My girlfriend Tag did one of the sexiest things I can imagine earlier this year. She fully funded her Roth IRA.
Thanks to some fine financial coaching by yours truly, Tag realized the importance of saving for retirement and she put $5,000 into her Roth IRA in her first year after college graduation. At the young age of 23 years old, Tag has a great start to her retirement savings. Putting money into an investment account is the first step to saving for retirement.
The second step is to actually invest that money, and this is where Tag got a little confused. She knew to put the money in her Roth IRA, but she had no idea what to invest in. Like many people, she had very little knowledge on the stock market and how to invest. When it comes to investing, she’s pretty much clueless.
All she knew was that she wanted to invest, and she wanted to meet the following requirements:
- She wants to be somewhat aggressive, but definitely not risky. She doesn’t want all her eggs in one basket.
- She doesn’t want to actively trade; she wants to buy and hold.
- She needs something that she can understand in case, for one reason or another, I’m not around in a few months or years to help her review her holdings.
I think she has some pretty reasonable requirements, and I wanted to help her build a portfolio that meets all of them. I came up with what I think is a pretty good, diverse portfolio that should work for anyone with similar goals. As always, I need to remind you that while I may be awesome, I am not a financial advisor; this may or may not be good advice, and if you choose to follow any of it you do so at your own risk.
Invest in ETFs
The reason I decided Tag should investing ETFs is because she could theoretically hold these investments for 30 years without looking at them again. She doesn’t want to worry about if a certain company is going to hit their earnings or if a merger will be approved. She truly wants to be hands off, which is fine. It also means it’s a good idea to let someone else be hands on. That someone else could be a personal financial advisor (which is expensive), a mutual fund (which can have expensive fees), or an ETF (which also has fees, but they are lower than mutual funds).
Since I’m a cheapo, I prefer ETFs and Tag agrees with me. This way she gets diversification and reduces her risk. Now, we just need to find the right ETFs to get her on track for being rich when she retires. After some research, we picked seven different types of investments and found an ETF for each.
US Stock Market: VTI – 25%
This is the biggest part of her investment, and it is basically an investment in the US Market. It’s very similar to the S&P 500, but also includes some smaller stocks as well. The majority of this ETF consists of very big American companies, and should track very closely to index funds like the Dow and S&P 500. We picked this instead of an ETF that mirrors the S&P because we liked the small exposure to smaller companies.
Large Cap US Dividend: DLN – 20%
One of the best things about a Roth IRA is that you don’t pay capital gains taxes on your dividends. The more dividends, the better for a Roth IRA, so the next largest holding is a mix of big US companies that pay dividends. This also puts her at roughly 45% in big US companies when you combine the first two ETFs, which is a good place to be in my opinion.
Large Cap International: VEA – 15%
Any good diversified portfolio is going to have international exposure. Tag wants to be safe, so she’s investing in big companies from Europe and Japan. Even though these are all international companies, she is familiar with a lot of the main ones like Nestle, Toyota, and BP. When you combine the first three ETFs, she has 60% of her investments in pretty safe, big companies. The other 40% is where she introduces a little more risk and potentially higher returns.
Emerging Markets: VWO – 10%
In contrast to the international ETF above, this fund invests in emerging markets. This still invests in large cap companies, but the companies come from places like Russia, China and Brazil instead of France, Germany and Japan. There is typically more growth in these countries, so there is more opportunity for large gains. However, there is also more risk being involved in countries that aren’t as economically established as those in the international fund.
Real Estate Investment Trusts (REIT): VNQ – 10%
This is an investment in US real estate. This is another somewhat risky investment, as we are all aware of the status of the US real estate market today. However, an unstable market usually means prices are low, and I expect real estate to come back in the next few years. When it does, Tag should see a lot of growth in this fund. She will also like the high dividends paid by REITs.
Renewable Energy: ICLN – 10%
Tag isn’t a hippie or anything, but she does like to recycle and is encouraged by the potential of our country moving towards more clean energy sources. She wanted to invest in something she believes in, and this is a great way to do that. This includes solar, wind, geothermal, and more energy companies. One day when either the oil and coal runs out or something incredible is invented, this is going to make her a lot of money.
Small Cap Growth: VBK – 10%
The last holding she has is a small cap growth ETF. This holds small US companies that are ideally going to grow in the next few years. I originally wasn’t going to include this ETF, but I realized Tag had too much exposure to large companies and needed some growth potential. This gives her that potential and will see large gains in a bull market.
