Advice for Roth

[hikingbum]

Hey everyone,

This is my first time posting and I'm still pretty new to this game. I believe in getting as much advice as possible before making decisions, so I thought I'd seek the wise advice of those of you who are more seasoned investors and/or more knowledgable. I'm trying to build a diversified portfolio in a similar manner to that suggested by William Bernstein, that is, build a diversified portfolio, play it a little risky at first, let it sit for the long run, and rebalance occassionally. I'm 25, am currently maxing out my TSP at 40I/35S/25C and have ~30,000 invested at this allocation. I may do an interfund transfer this year to ramp up my C allocation and tone down my S allocation. I also have a 4400 Roth IRA invested in the Vanguard STAR fund, which I plan on redirecting to something more specific this year. I will also be maxing out my Roth for 2006 and 2007. I'm trying to diversify through my Roth. Thus, I'm looking to choose three areas for diversification. In the vein of Bernstein and Bogle, I'm looking particularly at index funds and low-cost mutual funds. So, my question is, what would you out there recommend as the most important diversification moves to make outside of the TSP at this stage. Thanks for your help!

[tsptalk]

Welcome hikingbum! Index funds such as ones that follow the S&P 500 are pretty diversified to being with. You get several different sectors in one package. At your age I would lean more toward being aggressive than fully diversified. Just my opinion.

Tom

[fedgolfer]

... if you do end up using the Vanguard funds, be careful on what funds you chose if you plan on hopping in and out under a 6 month window... several of their funds take a 1 or 2% redemption fee. You can open a brokerage account w/in Vanguard as well and make some aggressive plays there. Also, instead of paying the fees for a fund, you can buy similar ETFs that are also diversified in the same fashion as the vguard funds... but, you don't pay that 1 or 2%, just to small fee for buying a stock/etf.

https://flagship.vanguard.com/VGApp/hnw/FundsByName?type=PIWANTTO1

I agree with Tom, at your age and those dollars levels, be aggressive and grow that seed money fast. You've got a ton of options w/ Vanguard, which are known for low fees compared to others... but not as cheap as TSP :)

P.S. Don't sleep on the REITs wish I knew about them in my 20's!!!!!

[hikingbum]

Thanks for the welcome Tom. You run a great site! Lots of useful advice here. I have been reading for about a year and learn a lot from this site.

I agree with being aggressive at my age, but I thought that by spreading out into other riskier indexes or mutual funds I'm not currently invested in I could be equally or even more aggressive and possibly even assume a smaller risk (a better chance of landing near some efficient frontier). I don't want to become overly aggressive in single areas, only to find out I picked the wrong areas and missed out on great returns in other areas.

I guess what I was trying to get at, is which areas am I currently missing that would be next to add to my portfolio. I'm thinking about REITs, Emerging Markets, Precious Metals, Large-Value, Mid-Value, and Small-Value, International Value, International Small, Bonds, etc. My head is spinning! It's just a lot of information to sift through. It seems like a good idea to more heavily weight value stocks, but I also like the idea of adding relatively risky high-return investments with low correlations to what I already have. I'm a little unsure of how much benefit I'd gain from adding a significant percentage of Bonds at my age.

I don't know enough about investing to trust my predictive abilities with individual stocks or frequent re-allocations. So, I'm trying to be aggressive by owning a lot of different indexes long-term.

Thanks again for your advice Tom!

[hikingbum]

fedgolfer,

Thanks for the advice! I'm not too worried about purchase or redemption fees at vanguard, because I don't intend to hop around.

I've thought about ETFs, but, and correct if I'm wrong on this, dividends would not be automatically re-invested as in mutual funds. Is this right? Would dividends be kept in the brokerage account outside of the ETF until you paid a brokerage fee to re-invest them? If so, wouldn't this be a big incentive to stick with mutual funds?

[fedgolfer]

... if you're going to buy and hold, yes the vanguard funds sound like they're your play if you don't want to go super aggresive with individual sectors or stocks. The dividend reinvestments are a great reason to stay w/ the vguard funds... also remember that reits distribute 90% of their taxable income to their investors.

[tsptalk]

I guess what I was trying to get at, is which areas am I currently missing that would be next to add to my portfolio. I'm thinking about REITs, Emerging Markets, Precious Metals, Large-Value, Mid-Value, and Small-Value, International Value, International Small, Bonds, etc. My head is spinning! It's just a lot of information to sift through. It seems like a good idea to more heavily weight value stocks, but I also like the idea of adding relatively risky high-return investments with low correlations to what I already have. I'm a little unsure of how much benefit I'd gain from adding a significant percentage of Bonds at my age.

I don't know enough about investing to trust my predictive abilities with individual stocks or frequent re-allocations. So, I'm trying to be aggressive by owning a lot of different indexes long-term.

Thanks again for your advice Tom!
Jim Cramer says something like you only need to own 6 to 15 stocks to be fully diversified so that is why I say a large index fund would get you as diversified as you need to be, particularly at your age. I don't believe bonds are essential for you at this point. Maybe when to turn 35 or 40. :)

[fedgolfer]

... Cramer has that call in section where he tells people if their 5 stocks are diversified... pretty much no two stocks in the same sector.

If I put together my short term dream team it would be: GS, GGP, DVN, GLD, CSCO... maybe DIS and ICE once it comes down some. That's a fun game, anyone else?

