Author: Ty Druse
Seed to Invest is here to assist you in developing an understanding of finances and investing. While we are not certified financial planners or certified public accountants, we can share insights based on what has worked for us. Here are some key considerations regarding an investment mix.
Retirement Accounts (Roth IRA, 401(k)/403(b), IRA, SEP IRA): Consider using a target date mutual fund which features a diversified mix of stocks and bonds that automatically becomes more conservative closer to your retirement date. As an example, if you were planning to retire in 2045, all three major brokerages (Fidelity, Schwab, and Vanguard) offer low-cost target date mutual funds for an approximate retirement of 2045.
Example 2045 Target Date Funds:
- Fidelity Freedom® 2045 Fund: FFFGX
- Schwab Target 2045 Fund: SWMRX
- Vanguard Target Retirement 2045 Fund: VTIVX
The aforementioned funds are incredibly diverse. When researching VTIVX you will find it consists of the following mix as of the day this article was written:
VTIVX Stock and Bond Mix:
- US Equities = 49.3%
- International Equities = 33.40%
- Bonds = 17.3%.
The approximate 82% stock allocation will gradually decrease, while the bond allocation will increase over the life of the fund, creating a more conservative portfolio. Typically, it isn’t recommended to place target date funds in a taxable account due to tax inefficiencies, such as capital gains distributions from internal rebalancing.
Taxable Accounts:A taxable account is an “all-purpose” account affording you flexibility now and in the future. Consider investing in broad-based ETFs. I have found starting with a simple ETF such as Vanguard Total World Stock Index Fund ETF (VT) provides amazing diversification, as it is around 60% US equities with the rest invested in international assets.
Vanguard Total World Stock Index Fund ETF (VT)
- North America = 64.90%
- Emerging Markets = 10.00% (includes China)
- Europe = 13.70%
- Pacific = 11.10%
- Middle East = 0.30%
If you are closer to retirement age, you can add simple bond funds such as Vanguard Total Bond Market ETF (BND) to establish a more conservative account and change the percentage mix of stocks and bonds. If you want more information on stock and bond mix allocations for your situation, consider reading this article, [4% Rule Explained].
Lastly, it is essential to examine expense ratios for any funds or ETFs under consideration. Expense ratios for the above-mentioned funds and ETFs are some of the lowest in the industry. Read about why expense ratios matter in this article, [Compound Interest’s Silent Killer].
Expense Ratios of Mutual Funds & ETFs Discussed:
- FFFGX = 0.69% to 0.75%
- SWMRX = 0.52%
- VTIVX = 0.08%
- VT = 0.06%
- BND = 0.03%
- VOO = 0.03%
- VXUS = 0.05%
Future Considerations beyond the Basics:
Investors often add exposure to small- and mid-cap ETFs as they get more experienced. Additionally, adjusting the percentage of US vs. international equities is simple by adding either of the following ETFs:
- Vanguard S&P 500 ETF (VOO) = Tracks the S&P 500 Index (100% US exposure)
- Vanguard Total International Stock ETF (VXUS) = Tracks the FTSE Global All Cap ex US Index (0% US exposure)
Other items to consider when investing are future returns and international market dynamics. Will the significant national debt of the United States lead to higher taxes and/or inflation, potentially reducing the S&P 500 returns? Are the historically high prices of US equities going to negatively affect future US market returns? If investors believe either to be true, consider diversifying away from relying solely on the US market into a mix of funds including more international assets. I personally strive for a 50% US and 50% International mix. While ETFs with international exposure (Vanguard’s VT) have historically shown slightly lower median returns compared to the S&P 500, diversifying globally protects a portfolio from country-specific fiscal risks, such as U.S. inflation or changes to corporate tax structures.
Leave a Reply