The most difficult part of starting a Roth IRA is deciding what funds to invest your money in. With basically unlimited options it can be a daunting task to take on by yourself. I’ve been getting asked what I hold in my personal Roth IRA so I figured I would write a quick post about it!
A lot of people aren’t sure which broker to use when starting a Roth. It can be a tough question for sure, but I personally couldn’t see going with anyone but Vanguard. They’ve been around since 1975 and were originally structured as a client owned mutual fund company without outside owners seeking profits. Vanguard boasts extremely low expense ratios helping to give the investors the returns they deserve. Vanguard has also been credited with the creation of the index fund. I’m a huge fan of index funds so naturally Vanguard was a perfect fit for me.
Holdings and Percentages
My personal take on my Roth IRA is a “set it and forget it” type of strategy. It’s a long term portfolio so whatever is happening in the market today is mostly irrelevant to my portfolio. I’ve constructed a simple, yet extremely effective and diverse portfolio that suits my investing style perfectly.
Before I start with my holdings you may be very surprised by the number. Five. That’s right, only five. I only have 5 holdings in my Roth IRA portfolio and I don’t plan to change that anytime soon. But I do plan to adjust my percentages as I grow older. Index funds allow me to have a diverse portfolio, with extremely low expenses with just five holdings.
Initially, I was torn between this fund and Vanguard’s S&P 500 fund. After some research I found that historically this fund does better. Large cap funds dominate this index so it rarely deviates much from the S&P 500 index by much more than 1%. The VTSAX tracks the CRSP U.S. Total Market Index and that includes roughly 3,800 stocks. The expense ratio of this fund is 0.005% and the fund has earned 7.55% annualized per year over the past 10 years. Vanguard classifies this fund as a 4/5 for risk (5 being the riskiest).
This fund track the FTSE All-World ex-U.S. Index by investing in roughly 2,500 stocks from 44 different countries. Roughly 20% of this fund is composed of emerging markets. This is a foreign play and it dependent on countries outside the United States. The U.S. has been outpacing foreign stocks over the past five years but there’s not guarantee that it will continue at this rate. The expense ratio of this fund is 0.13% and the fund has earned 2.49% annualized per year over the past 10 years. Vanguard classifies this fund as a 5/5 for risk (5 being the riskiest).
Intermediate-Term Corporate Bond Index tracks Barclays Capital U.S. 5-10 Year Corporate Bond Index. The average credit rating of it’s holdings are a triple-B. I prefer corporate bonds because they tend to have a higher yield. Also, intermediate bonds have historically returned more than long-term and short-term bonds. The expense ratio of this fund is 0.10% and the fund has earned 6.70% annualized per year over the past 10 years. Vanguard classifies this fund as a 2/5 for risk (5 being the riskiest).
This fund tracks the CRSP U.S. Small Cap Value Index. It invests in many of the stock market’s smallest and cheapest companies. These stocks historically out perform there large cap counterparts. It tends to take a longer amount of time to see significant gains here though. The expense ratio of this fund is 0.08% and the fund has earned 7.20% annualized per year over the past 10 years. Vanguard classifies this fund as a 5/5 for risk (5 being the riskiest).
This fund tracks the FTSE Emerging Index. Roughly 25% of the stocks in this fund are in China. The emerging markets have been struggling the last several years but the argument for these fast growing markets remains strong. The expense ratio of this fund is 0.15% and the fund has earned 3.64% annualized per year over the past 10 years. Vanguard classifies this fund as a 5/5 for risk (5 being the riskiest).
As you can see the majority of my stocks are very risky. This is due to the fact that I’m still very young and can tolerate this risk. This is a long-term portfolio that I shouldn’t have to touch at all until way down the road. Some changes I plan on making when I do get closer to retirement is to increase my holdings in VICSX (Bonds). Other than that, I will simply need to balance my portfolio back out every year or two and watch the money stack up!
What does your Roth IRA look like?