The old "$20,000" question

[radionightster]

Hi all,

Background: I'm 29, I have a 6 month emergency fund, and I already have a Roth IRA. I'll shortly be joining a military and using their TSP. I will max my Roth IRA contributions, and try to max the TSP as well, but the military does not match TSP contributions, so I just think of it as a backdoor into eventually putting more money into my Roth IRA.

I'm trying to take control of the money in my life. I have about $20,000 in a random account that I really have no investment control over. I'd like to withdraw it, and start investing wisely. I want to put this 20,000 to work for me. I'd like to diversify it a little, and my investment profile would be "moderately aggressive." I'm in this for the long haul - ie, 30+ years. I'd also like funds that pay dividends so I can have them automatically re-invested in the fund. I do not need these funds for income now, or anything like that. I've read frequently that people aren't too fond of mutual funds, and like index funds a lot better.

Also, I do not have any financial aptitude. If there's a dollar to be gained, I'm the one you're probably gaining it from. I'll never be the person to get their 12% return. If I end up with 8% I'll be ecstatic.

I was initially thinking something along the lines of:

$20,000 total, broken down to:
$5000 -> S&P 500 Index Fund
$5000 -> USAA 2040 Year Retirement Fund [heavily stock based, and will slowly become more bond based closer to 2040]
$5000 -> A moderate mutual fund
$5000 -> USCRX - A moderately aggressive mutual fund

I'm active duty, etc, and I for some reason have faith in USAA. That's why I included two of their funds. Their portfolio planner recommended USCRX as a great "getting started in investing" fund. I like the idea of the USFRX (2040 targeted retirement fund) because it's very aggressive at first.

Question: Is it better to take $20,000 and invest it in four different things, or to invest the $20,000 as a giant entity? Which has a greater shot of growing large?

Question: Is this idea even remotely decent?

Question: I really feel lost in trying to decide which funds to pick. If you have suggestions for funds for the Roth IRA, and then funds for the $20,000, I'd love your input.

Please feel free to call me naive, or whatever. I really want to learn!

Thank you
RN

[jpg7n16]

I was initially thinking something along the lines of:

$20,000 total, broken down to:
$5000 -> S&P 500 Index Fund
$5000 -> USAA 2040 Year Retirement Fund [heavily stock based, and will slowly become more bond based closer to 2040]
$5000 -> A moderate mutual fund
$5000 -> USCRX - A moderately aggressive mutual fund

I'm active duty, etc, and I for some reason have faith in USAA. That's why I included two of their funds. Their portfolio planner recommended USCRX as a great "getting started in investing" fund. I like the idea of the USFRX (2040 targeted retirement fund) because it's very aggressive at first.

Question: Is it better to take $20,000 and invest it in four different things, or to invest the $20,000 as a giant entity? Which has a greater shot of growing large?

Either way is fine. You have the timeframe to tolerate the risk, so if you wanted a piece in the moderately aggressive fund and the S&P fund that's fine. The 2040 fund would work fine as well.

I would probably skip the moderate fund, and invest it in the S&P fund instead. Lower fees and probably about the same expected return.

Which has the greater shot of growing large? The aggressive fund. The more risk you take, the more potential upside/downside there is. So you could make more, or lose more.

As it's impossible to know the future, there's no way to know in advance which will do the best/worst. So spreading over a few funds sort of lowers the risk.

Question: Is this idea even remotely decent?

Your plan would work fine. I would personally use the S&P instead of the moderate.

Question: I really feel lost in trying to decide which funds to pick. If you have suggestions for funds for the Roth IRA, and then funds for the $20,000, I'd love your input.

There doesn't have to be a super complicated system to invest. Your idea would work just fine.

For several people, they could just do 100% in the target date fund, and it would likely work out reasonably well.

The biggest factor for your savings is your ability to save money consistently, early, and often.

So for you, there are a couple options that would likely work:

1. 50% in S&P; 25% in target date; and 25% in aggressive...... lower fees, good allocation to stocks
2. 50% in target fund; 25% in S&P; and 25% in aggressive...... more reliance on the target fund that will auto rebalance for you each year
3. 1/3 in each..... very easy to set up, emphasizes the aggressive
4. your idea above with 1/4 in each

So if you want low fees, choose #1, ease of asset allocation #2, to be more aggressive #3, or to add 1 other fund stick with your original idea.

It doesn't have to be complicated.

