I’ve said it before and I’ll say it again: the Roth IRA is, in my opinion, the best investment
you can make in your life.
By simply maxing out the annual contributions and investing $6,000/year into total market
index funds, you’re practically guaranteed to retire as a millionaire without owing a
cent in taxes.
Quick plug to my video on why these are so great if you’re interested in checking that
out.
I started getting serious about my Roth IRA and investing in general about a year ago,
and during this time, I’ve been gradually researching and tweaking my Roth portfolio
to create an allocation strategy that I can buy and hold for decades to come.
And today, I’m finally ready to share my Roth IRA strategy, the reasoning behind it
and what my portfolio actually looks like.
We’ll start with my general philosophy behind my Roth IRA strategy, which guided me towards
the stocks and funds I have in my portfolio.
This will include a breakdown of my exact holdings and my target allocations to each
of these holdings.
However, I don’t want you to think I’ve got it all figured out.
Just a few months ago I made a huge mistake with my Roth IRA that cost me thousands of
dollars and threw off my whole portfolio.
In an effort to save you guys from making this mistake, I’ll walk you through what
went wrong and exactly how it impacted my current portfolio.
This will include a fully transparent look at my Roth IRA portfolio with M1 Finance,
which is currently valued a little over $10,000.
So be sure to stick around for all of that as well as some details for getting free money
in your very own Roth IRA.
Let’s take a look.
Before we start, I should probably preface with the fact that this is just how I’M
choosing to invest my money, and I cannot say whether this strategy will work for anyone
else, or even myself.
Since I’m only 25, I am willingly taking on a little more risk in my portfolio, because
I’ve got nearly 40 years until retirement if things don’t go my way in my early years.
However, I also want to be clear that I’m not deliberately SEEKING risk in this portfolio
either.
Most studies show that active trading and stock-picking will underperform a total market
strategy in the long-term.
I know the more I deviate from total market index funds, the more I risk earning consistent
long-term returns.
So I’ve tried to balance my strategy by minimizing trading, selecting holdings that
I can dollar cost average into for years or even decades, and keeping a diversified portfolio
that supports these practices.
To do this, I’ve based my portfolio on a few key ideas of diversification and asset
allocation.
First is straight up stock diversification.
As I said, almost every study shows that total market index funds beat most other investing
strategies over the long-term, which will be super important for my 40-year timeframe.
Because of this, I focus on total market index funds and ETFs for my portfolio.
In other words, no individual stocks.
Next is having international diversification.
This is somewhat of a debated topic, as many respected investors, including father of the
index fund, Jack Bogle, believe that you don’t need to diversify outside of the US.
However, I did a video on this a few months back and found a lot of great reasons to diversify
internationally.
You get diversification away from U.S. market risks, lower volatility, higher returns and
recently, better valuations, which means relatively cheaper stocks.
After considering all these details, I ultimately decided to target an international allocation
of about 30% within my Roth IRA, which again, is explained in my previous video.
Another component is asset allocation, which is the practice of diversifying into other
asset classes outside of stocks.
Beyond stocks, you also have bonds, which are probably the next most common ingredient
in a portfolio.
There are a couple different methods to choosing how much of your portfolio you allocate to
bonds depending on your age and risk tolerance, such as using your age as your bond allocation
percentage, which for me would be 25%.
Since I’m young and consider myself to be quite tolerant of risk, I do not allocate
any of my portfolio to bonds and probably won’t for at least another 15 or 20 years.
But, I do allocate to real estate with real estate investment trusts, or REITs.
In addition to providing diversification out of stocks with lower correlation to the stock
market, REITs pay really high dividends, which means I can get substantial cash flow coming
into my Roth IRA to reinvest for compound growth over the years.
Due to these benefits, I’m currently targeting a 15% allocation to real estate.
And while I don’t hold any commodities, gold or other precious metals, I AM allocating
5% to Bitcoin to participate in that growth within my tax-shielded account.
I think Bitcoin is proving more and more that it has a role in the world of traditional
finance, and however it fulfills that role, I want to be a part of it.
I do acknowledge that this could be a significant risk in my IRA, but that’s why I’m only
allocating 5%.
Finally, although this is less about diversification, I’m also staying focused on highest total
returns.
I’ve mentioned in plenty of videos now my current stance on dividend investing, which
comes down to the fact that I don’t want to sacrifice growth and price appreciation
for the sake of dividends.
Even though IRAs are one of THE best places for dividend investing, a high dividend yield
doesn’t mean much if I can hold a different investment that simply grows faster.