Seven ETFs, One Portfolio for a Clueless Investor
After a little bit of research, Tag and I decided on these seven ETFs, and I think she has a pretty sexy profile. Oh, and her investments look good too. Seriously, is there anything hotter than a girl who knows her way around money? I don’t think so.
If you are a new investor and want to take a diversified, hands off approach to your investments, this could work for you too. To those experienced investors, is there anything you would add or subtract from this list?
This post was included in the Carnival of Passive Investing at A Rich Life.
Kevin McKee is an entrepreneur, IT guru, and personal finance leader. In addition to his writing, Kevin is the head of IT at Buildingstars, Co-Founder of Padmission, and organizer of Laravel STL. He is also the creator of www.contributetoopensource.com. When he’s not working, Kevin enjoys podcasting about movies and spending time with his wife and four children.
Looks pretty good for diversification. There is likely a lot of overlap between VTI and DLN though. I just looked at the top 10 holdings of each and 6 are in both of those.
Exxon
At&t
J&J
GE
P&G
Chevron
Personally, I would prefer more in mid to small cap.
Yeah, I know there is lots of overlap on those stocks, but I also think there is good growth potential for large caps over the next few years as we continue to climb out of the recession. She could probably use some mid-cap exposure though. Thanks for the comments.
Good for her. Well, I mean you did help her out a lot so good job, as well. I like the investments, real estate could be risky, but hopefully its bottomed out already.
I’ve had a lot of luck with REITs in the past, and I think it’s a good play with just 10% of her investments.
It’s a pretty good allocation split 75/25 between domestic/international, and I can see the benefit of having a fund that concentrates on paying dividends. Other than a REIT, which tends not to correlate with either stocks or bonds, I don’t care for sector funds as they reduce diversity, and so I would not use ICLN myself. I like also the idea of having something in value, so you could swap VBK for VBR or VB. There’s nothing in fixed income, either, and regardless of any noise from the S+P about treasuries, having 10% in bonds is not a bad idea at any age since it smooths out ups and downs in the market and gives you money to buy more stocks if they fall. So as one more suggestion I think I’d swap ICLN for BND. But there’s no such thing as risk-free investing, and 100% in equities is pretty aggressive. You should also look to rebalancing every few years if your target percentages get out of whack.
Thanks for the tips Larry. I thought about doing some bonds, but considering she’s only 23, I think she can afford to be a little risky. Maybe when she starts contributing for 2011, we’ll look into some bond ETFs.
Tag, great job on funding the Roth IRA! I like your allocation. 7 ETF give you diversification and is still easy to follow. Now you just need to make sure you rebalance annually. Personally, I would put a bit more in small cap and a bit less in large cap.
Yeah, there’s definitely room for more small and mid cap, but we’ve kind of agreed that by holding so much large cap, it kind of negates the fact that she isn’t holding any bonds. The large cap stuff with dividends is stable enough that she doesn’t need bonds just yet.
Nice diversification. Any thoughts on those funds based on when you retire? Just set it and let the money managers work their mojo and ease things up when you get closer to retirement.
The market is going to have a major market correction this year. The global economy is still on life support and today’s market gains are a result of a lot of bailout money.
So here’s a tip: if you really have your heart set on investing in it, sit on your cash and pick out some names that you would love to own at a good price, then wait 3-6 months until they become really cheap then swoop in and buy. By the way, when the correction comes those ‘growth’ stocks are going to be the hardest hit when people realize that in the US, there is no growth.
What is the liquidity and rate of return on all these investments?
I can get Real Estate at 10% return, pretty liquid, with built in equity, no fees
Renewable energy is going to be huge in the next 20 years so investing in those companies / technologies was a wise choice.
Definitely like the ETFs for diversification and it looks like there’s some good healthy risk in there. I would do a quick check on historical returns to make sure there are no major correlations.
agree that there are overlaps – but definitely second your idea that when the mid-large caps start to move again, that would provide a very comfy return on the portfolio. the renewable energy direction is a great one too!
Investing in silver is a wise way to invest and also to survive this days. No other precious metal has such potential as silver. No matter it is in form of coins, bars.Just buy it.
Do you suggest buying silver outright or buying derivative products instead? Is one better than the other?