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Learning, Sharing, and Teaching => Investor Alley => Topic started by: Math N Money on April 23, 2020, 09:26:19 AM

Title: IRA vs. Managed Brokerage
Post by: Math N Money on April 23, 2020, 09:26:19 AM
Hi All,

New to this site after ironically being referred here from another (unrelated) forum that I frequent. So far I have found that my current personal finance approach lines up in many ways with the advice I have found here, evidenced by the excel workbook I have documenting every penny in and out since my first paycheck.

I am admittedly lacking understanding on the investments side. I am maxing out the matched portion of my 401(k) though my employer, but I am trying to figure out the best place to put any additional money that is free to invest. I have a monthly budget (which includes a static savings amount), but I often times fall short of it in other areas and I invest that difference. Right now I am using a Managed Brokerage through Ally. I like it, it makes sense to me. It automatically splits deposits into a mix of Stocks (ETFs) and Bonds and then also take a 30% cash holdout earning 1.5% APY. I haven't actually heard of many other people using this kind of account, but I have heard of a Roth IRA as a place to put extra investments.

I must be missing something. My question is, what are the benefits/shortfalls of an account like this vs. a Roth IRA when it comes to investing money outside of a 401(k)? What kind of account would you suggest to someone just starting out?
Title: Re: IRA vs. Managed Brokerage
Post by: Sibley on April 23, 2020, 09:38:56 AM
What are the fees you're paying for them to do what you could setup to do, yourself, automatically, for pretty much free?

Also, google J Collins Stock Series. Good primer (yes, he has a bias towards index funds) on the stock market.
Title: Re: IRA vs. Managed Brokerage
Post by: EvenSteven on April 23, 2020, 09:55:51 AM
The stock series recommended is a good one to read. It also sounds like you could benefit from taking a look at the investment order sticky.

https://forum.mrmoneymustache.com/investor-alley/investment-order/msg1333153/#msg1333153

This should help order and clarify a few things, as well as bring up a few more questions you might have.
Title: Re: IRA vs. Managed Brokerage
Post by: Math N Money on April 23, 2020, 10:36:12 AM
What are the fees you're paying for them to do what you could setup to do, yourself, automatically, for pretty much free?

The Ally account is a robo-advisor type so there are no fees. When I started it seemed to me like an easy and free way to handle the things I didn't understand yet - i.e re-balancing, dividend reinvestment and portfolio allocation.
Title: Re: IRA vs. Managed Brokerage
Post by: seattlecyclone on April 23, 2020, 11:36:11 AM
You phrase this choice as a simple binary ("managed portfolios vs. Roth IRA"), but there are really two dimensions to the question here.
1) What do you want to invest in?
2) What type of tax shelter, if any, would be the best place for that investment?

A Roth IRA isn't an investment, it's merely a special tax-sheltered bucket of money that you can use to invest in whatever you want. You can buy stocks in a Roth IRA, you can buy bonds, you can hold cash, you can even buy a rental property. In fact, the FAQ section on Ally's Managed Portfolios advertisement page (https://www.ally.com/invest/managed-portfolios/) mentions that they'll be happy to do their magic in a Roth IRA. It's therefore not a choice between a Roth IRA and this Ally investment service at all; you can easily do both if you wish.

Looking at the first question, what to invest in, this Managed Portfolio service is an okay option. My biggest criticism would be the mandatory 30% cash cushion. For one thing, this is a really big fraction of your wealth to have sitting around losing value to inflation every year. For another thing, you don't really even get to take advantage of the main reason many folks like to have a cash cushion in the first place: to have the opportunity to withdraw exclusively from that cash during a market downturn so that you don't need to sell any other investments at a low point. Instead with this account each and every withdrawal will be 30% cash and 70% other investments whether you like it or not.

A lot of folks on this forum will recommend that you pick a more DIY solution like some variation of the three-fund portfolio (https://www.bogleheads.org/wiki/Three-fund_portfolio). This adds a bit of complexity, but you get a lot more control. Someone just learning about this stuff like you might prefer to start with an all-in-one solution like a Vanguard target date fund (https://investor.vanguard.com/mutual-funds/target-retirement/#/).

As to the second question, where to put your investments, a retirement account such as an IRA is often a great choice. Again, you can have your Ally Managed Portfolio in a Roth IRA if that's what you really want to do. I encourage you to read a bit more about investing, such as the JL Collins stock series mentioned above, before you make too many decisions. There isn't a huge hurry here. Take a month or two and educate yourself.
Title: Re: IRA vs. Managed Brokerage
Post by: MustacheAndaHalf on April 25, 2020, 01:57:17 AM
https://www.ally.com/invest/managed-portfolios/
"No advisory fee. No fine print. No, really."
"We’ll rebalance and add more money to your other investments as your cash grows, but your portfolio will always have about 30% cash."

For an investor far from retirement, 30% cash is very high.  I actually switched my HSA to a provider that charges monthly fees just so I could be 100% invested, instead of requiring a certain amount in cash.  The average return of stocks more than made up for it.

In my view, the hidden cost here is limiting yourself to 70% equities.