Author Topic: 25 yr old Current Invesment Allocation  (Read 1271 times)

GratefulDeadBanker

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25 yr old Current Invesment Allocation
« on: May 23, 2019, 11:20:07 AM »
Hello all,

Thanks for taking the time to read. I am 25 years old and have ~$50K invested b/w Roth IRA and Roth 401K. I have two quick questions:

1. I am completely invested in the Russell2000/Russell1000. Is this a mistake? I have felt comfortable the last two working years with being invested there, I have studied the historical returns through recessions, but what to get thoughts on if this is to aggressive? I would like to retire at age 40.

2. I have seen where people say that its a mistake to use a ROTH instead of traditional 401K/IRA. Could someone explain that to me? If I would like to retire at ~40 - am I making a mistake by being in a ROTH for both my retirement accounts?

Thanks,
Gratefuldeadbanker

GuitarStv

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Re: 25 yr old Current Invesment Allocation
« Reply #1 on: May 23, 2019, 11:49:03 AM »
Re: Risk tolerance:
- Do you want to be completely US dependent in your stock allocation?  If so, why?
- Everyone has very high risk tolerance until they lose 60% of their total net worth over a couple weeks.  It's really up to how well you know yourself and how you'll react when that happens.

Rob_bob

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Re: 25 yr old Current Invesment Allocation
« Reply #2 on: May 23, 2019, 03:42:20 PM »
You didn't specify exactly which Russell Index funds you are using, there are many with slightly different allocations.

I ran a back test of 50% IWB iShares Russ1000 and 50% IWM Russ 2000 compared to 50/50% Vanguard small cap VB and mid cap VO Value/Growth Blend funds with Vanguard total U.S. market VTI from Jan. 2005 to present.

The Russel portfolio had a compounded annual growth rate, CAGR, of 8.33%

Vanguard small and mid cap CAGR of 9.17%

At your age you can be aggressive if you personally can stand volatility.

Total market fund CAGR of 8.83%.  This fund also had the lowest volatility.


Telecaster

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Re: 25 yr old Current Invesment Allocation
« Reply #3 on: May 23, 2019, 04:02:25 PM »
Hello all,

Thanks for taking the time to read. I am 25 years old and have ~$50K invested b/w Roth IRA and Roth 401K. I have two quick questions:

1. I am completely invested in the Russell2000/Russell1000. Is this a mistake? I have felt comfortable the last two working years with being invested there, I have studied the historical returns through recessions, but what to get thoughts on if this is to aggressive? I would like to retire at age 40.

2. I have seen where people say that its a mistake to use a ROTH instead of traditional 401K/IRA. Could someone explain that to me? If I would like to retire at ~40 - am I making a mistake by being in a ROTH for both my retirement accounts?

Thanks,
Gratefuldeadbanker

It isn't a "mistake" but it likely is not optimal.  The logic goes like this:  If you stay in the same tax bracket when you are working and when you are retired, it doesn't matter if you do a Roth or a traditional.  Math works out the same. 

But when you retire, you will likely be in a lower tax bracket.  In that case, the traditional is better because you deduct at your highest marginal rate, but withdraw at your average rate.    There is more to it than that, but that's the gist. 

Re:  Russell.  Russell-based funds have had a consistent problem with front-running which drags down returns.  That aside, you have a mid-cap/small cap strategy which is find, but realistically you should have some large cap and maybe some bonds too. 

Aggie1999

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Re: 25 yr old Current Invesment Allocation
« Reply #4 on: May 23, 2019, 05:19:41 PM »
Hello all,

Thanks for taking the time to read. I am 25 years old and have ~$50K invested b/w Roth IRA and Roth 401K. I have two quick questions:

1. I am completely invested in the Russell2000/Russell1000. Is this a mistake? I have felt comfortable the last two working years with being invested there, I have studied the historical returns through recessions, but what to get thoughts on if this is to aggressive? I would like to retire at age 40.

2. I have seen where people say that its a mistake to use a ROTH instead of traditional 401K/IRA. Could someone explain that to me? If I would like to retire at ~40 - am I making a mistake by being in a ROTH for both my retirement accounts?