[Birchtree]

Please stay away from mutual funds and indexes in a Roth. Buy yourself some good stocks that have a high percentage of increasing their dividends over the coming years. Stock dividends are paid every three months and usually reinvested for free. Take a look at Sharbuilders as a cheap online program. I don't personally own a Roth but do have over 200 individual stocks in my tax portfolio and they are constantly paying dividends which can be a good redeemer in a bear type market. If you ever want some suggestions I'm full of superlative manure.

[Birchtree]

And on second thought, don't go near any of those over hyped plays that fedgolfer is recommending.

[MarkB]

Please stay away from mutual funds and indexes in a Roth. Buy yourself some good stocks that have a high percentage of increasing their dividends over the coming years. If you ever want some suggestions I'm full of superlative manure.


Spread the manure!!! All ears on the 200.

First thing Sharebuilder recommended for me was exchange traded. I am just poking around the site SB trying to get a feel for it. I am guessing it depends on how you use the portfolio builder. Got any stinky tipz?

[Jaguar61]

Birchy,

I won't mine seeing some of those of your choice.

Thanks.

Jag:)

[rokid]

Hey everyone,

I'm trying to build a diversified portfolio in a similar manner to that suggested by William Bernstein, that is, build a diversified portfolio, play it a little risky at first, let it sit for the long run, and rebalance occassionally.

I like your style. I also really like REITS. They non-correlate with stocks and bonds. They perform well during inflationary periods. Finally, they've returned an average of over 14% a year since 1972. In the short term, they've had quite a run, so as Bogle would say, they may be due for mean reversion. However, since you're in it for the long term, I'd take the plunge.

Ala Fama/French, you also might want to consider small value. I don't hold a pure small value fund. However, my wife holds FLPSX in her 401K. It has done very well over the last 16 years (over 19% annually with a 15.32% standard deviation) and has a relatively low correlation with stocks (C, S, and I Funds) Recently, I did a Fama/French 3 factor analysis of FLPSX to see if its performance was due to the value or small factors. http://www.tsptalk.com/mb/showthread.php?t=3900 The analysis revealed a value tilt. Therefore, value seems to be alive and well.

Emerging Markets (EM) non-correlate with U.S. bonds and stocks. However, they do correlate with the MS EAFE index, i.e. I Fund, at .75. My data doesn't indicate that EM is great for building a portfolio (Markowitz MVO). However, I have less data for EM than any other asset class. In addition, J.P. Mei and Burton Malkiel make a strong case for EM in their book "Global Bargain Hunting". Since they are growing so rapidly, owning a piece of EMs seems intuitively appealing.

Finally, join the Diehards forum at http://www.diehards.org/?ndays=10. It only costs $5 and you'll get all the diversification advice you can handle - and more.:laugh: Incidentally, William Bernstein occasionally posts to the Diehards forum. Authors Rick Ferri, Larry Swedroe, and Taylor Larimore are frequent posters.

Good luck and welcome to TSPTalk!

[Birchtree]

I'll be posting some of my stinky stock buys on the Birchtree thread over the next several days. Tune in for some manure pampered tipz.

[hikingbum]

"Please stay away from mutual funds and indexes in a Roth. Buy yourself some good stocks that have a high percentage of increasing their dividends over the coming years. Stock dividends are paid every three months and usually reinvested for free. Take a look at Sharbuilders as a cheap online program."

Birchtree, I don't understand why this would be a better option than a mutual fund or index fund. Vanguard has dividend indexes.

"Vanguard® Dividend Appreciation Index Fund seeks to track the performance of a benchmark index that measures the investment return of common stocks of companies that have a record of increasing dividends over time."

Isn't building your own portfolio of stocks that increase their dividends through Sharebuilders essentially the same as buying an actively-managed mutual fund, except that I'm trusting my own insights rather than some stranger's? It seems like the Sharebuilders option would leave me with a pretty hefty expense in the end as well. Given that I don't have the time or money to gather as much information or advice that fund managers do, and that I'm fairly new to all of this and, although learning quickly, have a lot to learn still, wouldn't indexes be a better option?

Also, what added benefit do dividend-paying stocks offer compared to regular stocks?

Is there something I'm missing here? I'm only asking because of your emphatic "Please stay away." It seems you feel your approach is much better, so I'm just wondering, why?

[hikingbum]

Rokid,

Thanks for your advice. I didn't know about the Diehards forum. It's filled with great information. Thanks for letting me know.

[rokid]

Rokid,

Thanks for your advice. I didn't know about the Diehards forum. It's filled with great information. Thanks for letting me know.

You're welcome. Good luck!

[Birchtree]

hikingbum,

Individual stocks certainly provide more risk but at the same time they provide much more versatility. They increase their dividends which are your DCA program while you learn, they go up and split, they get bought out at premiums, and when you need to borrow you have selectivity. Remember when you sell inside a Roth there are no tax consequences - all income is eventually treated tax free even for heirs. I have a friend that has a Sharebuilder account where he has $50.00 taken out of his bank account on a weekly basis and buys 5 same stocks on a consecutive basis and he pays $20 commission for twenty purchases per month. All dividends are reinvested for free. He buys every Tuesday morning no matter what the prices are.