First Steps w/ Roth IRA

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Topic Author
LorenzoJW
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Joined: Sun Jul 01, 2018 4:48 pm

First Steps w/ Roth IRA

Post by LorenzoJW » Sun Sep 02, 2018 5:20 pm

I just opened a Roth IRA with Fidelity, maximum contribution, and was going to go for 80/20 on mutual funds & bonds ratio (I'm only 22). I'm only looking at index funds and am not sure if I should only have two funds, one mutual and one bond, or multiple of each type.
From my understanding, all the inflation-protected bonds are nigh identical and I believe one of those might be my best choice for that side.
For the mutual fund side I'm looking at FSMAX. It has a .045% expense rate and has a healthy lifetime return rate of about 11%. Should I also look for another similar one, or does the nature of index funds make only having one okay?
Alternatively, should I just scrap all of this and go for a target fund for 2055 or 2060?

gostars
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Re: First Steps w/ Roth IRA

Post by gostars » Sun Sep 02, 2018 5:41 pm

Do you have any other investments for retirement, like a workplace 401k? If you have multiple accounts, then you may want to divide things up for optimal results. If the Roth IRA is all you have, then obviously everything would go there. For what it's worth, at 22, I would consider an 80/20 allocation insufficiently aggressive. I would be 100/0 or 95/5 at that age and hitting 80/20 somewhere around age 35. Typical choices at Fidelity are total US stock market (FSKAX or FZROX), total international stock market (FTIHX), and the US bond index (FXNAX). The target date funds are also a good choice, just make sure you get the Index one at the lower ER, not the higher-cost non-Index version.

DrBreatheEasyFinance
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Re: First Steps w/ Roth IRA

Post by DrBreatheEasyFinance » Sun Sep 02, 2018 6:05 pm

As stated above, if you have multiple accounts, you will have to consider your asset allocation across all your accounts. If you only have Roth iRA, i will recommend the lazy portfolio or 4 funds portfolio as a start. Total US stock, total international stock, total us bond and total international bond/REIT. All vanguard of course. If you do not want to do your own balancing, the target day funds are also reasonable. Pick a year you want to retire, say 2060, then pick a fund that says that year. 90% stock portfolio is optimal at your age.

mortfree
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Re: First Steps w/ Roth IRA

Post by mortfree » Sun Sep 02, 2018 7:22 pm

ITOT at Fidelity.

100% this year and 2019.

You’re young

retiredjg
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Re: First Steps w/ Roth IRA

Post by retiredjg » Mon Sep 03, 2018 7:26 am

LorenzoJW wrote:
Sun Sep 02, 2018 5:20 pm
I just opened a Roth IRA with Fidelity, maximum contribution, and was going to go for 80/20 on mutual funds & bonds ratio (I'm only 22). I'm only looking at index funds and am not sure if I should only have two funds, one mutual and one bond, or multiple of each type.
Just so you'll know, a mutual fund could contain stocks, bonds or a combination of stocks and bonds.

From my understanding, all the inflation-protected bonds are nigh identical and I believe one of those might be my best choice for that side.
Some people like inflation protected bonds, but I would not use that for the entire bond allocation. Consider using a total bond index fund either alone or in combination with the inflation protected bond fund.

For the mutual fund side I'm looking at FSMAX. It has a .045% expense rate and has a healthy lifetime return rate of about 11%. Should I also look for another similar one, or does the nature of index funds make only having one okay?
FSMAX is Fidelity's Extended Market index fund. It represents the mid and small sized companies of the US stock universe. It does not contain the large cap companies - the 500 index. You should have both. And you should consider holding some foreign stocks as well.

Alternatively, should I just scrap all of this and go for a target fund for 2055 or 2060?
I think this is a good idea until you learn more about what the various funds contain and until you have more money to buy individual stock funds with. Be careful that you find the Fidelity Freedom Index funds instead of the Fidelity Freedom funds.

As mentioned above. What you hold in your Roth IRA should be coordinated with what you hold in other accounts. So if you have a plan at work, your best choice might not be any of what is discussed above.

Check this out. https://www.bogleheads.org/wiki/Getting_started

Olemiss540
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Joined: Fri Aug 18, 2017 8:46 pm

Re: First Steps w/ Roth IRA

Post by Olemiss540 » Mon Sep 03, 2018 8:42 am

Target date funds not only maintain your selected glide path, but also help to prevent performance chasing. They are also low cost and index based which is why I am most certainly using them myself.
I hold index funds because I do not overestimate my ability to pick stocks OR stock pickers.

