The Money Mustache Community
Learning, Sharing, and Teaching => Investor Alley => Topic started by: icemodeled on March 01, 2016, 11:36:16 AM
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I have not paid much attention to investing until about 6 months ago and have read a lot about it, especially here. I had my Traditional IRA with LPL Financial. After realizing the high fees and little use I got from them, I believed I could manage it myself and just transfered it all to a vangaurd IRA. I just got the confirmation letter in the mail and now need to decide how to allocate/manage it. Theres only $1300 in it, my plan was to add more money and invest in their index funds BUT we are planning a move very soon and want to hold up putting money into it until we move and settle in.
So, I know many funds at Vangaurd requires a certain balance. Right now its just in their prime money market fund. After some research I came across the ETF (VTI) and think it may work until we have a larger balance. Then, I had a suggestion about vanguards star fund, seems it has a stock to bond ratio that's less risky then the VTI? At this point, the thought of risk doesn't scare me, but of course there's a small balance right now.
I would love suggestions. Although I have learned a lot lately, I still have a ways to go and could be missing something important. So, will the VTI work with the low balance and is that the best option at this point? Or is the star fund something to seriously consider?
Another question, with the balance so low right now, do we really need to allocate money and diversify much until the balance grows? Is it ok to just stick it into one thing like VTI or should I put it into 2 or more locations within vanguard?
Some info of us.
I'm married, husband and I are late 20s. No kids, but maybe next few years. This is the ONLY retirement account we have, both self employed with rental properties and lawncare business. Would like to open another IRA in my husbands name in the near future. Short term goal is to remain self employed and continue to save drastically over time. Longer term is to reach FI by 40-50s. This is something I'm still working on and figuring. We enjoy what we do(since we do not have typical 9-5 jobs) but in time would want to be fully FI. So just a little info on us.
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I wouldn't worry too much about diversification, other than to be in mutual funds and not individual stocks, until you've got more money - 100% in VTI works just fine.
In addition to the options you've listed (ETFs, and STAR fund), Vanguard Target-Date retirement funds also have a low-enough minimum for your account. Those would get you diversification similar to STAR fund at a lower cost. And you can pick your allocation, more or less - want 90-10? Go with a long-dated fund. 60-40? Closer to "already retired".
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Set your account up as a brokerage account that way you can buy Vanguard ETFs for free. The minimum is 1 share.
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Some info of us.
I'm married, husband and I are late 20s. No kids, but maybe next few years. This is the ONLY retirement account we have, both self employed with rental properties and lawncare business. Would like to open another IRA in my husbands name in the near future. Short term goal is to remain self employed and continue to save drastically over time. Longer term is to reach FI by 40-50s. This is something I'm still working on and figuring. We enjoy what we do(since we do not have typical 9-5 jobs) but in time would want to be fully FI. So just a little info on us.
The Star Fund is 60/40 stocks and bonds. The correct stocks vs. bonds ratio is a matter of some debate, however given your ages and investing horizon (presumably even after you retire you'll still be in the market, so your horizon could easily be 60 years), you should probably more like 80/20 stocks and bonds. Personally, given your ages I'd even push the stock percentage higher.
Right now, you are probably fine just going with 100% VTI until you add some more money, but you could also do 80% VTI and 20% AGG and call it good.
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If you're happy with an ETF, then VTI should be fine.
If you'd rather a regular mutual fund, you can by a Target Retirement Fund which invests in US Stock, International Stock, US Bonds, and International Bonds (ratio depends on how close to the target date of the fund you are - available in 5 year increments).
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When you're self employed, generally speaking you need a larger emergency fund than someone with a 9-5 job. Note that emergency funds aren't just for literal medical or house repair emergencies. Emergency funds also cover no longer having job income, which is why self-employed might even have 12 months of emergency fund. I suspect others will find that too high, and suggest 6-12 months. Job stability can even be a factor, but make sure you have an emergency fund to cover expenses "in case" before you invest.
If you have limited funds and want to invest, I'd suggest building up:
1) first in "VTI", Vanguard Total Stock ETF. This puts you 100% in US stocks, but very diversified (~3800 stocks)
2) when affordable, expand to "VXUS", Vanguard Total International ex-US ETF. Diversifying is the important thing, whether you're comfortable with 1/5th VXUS or 1/3rd VXUS.
3) finally some allocation to bonds, like with BND (Vanguard Total Bond Market). This is good to keep low because of your time horizon, but 10-20% might be reasonable.
If you invest in ETFs instead of funds, you can probably afford to diversify already. Buying a slice of all US stocks costs $100 / share ("VTI"), and buying a slice of the rest of the world costs $42 / share ("VXUS"). Wow, you can invest 70% VTI and 30% VXUS by purchasing one share each for just $142. Vanguard ETFs cost $0 when you buy them at Vanguard.
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Thanks for all the replies!
I think were really leaning toward the VTI now and as we add more money, change it later. Were fine with the 100% stocks and wouldnt want less then 80% stocks.
Mustacheandahalf - great advice! We actually have $40000 in our savings, more then we would nomally but we are buying a home soon and our goal is to always have $10k savings, really $20k were most comfortable with. After our move, we will fund the IRA.
Thanks again!