The Roth IRA Further Explained

The Roth IRA Further Explained
Who doesn’t love a little desert beauty to go along with financial topics?

Who is a Roth For?

Most everyone. If you have made income or your spouse has made income in a given year you are eligible to open a Roth IRA. The max amount of money you can contribute to a Roth IRA in a given tax year is $5,500. I say “given tax year” because you can contribute for any year from January 1st of that year up to tax day (mid April) of the following year giving you an actual 15 and 1/2 months to contribute. If you make more than $135,000 as an individual or $199,000 married filing jointly you are still eligible for a Roth, BUT you have to complete the backdoor Roth IRA. The Physician on FIRE has written an amazing step by step post for this so if you are in that camp follow his walk-through!

Do This Today!

Hopefully, you are busy working on completing your Step By Step and have already Set Up Your Roth IRA so you are now ready for this post! Either way, when you do decide for yourself that investing in a Roth is your next step, go with Vanguard. Let me tell you why I went with them.

As Jack Bogle says: “Two roads diverged in a wood, and I— I took the one less traveled by, And that has made all the difference.” What, what- that was Robert Frost wasn’t it?

Vanguard

Vanguard has some of the lowest fees across the industry. This is assessed by what is known as an “Expense Ratio” or “ER” for short on your mutual fund. How does Vanguard keep costs so low? It is brilliant really, they are the only mutual fund company in the world that is owned by its shareholders i.e. you and me. Pretty novel concept huh? I guess that is also why it is the largest mutual fund company in the world. It was founded by Jack Bogle, a pioneer of the mutual fund; you should look him up sometime, he is a class act.

Expense Ratios

Anyways, he remains to this day a strong voice for the average Joe investor looking to not get ripped off while walking on Wall Street. Expense Ratios on mutual funds at Vanguard are hard to beat! Always know your ERs. If you have any sort of account in the stock market right now call up and ask what you are paying in regards to your expense ratios. If you are above .16% you can easily have it lower so shop around. Now let’s talk mutual funds.

Mutual Funds

Oh, the mutual fund. I will describe a mutual fund in broad terms and then we will circle around and go into specifics. A mutual fund is less risky investment than investing in one stock or one bond or some other investment entity because mutual funds bring multiple stocks and/or bonds together to spread risk and offer investors an opportunity to invest in multiple companies at one time. It’s pretty sweet. So say you are interested in investing in Apple stock (after all you are probably reading this on an Apple device right now), but you are not sure about how risky it is to put a large sum of money into one stock on the stock market. To answer your question, IT’S RISKY!!! But how risky?

Prickly business and  risky business, both can really hurt

Risky Business

Let’s consider the risk to be a fluctuation from a mean. All stock investments on the market fluctuate, that is just what they do, but those investments that carry more risk of loss (and subsequently more opportunity for gain) fluctuate more- that is to say, one day you are up… a lot, and the next day you are down…a lot. For the beginning investor (even for a seasoned one) large fluctuation in whatever sum of money you have set aside to invest with does not sit well with most.

Millennials These Days

So then let’s say you are like most millennials, you have an upwards of at least 4 Apple products of some sort (iPhone, iPod, iPad, and an Apple watch) with which you impulse buy on Amazon.com all the time (I am totally guilty of this, no shame here), you drink Starbucks at least weekly (if not daily… me too) and you have been known to frequent Wal-Mart every so often, okay you are there all the time… just admit it. You want to invest in all of these companies, but to do so would take a lot of work and the stock market is a scary place where people lose money and you don’t know a ton about it so you stay away. You are like most Americans! How could you invest in all of these companies at once and save tons of headaches and time? I am glad the reaches of the internet brought you here. Let’s tackle this question together!

Mutual Funds!!! To Load Or Not To Load?

Mutual funds are the answer! They are a great investment tool in that they pool risk together inherent in the stock market and spreading it out through investing in multiple stocks, and by multiple, I mean hundreds to thousands of stocks. There are many different types of mutual funds and you should read more about them so you are informed, but I will give you a heads up here.

YOLO? No, No Load Bro

The very best type of mutual fund you can have is a “No Load Mutual Fund” Like VTSMX/VTSAX. No load simply means that you are not charged to invest whenever you want to invest. These “load funds” are nothing more than mutual funds with commissions for the salesman that sold them to you. Wave bye-bye to that load money that you will never see again… It’s a pretty sad really. My thoughts and prayers are with the investor hoping to create wealth in this manner. Why pay for something when you can have it absolutely free? Keep reading.

Bro, YOLO So No Load.

Mutual Funds!!! To Index Or Not To Index

What I mean by actively managed funds is this: many mutual funds have fund managers. These managers attempt to predict the market by coin flipping, palm reading, underwater basket weaving and all sorts of hoopla that aims to “beat the market” and get “better than market” returns. Hogwash! This is a futile exercise and study after study has shown that there’s no way to predict the market. However, it’s clear that there is money to be made in convincing people that you can do so. They make it look like meticulous study when indeed, it is just meretricious propagation. You have to be in the know to recognize it, now you are in the know. Now it’s time for a shameless bad dad joke.

Major Pointer: Index… dig it?