Topic Author
LorenzoJW
Posts: 7
Joined: Sun Jul 01, 2018 4:48 pm

Re: First Steps w/ Roth IRA

Post by LorenzoJW » Mon Sep 03, 2018 2:05 pm

gostars wrote:
Sun Sep 02, 2018 5:41 pm
Do you have any other investments for retirement, like a workplace 401k? If you have multiple accounts, then you may want to divide things up for optimal results...
retiredjg wrote:
Mon Sep 03, 2018 7:26 am
your Roth IRA should be coordinated with what you hold in other accounts.
I'm just starting as a fellowshipped grad student and am opening this account with money earned over the summer, Roth is the only option I have. Thank you for the advice! I'm also keen to avoid anything non-index, essentially if there isn't a 0.0... next to the expense I tend to be wary. Thank you for giving some funds to look into.
DrBreatheEasyFinance wrote:
Sun Sep 02, 2018 6:05 pm
If you do not want to do your own balancing, the target day funds are also reasonable. Pick a year you want to retire, say 2060, then pick a fund that says that year. 90% stock portfolio is optimal at your age.
Thank you! My only issue with the target fund is that I feel like rebalancing index funds every 18 or so months, especially since my strategy won't change much for almost a decade, won't be that much and the target fund doesn't perform as well in comparison. Additionally, since Roth is tax-advantaged & I have a low-management approach, tax-loss harvesting and all that won't be as much of a hassle. Is that valid, or am I just not looking at it right?

Thank all of you for your responses! It's a huge help for me. I know a lot of the decisions I make about this are smaller, but over X amount of years that percent or so difference could add up.

gostars
Posts: 439
Joined: Mon Oct 09, 2017 7:53 pm

Re: First Steps w/ Roth IRA

Post by gostars » Tue Sep 04, 2018 2:44 am

To be honest, if I only had a single account, I'd stick with a target date index fund for now. Since it's an IRA, you can make changes to your holdings with no tax consequences. Start with a target date fund, then in a few years when you add a 401k and maybe a taxable brokerage account, you can slice and dice to make optimal use of the different account types.

Tax loss harvesting isn't a thing in an IRA, so don't worry about that.

The difference in expense ratios between slicing and dicing and using a target date index fund is a tenth of a percent, not one percent. One percent adds up to real money over time. One tenth of a percent is probably less than the difference between buying today vs buying tomorrow, or in picking one index over another, or tracking error between the fund and the index.

TwstdSista
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Joined: Thu Nov 16, 2017 4:03 am

Re: First Steps w/ Roth IRA

Post by TwstdSista » Tue Sep 04, 2018 4:57 am

I highly recommend either a Fidelity Freedom Index Fund (ER 0.14%) or Fidelity® Four-in-One Index Fund (FFNOX), ER 0.11% for the first few years. Then simply forget about it. No need to rebalance or worry about the three fund portfolio until you also have a workplace retirement plan.

There is no such thing as tax loss harvesting in a tax advantaged account.

In the meantime, you can continue to read and learn.

Oddball
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Joined: Thu May 03, 2018 9:35 am

Re: First Steps w/ Roth IRA

Post by Oddball » Tue Sep 04, 2018 1:05 pm

If this is your first account, I would just pick a Total US Index fund or S&P 500 fund and keep the account 100% in that one fund until you had at least $10k in there. Then add your bond allocation

DrBreatheEasyFinance
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Re: First Steps w/ Roth IRA

Post by DrBreatheEasyFinance » Wed Sep 05, 2018 5:33 pm

DrBreatheEasyFinance wrote:
Sun Sep 02, 2018 6:05 pm
If you do not want to do your own balancing, the target day funds are also reasonable. Pick a year you want to retire, say 2060, then pick a fund that says that year. 90% stock portfolio is optimal at your age.
Thank you! My only issue with the target fund is that I feel like rebalancing index funds every 18 or so months, especially since my strategy won't change much for almost a decade, won't be that much and the target fund doesn't perform as well in comparison. Additionally, since Roth is tax-advantaged & I have a low-management approach, tax-loss harvesting and all that won't be as much of a hassle. Is that valid, or am I just not looking at it right?

Thank all of you for your responses! It's a huge help for me. I know a lot of the decisions I make about this are smaller, but over X amount of years that percent or so difference could add up.
[/quote]

I do not agree that target date fund do not perform well. You can check the asset allocations in the fund and decide if it is the right one for you. For example, sometimes i pick a fund ten years later than I would retire. I do this to increase my stock percentage. You are right that tax loss harvesting is mainly done in the taxable. However, if you have a taxable and roth account, the funds is considered across all accounts. I am a fan of the 4 fund portfolio. You can pick it out yourself if you don't like target date funds. You are doing great, asking the right questions is a good step to improving financial literacy. stay on it!

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