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© 2023 by Troy Springer

How to Set up Your First IRA and What to Put in It

May 20, 2018

 

A lot of people in my age group are getting their first post-grad jobs and are starting to accumulate meaningful savings. The best way for you to save your money and build wealth is through an IRA (individual retirement account).

 

The Skinny:

 

An IRA is what is called a tax-advantaged account in which you would pay fewer taxes on your capital gains than you would if it were a standard investment account. The government created these accounts to encourage people to save for retirement. The catch is you cannot take your money out of these accounts with paying a fee until you are 60.

 

There is two way to truly gaurentee investment returns. They are:

 

1. Minimize taxes

2. Minimize fees

 

With an IRA you are minimizing taxes.

 

There are two types of IRAs. A Roth IRA and a Traditional IRA. With a Roth IRA, you pay taxes when you first put money into the account, with a Traditional IRA you pay taxes when you take your money out. Under almost all circumstances a Roth IRA is better as you won't have to pay taxes after your initial investment has grown.

 

The max contribution for an IRA is currently 5,500 if you are under 50 and 6,500 if you are over 60. If you can contribute close to 5,500 every year in your twenties...congratulations and welcome to the 1%. Saving and Investing is that powerful.

 

This is the question that most people fail to answer: How and where can I invest?

 

Most brokerages offer an IRA account. In practice, it looks very similar to a regular investment account. (unfortunately for many Robinhood does not offer an IRA) Contrary to what you may think, you may actively trade stocks for free in an IRA so longs as you are not over your yearly contribution of 5,500.

 

You have three types of options for brokerages depending on how much control you want:

 

Most control: Online Brokers ( Charles Schwab, TD Ameritrade, E*Trade)

 

Medium Control: M1 Finance

 

Automated: Wealthfront, Betterment

 

The automated services, also known as Robo-advisors are currently all the rage, and essentially minimize fees by using algorithms to invest using academic models.

 

As a more knowledgeable investor, I tend to favor M1 Finance. I like the that it uses both the better features of Robo advisors while allowing me to choose my. If I can slightly outperform Robo-advisors, who will stay around the market average, over time that can lead to a few extra tens of thousands of dollars in return.

 

One of the mistakes I think many investors make when they are young (besides NOT investing) is being too cautious or hiring a financial advisor. Financial advisors are expensive, especially when you are not working with a lot of capital. And when you are young, your relative risk in the short term is completely minimized by 35-40yr+ time horizon.

 

With that said, here are three portfolios I would consider for my own IRA, organized my risk. Each one of these portfolios would not need much-contiuned oversight, and I would be comfortable not touching over ten year periods.

 

Higher Risk- Individual stock picking, and funds.

 

Funds:

Vanguard S&P 500  (VOO) -5%

Vanguard Total Stock Market (VTI)  4%

Vanguard Developed Markets (VEA) -4%

Vanguard Emerging Markets (VWO) 4-%

Vanguard Small Cap (VB) 4%

Alpha Architect Quantitative Momentum (QMOM) 3%

S&P Biotech ETF (XBI) 1%

Stocks:

 

Markel Corporation (MKL) - 7%

Google (GOOG) -7%

Microsoft (MSFT) -7%

Amazon (AMZN) -7%

Salesforce (CRM) -5%

Facebook (FB) -5%

Disney (DIS) -5%

Tencent Holdings (TCEHY) -5%

Berkshire Hathaway (BRK.B) -3%

Visa (V) -3%

Anheuser-Bush (BUD) - 3%

General Motors (GM) -3%

Celgene Corp (CELG) -3%

JD.com (JD) -3%

Mercadolibre (MELI) -3%

Paypal (PYPL) -3%

Activision Blizzard (ATVI) -3%

 

Medium Risk - "Index Plus"

 

Vanguard S&P 500  (VOO) -15%

Vanguard Total Stock Market (VTI) -15%

Vanguard Developed Markets (VEA) -10%

Vanguard Emerging Markets (VWO) -10%

Vanguard Small Cap (VB) -7%

Alpha Architect Quantitative Momentum (QMOM) -7%

Markel Corporation (MKL) -3%

Microsoft (MSFT) -3%

Salesforce (CRM) -3%

Amazon (AMZN) -3%

Google (GOOG) -3%

Disney (DIS) -3%

Berkshire Hathaway (BRK.B) -2%

Facebook (FB) -2%

Tencent Holdings (TCEHY) -2%

General Motors (GM) -2%

Canadian National Railway (CNI) 2%

Starbucks (SBUX) 2%

Canadian National Railway (CNI) 2%

Philip Morris International (PM) -2%

Altria (MO) -1%

Celgene Corp (CELG) -1%

JD.com (JD) -1%

Enbridge (ENB) -1%

 

Lower Risk - Index

 

Vanguard Total Stock Market (VTI) -25%

Vanguard S&P 500  (VOO) -15%

Vanguard Developed Markets (VEA) -15%

Vanguard Emerging Markets (VWO) 15%

Vanguard Small Cap (VB) - 10%

Alpha Architect Quantitative Momentum (QMOM) -8%

iShares Morningstar (Large-Cap Value) -8%

Vanguard Long-Term Bond -4%

 

 

 

 

 

 

 

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