[Scanner]

Well, in investing, there is no "right or wrong" answer when it comes to deploying your portfolio. What's right for you may not be right for me.

I, however, do think that divveying up 20K 4 ways a little "overdiversified." I would think 1 or 2 mutual funds, moderately aggressive, if that is your risk tolerance would be just fine at that relatively low amount.

Maybe a S&P 500 and an international fund. I like JAOSX and have used them in the past a lot.

Just my opinion.

[radionightster]

Gentlemen,

Thank you kindly for the advice. I have re-adjusted my ratios as suggested by you guys and a few others that I trust dearly. I was originally planning on using USAA funds, but it seems their expense ratios are much higher as compared to others, and they are never rated very well. (Weird.)

I have no come up with this distribution of funds:


$20,000:
50% - Vanguard 500 Index Fund Investor Shares (VFINX)
30% - Vanguard Small-Cap Index Fund Investor Shares (NAESX)
20% - Janus Overseas T Fund (JAOSX)

Roth IRA:
75% - Vanguard 2045 Targeted Retirement Fund (VTIVX)
25% - Vanguard Wellesley Income Fund Investor Shares (VWINX)

Do you guys think this is reasonable? Is it a poor idea to be so invested with Vanguard? Their expense ratios are so low.

Thank you kindly,
RN

[MaxPowers]

I'll shortly be joining a military and using their TSP.

You might want to look into it, but from what I understand, the TSP will match up to like 5% for the first 4 years of your military career. I am active duty and was looking into starting the TSP and was disappointed by that news because I didn't jump on it. But there might be more stipulations, I didn't read too much about it.
Not giving advice here, but when I was doing research for my IRA I was turned off by USAA. I liked what Vanguard had to offer. I have about 20k in the 2040 target fund, and 5k in the S&P 500. Planing on moving away from the target fund when I get more money in.

[radionightster]

Not giving advice here, but when I was doing research for my IRA I was turned off by USAA. I liked what Vanguard had to offer. I have about 20k in the 2040 target fund, and 5k in the S&P 500. Planing on moving away from the target fund when I get more money in.

Did you invest in VFINX?

I too am turned off by USAA's fund choices. They all seem to carry very high expense ratios. I like using them as a bank (and auto insurance, and my brokerage firm, and I have my Roth through them, and will have home, life, etc insurance too), but their funds don't seem to perform well.

[jpg7n16]

$20,000:
50% - Vanguard 500 Index Fund Investor Shares (VFINX)
30% - Vanguard Small-Cap Index Fund Investor Shares (NAESX)
20% - Janus Overseas T Fund (JAOSX)

Roth IRA:
75% - Vanguard 2045 Targeted Retirement Fund (VTIVX)
25% - Vanguard Wellesley Income Fund Investor Shares (VWINX)

Do you guys think this is reasonable?

Looks fine. The $20k is invested a bit aggressively. But as it relates to your full financial picture (inluding the Roth money), it looks reasonable given the goals and risk tolerance you noted above.

Is it a poor idea to be so invested with Vanguard? Their expense ratios are so low.

Vanguard is a terrific company to invest with. I like their target date funds in particular.

(I'm not guaranteeing you a great return on your money though, I'm just saying Vanguard is a quality company)

[radionightster]

Looks fine. The $20k is invested a bit aggressively. But as it relates to your full financial picture (inluding the Roth money), it looks reasonable given the goals and risk tolerance you noted above

Sir,

Thank you for your input. If you were to tone back the aggressiveness just a little bit, how would you adjust the percentages? Perhaps 60/20/20, or 70/15/15?

Thank you kindly,
RN

[Scanner]

I like it!

I should have said though, and you may want to check into this - I didn't realize the 20K would be in a taxable account. I thought that was going into your Roth IRA. In that, i am not sure I can wholeheartedly endorse JAOSX or your others until I know their tax liability. A lot of trading around in actively managed mutual funds may not bode well for your tax picture.

I am not saying they are bad but you may want to watch the amount of turnover (buying and selling and capital gains) the funds has.

Performance wise and quality-wise (morningstar ratings), I have no problem with your choices.

And certainly no problem with Vanguard - in fact, indexing may be pretty tax-efficient, which is what Vanguard is known for.

EDIT: What you may want to do is flip your JAOSX into the Roth IRA and the Wellsely Income (another great fund!) fund into the taxable account then you don't have to worry as much about tax implications. I know the Wellsely Fund is a balanced fund, but I can't recall if it's based on indexes or not and if it trades a lot. I think trading is your enemy with taxation but maybe one of the other posters can speak better of that.

