Finally starting a Roth IRA through Fidelity. This is the allocation I am considering: 6 stock funds, 1 bond fund. It has a 74/25/1% allocation in stocks/bonds/other. I want to focus on small cap and value stocks in the US market in particular.
- ITOT
- EEM
IYR
- EFA
- IJR
- IWD
- TIP
- Income: $108K
- Account type: IRA
- Debt:None
- Other savings or investments: 401K, $10K in CD
- Portfolio goal: Long-term portfolio that just needs to be left alone for years. I want to start with an aggressive portfolio and slowly adjust to a balanced allocation as I get older. I don't have large purchases in the foreseeable future that I need to save up for. So my portfolio is all long term investments.
Please point out obvious mistakes, or how you might improve this portfolio. Thank your for your help!
Congratulations on your decision to fund a Roth account! Good Move!
I assume with your income you will add into your Roth the $5,000.00 ANNUALLY- your account could grow substantially- Tax Free!
I do not know anything about Fidelity or their costs to make a transaction or Fees to hold your Roth account- I am a fan of Vanguard's low cost approach and no commission charge if you select to Buy or Sell one of their Funds in your Vanguard Roth account- I am in the process of transferring my IRA accounts to Vanguard for that reason. and also have opened a Vanguard Roth account-
That said- My understanding is that through a Vanguard Brokerage account you can open a Roth or regular IRA- choose electronic statements- and as long as you select one of Vanguard's funds- there is NO commission charge- This is important to understand- particularly for a starting account.
In choosing your asset allocation % - you establish a range for your asset holdings- and periodic rebalancing of the account will be necessary- Your approach could perhaps consider a quarterly review and rebalancing if things have swung out of your ideal exposure % wise. This will incur transaction costs that the broker will appreciate. Possibly 6 transactions per quarter x 4 qtrs = 24 possible transactions/year @ $$$$ ? $8.00 ea = $196.00 / $5,000.00 = a 3.9% LOSS for the transaction costs.
Also, if you prudently desire to dollar cost average in to your Roth positions quarterly, and you are paying a full $7 or $8 commission on each transaction- Let's assume in 2016 you intend to quarterly fund your $5,000.00 Roth with $1,250.00 each quarter- and divide that quarterly
contribution into 3-6 positions- you incur an extremely high transaction cost per each desired transaction. The advantage of funding automatically each quarter vs once a year is that you improve your average cost basis.
Let's assume you want to add funds to 5 positions each quarter- This could actually be combined with your 'rebalancing' approach- If you only have 25% of your annual Roth $1,250. and want to break that into 5 positions - That is $250.00 per position.
This is where a $8.00 commission prevents you from applying this type of investment approach- because $8/250 = a 3.2% loss This high transaction cost is almost like paying for a load fund with an upfront charge- It would likely deter you from following this approach - and the advantage of dollar cost averaging .
Look at Vanguard's funds- I think I got this correct- I believe if you use their funds in your portfolio- you will pay NO commission charges to Buy-even in small amounts- and i think a hold for 60 days is required- or a $20.00 trade fee is charged. For an individual positioning for a long term account- eliminating the fees is a huge boost to the account-
I would also consider that it would be prudent to not make the assumption that Bonds will be a 'safer' asset class if we enter into a higher interest rate environment- At least in the near term. We cannot judge the future based on the relatively recent past . As you learn about how this approach works for you- consider funding a cash position of 10-20% to use at your discretion in rebalancing your assets quarterly.
Over the longer term, and as your account value increases- if your interest is still there-
you should consider adding greater diversification to a narrow focused account-
If you get bored or tired of it- simply invest in a target date fund that will automatically reduce your Risk as you get older- But -by all means- stay the course and contribute as much as you legally can in your Roth & IRA.
Kudos to taking the steps to initiate action!
If you are interested-and you obviously are to have taken action instead of sitting back passively -
An easy read is "The Ivy Portfolio" by Mebane Faber- intro to asset allocation
You can also read David Swenson- Yale fund.
and- a Cliff's note version on portfolio development is Daniel R Solin-
"The Smartest Portfolio You'll ever Own-" 2011- somewhat dated- but I think a very succinct book " There likely are more recent and up to date better resources-
The important thing is that you have actually taken the steps to start- Go Forward with what you have initially planned- and adapt it as you see fit in the next 1-3-5-10-20 years.
You have initiated a step down a path that many others have failed to find value in- or ignored...
Yours will be rewarded in the long term, while those that choose to postpone or put off
will never be aware of what they could have accomplished-
Don't let this go to your head- but i think you are the 'Exception' rather than the 'Rule'.
SD