I’m not avoiding dividends, as is shown by my REIT allocation, but I don’t want
to build a portfolio around the strategy and miss out on growth elsewhere.
Plus, index funds pay dividends too, and those will compound just fine.
So let’s see how all of this comes together in my portfolio and which holdings I’ve
chosen from smallest to largest.
We’ll start with my 5% Bitcoin allocation, because this is the one I’m least satisfied
with at the moment.
Currently, there are no great ways to hold Bitcoin in a retirement account, because most
traditional Bitcoin investment vehicles have high expense fees or costly premiums.
I hope we get a Bitcoin ETF soon, so I can get some direct and cost-efficient Bitcoin
exposure in my portfolio.
I previously said I would make do with the Osprey Bitcoin Trust, ticker OBTC, but unfortunately
it is not available with M1 Finance, so I have to find a temporary workaround until
that or a Bticoin ETF becomes available.
So for now, I have a simple copycat portfolio that mimics the BITQ ETF.
BITQ allocates to 30 holdings involved in cryptocurrency, including Coinbase, Bitcoin
mining companies, and companies with Bitcoin on their balance sheets.
Unfortunately, BITQ ALSO isn’t available on M1 Finance, so I’m reluctantly copying
their holdings until a better alternative becomes available.
Fortunately, I’m eliminating the .85% management fee associated with BITQ in the process.
This is what the pie looks like - it comes out to 12 holdings, which I weighted to mimic
the weightings in BITQ.
There were some stocks in the BITQ portfolio that weren’t available from M1 finance,
so I chose the biggest holdings I did have access to.
Again, I’m not too thrilled with this arrangement and I’m hoping it’s temporary, but I just
want to make sure I’m getting some Bitcoin exposure now until the optimal products become
available.
This is definitely the sloppiest part of my portfolio and I’m ready to simplify as soon
as I can.
Up next, we’ve got another 5% allocation, this time to renewable energy via the Invesco
WilderHill Clean Energy ETF, ticker PBW.
Not only is renewable energy becoming more affordable and more practical, but it’s
also becoming expected of the world as the dangers of climate change get more severe.
Most businesses are committing to renewable and carbon-neutral goals with targets anywhere
from 2030 to 2050.
Because of all of these factors, I think the energy industry is going to shift completely
in the coming decades, and I’m positioning my portfolio to benefit alongside the companies
that are responsible for this shift.
I did a whole video researching this idea a few months back, and selected PBW because
it was well diversified globally, across sectors and across market caps, and has a strategically
weighted portfolio of 48 stocks.
Admittedly, this is my worst performing holding yet, and I realize this is also a riskier
holding.
But again, that’s why I’m sticking with a 5% allocation.
Ultimately, I think renewable energy is a very long-term play, and I feel confident
holding PBW for at least the next 5-10 years as renewable energy becomes more prevalent.
Next, we’ve got my 15% REIT allocation, which is super simple.
I’ve got 10% of this allocated to VNQ, which is Vanguard's real estate index fund.
It’s extremely diversified, low cost and has a dividend yield of just over 3%.
I’ve got 5% of this allocated to VNQI, which is Vanguard’s international real estate
index fund and has similar benefits.
Something to highlight is that VNQI suspended its dividend during COVID, but I do expect
it to return in the future.
With VNQ and VNQI, I have exposure to the entire REIT market right in line with my goal
of diversifying about 30% of my holdings internationally.
And again, the dividends from REITs are a great feature of this diversification.
Next in the portfolio is a 20% allocation to the entire US stock market, using VTI,
Vanguards total market index fund.
A comparable choice here would be VOO or any other ETF that tracks the S&P500, as both
indexes perform almost identically.
However, since the S&P500 index is a little more concentrated and doesn’t include small
cap exposure, I like holding VTI and knowing I’m getting absolutely everything at once.
Plus the fund only has a .03% expense ratio so it’s practically free to hold.
Next is a 20% allocation to the entire international stock market, using VXUS, which is Vanguard’s
total international market index fund.
So VTI holds all US stocks, and VXUS holds everything else.
This gives me full exposure to international markets and boosts my international allocation
towards that 30% goal.
Quick side note, I thought about adding a small position in an emerging market ETF to
capture the growth potential in developing nations.
However, it turns out VXUS has 25% exposure to these emerging markets, so I’m getting
everything I could want out of emerging market exposure just by holding VXUS.