The truth is nobody can predict the market and that is exactly what an actively managed fund manager tries to do! You are better off with an index fund. Major pointer:  Index funds are mutual funds that follow a particular index of the stock market. There is no manager involved. They spread out assets of that index and the goal of these funds is to get you the identical returns of stock market for that particular index. They don’t sell you on the idea of trying to beat the market and play towards your greed, rather they sell you on the promise of meeting market returns and this should appeal to your logic and wisdom. Ah yes, logic, such a forgotten thing in today’s feel-good society. Indexing is a stellar way to start and finish your investment career.

Sometime it takes hours of slogging through boring landscape to come on that one reason for your journey. You have now reached that point in this write up. NOW GO START YOUR ROTH!!!

So Then Why VTSMX In Your Roth?

Because it is the combination of everything I have spoken of to this point! It is one of the cheapest and best  low cost no load index mutual fund. Additionally, if you are young like me, you can stand to start here- it is easy and simple. As you grow in knowledge you will find more conservative investors who might want you to consider adding some bonds to your set up which is totally fine. Do yourself the favor though, start today regardless!

Down The Road, You Can Switch

As the years go on and I continue to fund my Roth, I will consider allocating it differently, but this is an excellent starting point. Having a Personal Investing Statement is huge later on in your investing career. I started with this fund because it is absolutely hands down one of the best. I picked it prior to the White Coat Investor’s write up on it, but in reading his recent review of it, I knew I had done something’s right! I will let him (someone much smarter than me) explain it to you in this post: My Favorite Mutual Fund.

Start Early

Starting early in investing is a surefire way to developing passive income (i.e. money that makes you money while you do nothing). Passive income coupled with compound interest is an absolute true recipe for success in your financial journey, but it takes years so start early.

The Other Guys

You might not hear much about Vanguard on TV or the Internet, that is because other companies pay a lot of coin to market themselves to you. You represent hundreds, if not thousands, if not millions, of dollars of profit if you invest with them over your lifetime. At Vanguard, the extra money that would go to fees and advisors is reinvested into your portfolio. Do your future self a favor and invest at Vanguard. Tell them Life Of FI MD sent you, they will probably think you are crazy. I get NO financial compensation for this BTW.

A Word On Financial Advisors & Brokers

There are good guys out there. They are fee-only financial advisors. Otherwise, If you have made it this far down the list you are smart enough to do this yourself, I promise. Give yourself all the time that you need to crush a couple good books on the subject of finance and mutual funds (see setting up your Roth IRA. Part 1) and come out with some knowledge. Investing isn’t hard, but it is worth devoting some good time too. So think, read, compare, be critical and stay away from the pichi caca that salesmen known as financial advisors push on you as “sound financial advice.”

Questions To Ask Everytime

If you are dealing with financial advisors them ask every time what their compensation is with whatever fund/product they “recommend.”

  •  Ask them about the commission they make on the funds they recommend.
  •  Ask for the Expense Ratios on the funds they recommend
  • Ask for the load fees on the funds they recommend
  • Ask for every other extra hidden fees, and if all that weren’t enough
  • Ask them about the extra 1-2% off the top they then charge from your hard earned money after all those fees.

Finally, Ask if they are acting as a fiduciary on every line of product they recommend which means that which they recommend has your best interest in mind. As you might later find, many times their recommendations are not based on your best interest, but rather on theirs. Unless you here born with deep pockets caveat emptor.

I think you are ready.

START YOUR ROTH IRA RIGHT NOW!!!

I leave you with one more desert landscape photograph. Don’t worry, more below average dad jokes to come.

 Oh BTY, Sharing is caring.

$10,000 to Bitcoin or VTSAX??? Please Help Me Decide.

News Flash: Stocks Are At All-Time Highs!

This is true, but Bitcoin is also crazy hot right now. Should I invest now or later and in which? What if the answer was yes and yes and yes? Yes to now, yes to later, and yes to Bitcoin hooray!!! But please for the love of all things holy less than 5% to Bitcoin… Keep reading to learn why.

Invest now, invest later, and invest in Bitcoin? 

Investing Bitcoin VTSAX Financial Independence What Should I Do
Chill Bro, You can invest in Bitcoin, but how much is too much?

I guess the above approach would leave everyone winners in the short term, but I don’t think it is a long term winning strategy. Why? Stocks are at all-time highs, this is true; stocks also have been at all-time highs for the past five years. There are people out there still holding onto lump sums of money from the crash of 2008 waiting for the next crash to reinvest. They are losing money thanks to inflation. If they were one of the few to have left their money in the market during that scary time, not only would they have received back all of their money by this point in time, but it also would have doubled. In the last year alone the Vanguard Total Stock Market Index Fund has returned investors roughly 20% back on their invested cash. If you are invested in a Roth that interest is tax-free!

VTSMX or Bitcoin? Hhhhmmmmmm….