Thanks,
Gratefuldeadbanker

It isn't a "mistake" but it likely is not optimal.  The logic goes like this:  If you stay in the same tax bracket when you are working and when you are retired, it doesn't matter if you do a Roth or a traditional.  Math works out the same. 

But when you retire, you will likely be in a lower tax bracket.  In that case, the traditional is better because you deduct at your highest marginal rate, but withdraw at your average rate.    There is more to it than that, but that's the gist. 

Re:  Russell.  Russell-based funds have had a consistent problem with front-running which drags down returns.  That aside, you have a mid-cap/small cap strategy which is find, but realistically you should have some large cap and maybe some bonds too.

Why do you say he doesn't have large caps? The Russell 1000 is mostly large caps, correct? Bogleheads says to approximate Vanguard Total US Stock Market you do 92% Russell 1000, 8% Russell 2000:

https://www.bogleheads.org/wiki/Approximating_total_stock_market#Examples

PDXTabs

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Re: 25 yr old Current Invesment Allocation
« Reply #5 on: May 23, 2019, 07:07:29 PM »
1. I think that your lack of international exposure is a mistake. I try to mimic the world stock market. The easiest way to do this is to buy VT. Others will have less international exposure, but few professionals are advocating no international exposure at this point.
2. Yes, I would change to pre-tax accounts. The money that you save in taxes can be used to invest in a taxable brokerage account, buy I-Bonds, buy real estate, etc.

MustacheAndaHalf

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Re: 25 yr old Current Invesment Allocation
« Reply #6 on: May 24, 2019, 04:04:23 AM »
Passive investing with low expense ratios is a good start.  Keep in mind the suggestions you see here build upon that base - but most people don't even get that far.

I've read that Russell decides to be transparent about changes to it's index.  As a result, active managers game their index by front-running their purchases.  I don't know if that's just historical information, or remains a problem today.  With 100% of your money there, it might be worth checking into.  You could also buy into a total stock market fund with over 2500+ holdings (SCHB, VTI).  I think Fidelity has some "zero expense ratio" funds, where they earn money through securities lending or something similar.

You might also look at IXUS (iShares Total International ETF) or VXUS (Vanguard Total Interntaional ETF) to diversify a little.  If you'd like to diversify only a little, you could switch 20% of your portfolio to VXUS / IXUS.  That has the highest chance of giving a benefit.

talltexan

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Re: 25 yr old Current Invesment Allocation
« Reply #7 on: May 24, 2019, 07:27:26 AM »
Part of why you can afford to be aggressive is that your contributions over the next five years will probably equal or exceed your account balance already.

So market drop = lower price for that new money being invested. If you want a slightly greater return (and think you can handle the risk), check out: https://paulmerriman.com/two-funds-for-life/

Sunshinewhenitrains

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Re: 25 yr old Current Invesment Allocation
« Reply #8 on: May 28, 2019, 12:56:24 PM »
Most likely not a popular opinion in this forum, but just ignore if you don't like the advice.

I have been very aggressive in my portfolio. 93% stocks 7% cash. But, the market has been going up for over 10%, I got a 12% during that time period, but it can't go up forever. Because of this I have changed my allocation to 80% stocks 20% cash.

I would recommend something similar.

It's a small hedge against a drop, but if the market does fall, and you reinvest the cash when it does, you can speed ball yourself to retirement.

If it doesn't fall, and continues to rise. MM are almost returning 3%, and climbing, so you wouldn't lose much.

flipboard

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Re: 25 yr old Current Invesment Allocation
« Reply #9 on: May 28, 2019, 01:17:49 PM »
100% stocks is tame.

Risky is levering up to things like 200% stocks.

There's also the option of levering with small-value. Also "higher risk", but perhaps less risky from a total loss perspective.

Single-country bias is silly kind of risky.

talltexan

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Re: 25 yr old Current Invesment Allocation
« Reply #10 on: May 30, 2019, 11:38:11 AM »
100% stocks is tame.

Risky is levering up to things like 200% stocks.


Is this meant to be a veiled reference to our patron saint "Markettimer" of the Bogel-Heads forum by that name?