My last allocation, and I’m already bracing myself for some critical comments, is 35%
to Ark Invest funds.
30% of this is the flagship Innovation ETF, ARKK, and 5% of this is to ARKG, the fund
focused on genomics.
I know there are some people who are pretty set in their beliefs against Ark Invest, but
I believe they’re successfully identifying the technologies and companies that will change
our future.
There are undeniably parallels to high-flying actively managed funds that came crashing
down in the past, but I really think this time is different with Ark Invest.
We live in a very unique period where multiple transformative technologies are developing
simultaneously, and I think that means there’s a very real possibility that we’re about
to see innovation in our day-to-day lives like we’ve never seen before.
I’ve combed through Ark Invest’s strategies, beliefs, research and more, and I think investing
with innovation using the Ark funds is the way to go.
The flagship Ark fund gets me a little bit of everything, including some additional exposure
to Bitcoin and international stocks.
I have a slice of ArkG because it varies the most from the other Ark funds, and genomics
is believed to have some of the biggest potent growth in the coming years.
Cathie Wood states that their investment outlook is 5 years, so I’m prepared to lower my
allocation to Ark funds in the years that follow if it seems like the opportunity for
innovation has passed and it’s time to diversify back into the total market.
So that is my targeted portfolio, and here’s a quick overview if you want to take it all
in for a second.
With this allocation strategy, I feel confident throwing money into my Roth IRA every month
and just forgetting about it for a few years.
But as I said, I made one big mistake a couple months ago - and it probably cost me thousands.
I told you I want to avoid any trading in my Roth and stick to index funds and ETFs.
This is to eliminate the risk of picking individual stocks that underperform, and to discourage
myself from watching my portfolio everyday and trying to trade or beat the market.
But, I broke my own rule.
In late February, growth stocks started getting crushed, and I was putting all of my extra
cash into my standard brokerage account to take advantage.
But, it got to a certain point where I didn’t have any more cash, and stocks kept dropping.
I wanted to take advantage of the lower prices on my absolute favorite conviction stock,
STEM, a smart energy storage company.
So, I sold over half of my Roth IRA holdings and put that money into STEM shares.
I regretted this within days.
Stem continued dropping, and at one point, the money I traded in my Roth was down more
than 30%.
On the bright side, Stem has since recovered and I am back in the green on my trade.
However, since I sold my holdings, I also missed out on the growth of everything I sold
to buy Stem shares.
I sold out of my total market stock funds that did really well during the last few months.
I abandoned my allocation and diversification rules and traded into a single stock trying
to beat the market, I failed, and it cost me thousands in opportunity costs.
If I stuck to any of the common sense investing rules that are so simple to follow, my IRA
would be worth significantly more today.
Luckily, I only need to make that mistake once to learn my lesson, and I’m glad I
did it so early in my life.
Hopefully this is enough to help you avoid my mistake, but if not, let’s take a look
at how my portfolio stands today.
As you can see, Stem is now grossly overweight in my portfolio at nearly 50%.
I don’t want to lock in this mistake and trade shares away, because I still believe
in Stem long-term.
So, I’m just going to reduce my Stem share weighting to 1% and make it part of my 5%
exposure to renewable energy.
This means I won’t sell any shares, but I won’t be putting any other money into
it either.
Every additional deposit will go into all of my other funds to bring them up to my target
allocation.
As you can see, with the exception of my Ark allocations, I have quite a bit of catching
up to do to get back to my target allocations.
But I’ve learned my lesson, I finally have a strict asset allocation strategy laid out
that I will commit to following, and now I just have to keep investing money every month,
which as it turns out, might be the easy part.
Actually I’d be interested to hear your take if you think I’m making the wrong decision
by keeping my Stem shares.
I love Stem so I probably won’t change my mind regardless, but maybe I am just prolonging
my mistake by refusing to sell my shares and restoring my portfolio to proper diversification
as soon as possible.
Since I still have a small account, I don’t think it will make a huge difference long-term,
but I’d still enjoy hearing someone else’s thoughts.
And before we wrap up, I know I complained about some of the limited options on M1 Finance,
but it really is an excellent brokerage if you want to build a set it and forget it IRA.
There aren’t any fees at all, and the automated balancing and allocation features are super
helpful for sticking to your desired weightings over the long-term.
This video isn’t sponsored or anything, but if you want to open an account with them,
there’s a referral link in the description that currently gives you $30 for free when
you open and fund your account.
So check that out if you’re interested, but in any case, I appreciate you watching
and I hope to see you in the next video!