The Vanguard Total Stock Market Index Fund (VTSMX for short) is one of the best investing funds available. It is also one of the cheapest. I share that with you to encourage you to start your road to a better future of freedom sooner rather than later. Like… RIGHT NOW… rather than later sooner…   If I were given a windfall of 10K I would put it right into VTSAX and let it sit. I would sit it and forget it! But Bitcoin is crazy hot right now, why am I not invested in it? There is just no track record for it, if you must invest in it use your play money (<5% of your portfolio). Just don’t leverage your house for bitcoin investments. But now lets talk stocks.

Should I Invest Now Or Later?

“I know I need to invest, I know stocks are at an all-time high, when should I invest and how should I invest? What would you do?” The answer is not a concrete one and no one should tell you “Oh, invest when the market drops this many or that many points,” or “You know, wait until next year when things smooth out.” They might as well be palm readers.

When you ask the question “When should I invest and how should I invest?” you are asking what you should do with your money, fair enough? But the reason you ask is because investing requires a stock market and you don’t know what the heck that thing is, or how it works, or when to invest, or what to invest in, but you know you don’t want to get burnt, and you are pretty sure you would like to make money and not lose it. And probably you are reading this article now because it had the work Bitcoin in the title and you thought it would make you rich! Well, let you and I talk long term 15-20 year wealth with track record and I think we will be on to something in this post.

You Need To Ask Yourself Some Harder Questions First Before You Bitcoin Power Up!

The truth is you need to tell your money where you want it to go and how it is going to get there. No one else can do that for you. Writing up a plan is the best thing you can do for yourself and your future. It helps you learn about these interesting topics and also steady the course for you in the future. Putting pen to paper and determining what is the best route of action for your invested dollar is just a smart thing to do. Some people call it an Investment Policy Statement, others have named it an Investing Policy Statement, or even an Investor Policy Statement. I have named mine something different because I can.

Investing Bitcoin VTSAX Financial Independence What Should I Do
My Very Best Bitcoin Power Up!!!

Please enjoy Thy Investment Personal Statement (IPS for short.) I have named it that for several reasons. First off, I have written lots of personal statements throughout the years (probably somewhere north of a 100) while applying to scholarships, medicals schools, residencies and so on, so a personal statement just feels like home to me, and loads better than a policy statement. The word policy makes me think of meetings, and I loathe meetings.

The Intern’s Investment Personal Statement

Philosophy:

  • Keep costs low, be happy accepting market returns.
  • Invest in Vanguard low-cost passive index mutual funds.
  • Lifelong buy & hold strategy with a fixed asset allocation.
  • Invest monthly; separate and automate accounts.

Goals:

  • Be financially independent as soon as possible. 10 years outside of residency Lord willing. This includes student debt, house payments, and sizable nest egg retirement savings while Traveling Wisely and seeking New Experiences as a couple.
  • At this point in our lives, our risk tolerance is quite high and can remain so until post-residency at which time we will reassess.

Fixed Asset Allocation:

  • 90/10 Stocks/Bond & REIT ratio
  • 90 % Stock (75% US and 15% International)
  • 5 % REIT & 5 % Bonds (3% US and 2% International)

Specifics:

  • Separate and automate savings and retirement accounts.
  • Early IRA contributions for longer market appreciation.
  • Maximize tax deductions in IRA, 401, 457, & HSA if possible.
  • Invest monthly & over the long-term. Never react to the market.

Expectations:

  • Expect a 20% drop bear market approximately every 3 years.
  • Expect a 10% drop correction approximately every year.
  • Expect these drops to scare you, but be faithful and don’t react.
  • When assets drop, it is a great time to buy.

Within my IPS you find several elements of who I am. I am quite cheap, I am very comfortable with long commitments, and I am pathologically passive, or at least I have been told so. Just playing, I am not passive, I am actually quite active with these things. Passive people get herded into actively managed funds with crazy fees by financial advisors.

My IPS Dictates My Investments Decisions…  Sorry Bitcoin…

My IPS tells you about my life and my comfort concerning risk: I like to travel and place a high value on experience over stuff. I am young and am comfortable with a more aggressive asset allocation, which I have determined as a fixed asset allocation. This means I don’t time or react to the market. I don’t buy or sell based on the market conditions. I invest monthly and have determined my stock to bond ratio to be 90% stock and 10% bond.

Investing Bitcoin VTSAX Financial Independence What Should I Do
Myself and several colleagues analyzing recent Bitcoin trends, as you can tell meticulous work in a very heated environment.

Within them there bullet points you see that I am serious about my financial independence and that I don’t pass the buck to tomorrow, or next year, or to when the market drops, or to when that smart guy tells me to invest. Rather, I have established where I want to be in X amount of years (set some sort and long term goals for yourself,) I have told my money where I want it to go (separate your investing cash from your day to day checking and saving accounts so it’s out of your hands as soon as the check clears,) I have told it when to get there (set up monthly automation,) and through asset allocation I have even set guidelines for how it behaves (If you are risk averse, increase your bonds. Like a wild ride? Go stocks).

Please feel free to take it and use it for yourself if you like. Send me a message or leave a reply if you have questions. This seems like complicated stuff, but it really isn’t that bad. Start learning about it now and start using the tools that God has given you. Remember all these things are on loan, aren’t they?

Everything should be made as simple as possible, but not simpler.

-Einstein

Thanks for the read 🙂