[jpg7n16]

Sir,

Thank you for your input. If you were to tone back the aggressiveness just a little bit, how would you adjust the percentages? Perhaps 60/20/20, or 70/15/15?

Thank you kindly,
RN

Yes. Either one of those would lower the risk on that 20k. But if you want it more aggressively, you can leave it like you have it. There's nothing 'wrong' with how you have it.

I like it!

I should have said though, and you may want to check into this - I didn't realize the 20K would be in a taxable account. I thought that was going into your Roth IRA. In that, i am not sure I can wholeheartedly endorse JAOSX or your others until I know their tax liability. A lot of trading around in actively managed mutual funds may not bode well for your tax picture.

If OP has around 25% in the JAOSX, that's about $5k; of which to incur any meaningful taxes would need like 20% flowthrough for cap gains.

That'd flow through $1000 of cap gains, for $150 extra tax (15% long term cap gains rate). But that seems like a lot of cap gains. I doubt it'd be that high.

EDIT: What you may want to do is flip your JAOSX into the Roth IRA and the Wellsely Income (another great fund!) fund into the taxable account then you don't have to worry as much about tax implications. I know the Wellsely Fund is a balanced fund, but I can't recall if it's based on indexes or not and if it trades a lot. I think trading is your enemy with taxation but maybe one of the other posters can speak better of that.

Why would you want to move the bond fund out of the tax free account? If the Income fund (mainly in bonds and dividend stocks) is moved into the taxable fund, you'd incur taxes on the interest payments every month.

Especially since interest is taxed at ordinary income, and cap gains/dividends are only taxed at the 15% rate. Keeping the bonds in the Roth is the best for the tax picture.

[radionightster]

Guys,

Thank you again for the kind words.

What do you think of doing a Total Stock Market Index Fund, which incorporates small caps, in place of separate S&P 500 and small cap funds?

[jpg7n16]

Guys,

Thank you again for the kind words.

What do you think of doing a Total Stock Market Index Fund, which incorporates small caps, in place of separate S&P 500 and small cap funds?

No problemo

The funds you are talking about have different goals.

The Total Market fund (https://personal.vanguard.com/us/Fun...T#hist=tab%3A1) and the S&P 500 fund (https://personal.vanguard.com/us/Fun...FundIntExt=INT) are both more set up with the goal of broad diversification. The 'total fund' has extreme diversification among 5000 U.S. companies, the S&P 500 is diversified among the 500 largest most stable U.S. companies out there.

The small cap index fund (https://personal.vanguard.com/us/fun...FundIntExt=INT) is diversified yes - but has a different goal: exposure to the growth potential of small up-and-coming businesses. Inherent in this goal is a slightly higher volatility of prices (some companies grow quickly, others don't make it and die out), but in order to compensate for that risk, small caps have done well historically. Higher risk, higher reward.

So it really depends on what you were trying to accomplish as to which one we should recommend:

-If you are looking to achieve as much diversification as possible, then sure - substitute the total fund for the combo. And if that's your goal, you could combine it with say 20-25% in an international index as well (like https://personal.vanguard.com/us/Fun...FundIntExt=INT). This strategy would achieve extreme diversification. [note: the 'total market index' is only in U.S. Companies, and the international index isn't in U.S. companies, so the combination would include just about everything]

-But if you were looking to amp up total returns, by taking a bit more risk - it'd be better to use either the Total Fund or the S&P fund (for core stability), and combine it with a small cap fund (for amped up returns -hopefully) and some international fund like you have above. International funds are also a higher risk, higher reward type asset class, so they would work towards amping up the returns of the portfolio.


Now, in the 1st post, you said you could tolerate more risk, and have the timeline available - so I'd recommend the 2nd more aggressive option based on that. But if after reading and thinking this over, your goal has changed, there's nothing wrong with trying for extreme diversification either.

There isn't anything 'wrong' with either option - they just have different goals. So pick the one that matches yours and run with it

[snafu]

Do you plan to add to your initial investments? I suggest you explore Dollar Cost Averaging [DCA] with your Vanguard representative when you set up the account. DCA reduces the volatility of equity funds since you buy more units when the value is down and less when the value is zinging. The contribution sum can be automatically withdrawn from your bank account.

Plan to talk to your Vanguard representative at least once a year to re-balance your portfolio if necessary.