substantially reduce portfolio volatility (risk), with only a relatively slight decrease in portfolio return. Graph, "An Efficient Frontier: the power of diversification". Please see the wiki articles Bogleheads® investment philosophy, part 3 "Never bear too much or too little risk", and "Asset allocation".

In my opinion 100% in stocks would be a bad idea.

I usually suggest around 20-30% of stocks in international stocks. Vanguard paper (March 2012), "Considerations for investing in non-U.S. equities". Historically, allocating 20% of an equity portfolio to non-U.S. stocks would have captured about 84% of the maximum possible diversification benefit, and allocating 30% of an equity portfolio to non-U.S. stocks would have captured about 99% of the maximum possible diversification benefit (p. 6). (You can find lots of debate here on international allocation, opinions ranging all the way from 00% to 50% of stocks in international stocks. If you want more viewpoints on international stocks please try the Google search box (upper right, this page).

That works out to about 30% bonds, 15-20% international stocks, and 50-55% domestic stocks. Asset allocation is a very personal decision, which you must make based on your own ability, willingness and need to take risk.

The simplest solution might be a target retirement fund in both accounts, using a fund that has approximately the bond allocation desired. In your Roth IRA at Fidelity that could be Fidelity Freedom Index Fund 2030 (FXIFX) ER 0.14%. Be sure you use a Fidelity Freedom Index Fund [year], rather than their much higher expense Fidelity Freedom Fund [year].

Back to your original question, in your Roth IRA at Fidelity with $40k you can go the full three-fund route that you wish. That could be about:
$12k, Fidelity U.S. Bond Index Fund;
$6-8k, Fidelity Total International Stock Index Fund; and
$20-22k, Fidelity Total Stock Market Index Fund.
For the two stock index funds in your three-fund portfolio you could use Fidelity's new ZERO(sm) funds.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started

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