The Money Mustache Community
Learning, Sharing, and Teaching => Investor Alley => Topic started by: JohnKgan on July 14, 2018, 11:13:47 AM
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Dear experts,
I am 21 years old student and want to 1) invest $5500 (income from my summer internships) into Roth IRA and 2) money that I received as gift ($100k) into some growing investment to be able use it for buying my first house (may be in 5 years) or keep it longer term until retirement, not for daily expenses)
Below are my corresponding questions:
1) Where would you recommend opening Roth IRA in Fidelity or Vanguard or any other? If so, any recommendations on the funds to choose?
2) For the gift money, would you recommend opening VSTAX or Fidelity Fidelity Freedom Index Fund? One of the factors of comparison (as per other posts I read) seems to be expense ratio which seems to be 0.19 for Fidelity Freedom Index 2060 fund and 0.04% for VSTAX from https://fundresearch.fidelity.com/mutua ... /315793695 and https://investor.vanguard.com/mutual-fu ... fees/vtsax. But I guess there may be other factors that experts like yourself may be more aware of that I should consider. I would greatly appreciate your advice on which one to choose.
Below is some background about myself and my current assets:
I am 21 years old student finishing undergraduate studies in May 2019. I plan to take a job after that, though I am not completely sure yet.
Emergency funds: Yes, I have 3 to six months of emergency fund
Debt: None.
Tax Filing Status: Single
Tax Rate: 10% ? (My income so far has been only my summer internships)
State of Residence: California
Age: 21
Desired Asset allocation: xx% stocks / xx% bonds: I am not too sure what is best for me.. May be 90% stocks as I am young?
Desired International allocation: xx% of stocks : I am not sure what is best for me, hence seeking advice where I should invest.
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Fidelity Freedom Index (FFNOX) is fine in a Roth IRA if it is the asset allocation you want. If you use a Fidelity account and are not already doing credit card trickery, also get the Fidelity 2% cash back Visa, it will put 2% of all your CC spending into your account.
In a taxable account, FFNOX will cause pain once you start working/paying taxes because it is not tax efficient. I'd use a mix of Vanguard's VTSAX and VTIAX in your taxable accounts, and keep any money you want to keep safe in the bank, to get started.
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Fidelity Freedom Index 2060 (FFNOX) is not the apples to apples comparison to Vanguard's VTSAX.
The Freedom Fund is a blended "target date" type of fund. This means it has a mix of stocks and bonds, set to go from stocks heavy to more balanced, to more conservative as you get closer to the date (the supposed retirement year that traditionally meant the investor wanted to preserve the portfolio so the risk levels of higher equity is reduced to a glide path).
Target date funds are fine and Vanguard also has many choices there too. The only difference between them and the regular index fund (like the ones mentioned below) are they are slightly higher expense ratios because there is a minimum amount of management activity doing the rebalancing as the years go by.
If you want straight ticket stock market index funds (like VTSAX) and you want to go with Fido, that would be their Fidelity Total Market Index fund (FSTVX for premium class, 10K minimum, just like VTSAX admiral level). It has an expense ratio of 0.035%, which is cheaper than Vanguard's VTSAX by about 5¢ per thousand. They are determined to stay competitive and had to introduce index funds a while back to keep up with Vanguard and keep cutting their fees so they are just under Vanguard's comparable funds. So they have a tiny edge over Vanguard by offering their index funds as a loss leader. But Vanguard holds a patent on how they handle their dividend/cap gains right now, so it may be a wash as far as which fund performs the best vs cost - we're likely talking pennies tho).
If you are investing lower amounts than 10K, then you'll want to look at Fidelity Total Market Index Fund Investor Class (FSTMX/minimum investment: $2,500/ER: 0.09%) and Vanguard Total Stock Market Index Fund Investor Shares (VTSMX/minimum investment: $3,000/ER: 0.14%)
Vanguard is great and there is absolutely no reason not to use them, but Fidelity is also a great company and they do offer similar funds to Vanguard, so it you're more comfortable there, then don't worry too much about using them. The only caution is to avoid their high dollar managed fees and don't let anyone there steer you away from your chosen investments (they're not hard sell in my experience, but they may inquire from time to time if you need any assistance).
I would caution you about investing any money you plan to need intact for something like a house downpayment within a 5 year or under time period. Investing funds you need to hold value to be used in that short a time frame is generally not a good idea, as you may need the total amount during a down time in the market and be pretty upset about having to pull out the money at a loss. If you have a short time horizon, then put it in CDs or even a high interest savings account.
And definitely be aware of the tax implications of what you hold in what kind of accounts. Like you'd may not want bonds or high dividend/cap gains producing funds in a taxable brokerage. See this for what I'm talking about:
https://www.bogleheads.org/wiki/Principles_of_tax-efficient_fund_placement
And just for giggles, here's the comparison over on Bogleheads for the Fido funds vs Vanguard:
https://www.bogleheads.org/wiki/Fidelity
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FFNOX is probably Fidelity's best implementation of a Three-fund portfolio - Bogleheads (https://www.bogleheads.org/wiki/Three-fund_portfolio), provided one is happy with 85% stock and 15% bonds.
It is not one of the Fidelity Freedom Index funds.
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FFNOX is probably Fidelity's best implementation of a Three-fund portfolio - Bogleheads (https://www.bogleheads.org/wiki/Three-fund_portfolio), provided one is happy with 85% stock and 15% bonds.
It is not one of the Fidelity Freedom Index funds.
D'oh. You are right, OP even said 2060. Though, there might not be much difference between them over the next 30 years, and doesn't really change the other advice.
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FSTVX would be more similar to VTSAX. Conversely, a Vanguard Target Retirement fund would be more similar to a Fidelity Freedom Index Fund.
Other than Vanguard which has patents letting it operate its mutual funds more like ETFs, ETFs tend to be more tax efficient because they aren't forced to realize capital gains. ITOT would be a good alternative to either FSTVX or VTSAX if you want to invest at Fidelity.
This might help: https://www.bogleheads.org/wiki/Fidelity