Tag: jarrad morrow
The $65,000 Roth IRA Mistake To Avoid
Jason 0 Comments Retire Wealthy Retirement Planning
– I've seen too many of
you making some mistakes when it comes to investing
in your Roth IRA. One of them could cost you
$65,000 and the other one could cost you almost $500,000. You guys are seriously going
to make my beard turn more gray than it already is if
you don't knock it off. So let me show you what to watch out for, that way, you don't lose more money than you have to and
I can save a few bucks on hair dye for a couple more years. A Roth IRA is a self-directed
retirement account where you can contribute after
tax dollars to be invested. Since the money going in is taxed, the growth of your investments are not taxed and the money withdrawal from the account are never taxed either, as long as you don't try to pull out some of the money before the age of 59.5. There is no such thing
as a joint Roth IRA. So if you and your spouse
want to contribute to one, then you'll have to do it individually, hence the name Individual
Retirement Account.
If you both have enough
earned income separately, then you can each invest up to the $6500 limit for the year. If one of you works and the other doesn't, but you file a joint tax return, then the person working can, of course, contribute to a Roth IRA and
your spouse can contribute to a Spousal Roth IRA as well. Remember, these accounts are
owned by the individual person and on paper, not co-owned by both people. I want to try to encourage you to max out your Roth IRA every single year, if possible, because if you
don't do it for that year, then in the future you
cannot go back and contribute for a previous year once that time limit has passed. A Roth IRA is one of those accounts where I would bend over backwards to make sure that I can
put in the full amount allowed every single year.
In my order of operations for
what to do with your money, I have maxing out a Roth
IRA right after investing up to your employer match and HSA. That is how important
this type of account is. The good news with this
is that you actually have a timeframe of 16
months to contribute for each calendar year. So if we are in 2023
right now, then you have from January 1st, 2023, up until
when taxes need to be filed for that year to contribute,
which in this case, would be April 15th, 2024. That's how it is every single year, so ignore the actual dates in my example and pay more attention to the timeframes since the date taxes are due
will change by a few days from year to year. Most brokerages will ask
you which year you want to contribute to. For example, I personally
invest using M1 Finance, which you can check out down
in the description below, and also get a deposit bonus as well.
If I contributed to my Roth
IRA through them right now, then they would ask if I wanted the money to go towards 2022 or 2023, since at the time of recording this, we haven't hit the date
where taxes are due. This is great because it
gives you some extra time beyond the current year to
contribute Roth IRA money for that year. Before I tell you the next mistake that I see way too many people making, please help support my dog Molly by hitting that thumbs up
button and sharing this video with anyone you think it would help. Once you deposit money into your Roth IRA, there's one more extremely important step you need to do that I see a ton of people missing, and that is
actually investing the money.
I can't tell you how
many people I've talked to over the years who just put money into the account assuming
it would automatically grow, or knowing that they
needed to invest the money, but just forgetting to do
it because life happens, and things naturally slip out of our mind, only to check their account
balance years later, realizing that it hasn't grown in value because they didn't invest the money. Stop the nonsense here and
just set up auto investing within your investment account, and if you're waiting because you think that you can time the market
to buy in at a lower price, you can't, because it's
nearly impossible to do, so just to get the money
invested right now. If you know how you want to
invest the money, then great. If you don't, then I personally
like the two fund portfolio for people who are in
the accumulation phase of investing and in the
three fund portfolio for when you're closer to
retirement or in retirement.
I'll have a link to a
playlist then I made just for you where I teach you
about both of those portfolios down in the description below
and above my head as well. When you contribute to a Roth IRA, all of your money is not
locked up until 59.5. You can withdraw the
contributions that you've made before that age without paying a penalty, but you cannot withdraw any of
the gains within the account. For example, if you've contributed $6500 and the account has grown to $10,000, then you can withdraw
the $6500 contribution, but you cannot touch the $3500 gain without paying a penalty until 59.5. I've gotta interject for a second to give my personal opinion on this.
While withdrawing money
penalty-free is an option, I want to encourage you not to do this. To be brutally honest, I think that doing this
is one of the dumbest, most irresponsible, short-sighted
things that you can do. Withdrawing just $6500
worth of contributions would cost you $65,000 in
future investment growth. So when any money is
taken out of this account before retirement, think
about how it's actually going to cost you 7,800 Chipotle burritos, or 65 new Apple iPhones, or anything else that you would buy for that amount of money. And yes, I am fully aware
that you can do a penalty-free early withdrawal up to
$10,000 before the age of 59.5 for a first time home purchase. But this is just as stupid as withdrawing your contributions early
because that $10,000 is costing you over $100,000
in future investment growth when you pull that money out. Average annual home appreciation over the past 12 years has been 6.11%, and the US stock market
has returned 12.27%. Leave your money in the freaking Roth IRA and go earn that $10,000 that
you need to buy the home. Responsible investing takes time, like five or 10-plus years, and this money needs time to grow. The second you withdraw
any of your contributions, you are cutting down that tree before it even has a chance to grow fruit.
Once you withdraw
contributions from the past, you cannot replace that
money in the future. I get that emergencies happen in life, so that's why you need
to have money set aside in an emergency fund to
pay for those things. Do not, under 99.999% of circumstances, use your Roth IRA money for anything other than when you retire. One thing I see way too many people doing is investing in a
taxable brokerage account before they have their Roth
IRA maxed out for the year. This is a huge mistake from a tax savings
perspective for some of you because of how each account is taxed. With a Roth IRA, you invest with money
that's already been taxed, so the money can grow tax-free
and be withdrawn tax-free. With a taxable brokerage
account, you are paying taxes for the ongoing dividend
distributions every single year. Then you have to pay capital gains tax when you go to withdraw the money. Since the money within
a Roth IRA will grow and can be withdrawn tax-free, realistically, you want
this account to get as large as possible, but not at the expense of
your personal risk tolerance.
You should not take on
additional levels of risk by investing in more
risky, unprofitable stocks that random YouTubers have been pumping over the past few years or actively manage funds to
try to achieve higher returns. 99% of people, including
myself, cannot handle investing in something with a
high risk and potential, potential, high return. So don't even bother. The money in this account
is for retirement, so is it really worth it to risk that 60-year-old's financial wellbeing because you decided to gamble with their money right now? I doubt it.
Some of you might be over
the income limit to be able to contribute to a Roth IRA, or some of you will be at
that point in the future as your income grows. You can still contribute to a Roth IRA to take advantage of the tax-free growth by doing a backdoor Roth. To simply explain the process,
all you do is contribute to a traditional IRA. Do not invest the money yet. Then contact your brokerage
to have them convert the money to a Roth IRA. Now, I have done it with M1 Finance before and it was extremely easy. It only took I think two or three days for the money to get into my Roth IRA. Only do this if it makes sense based on your current tax rates
and future financial plans.
There's two things that you can do. if you are someone who thinks that you might be over the income limit, but you are not going to 100%
know until the year is over. Number one, you can
either wait until January of the following year,
like we talked about in one of the previous mistakes that
I mentioned, or number two, you can just contribute the
money to a traditional IRA, then do a backdoor Roth within
the year to get the money into the account so it can be invested. That way, if you are
over the income limit, you've already done the backdoor Roth. If you're under the income limit, no big deal 'cause you had to pay taxes on that money that was going
into the Roth IRA anyways. A question I get a lot is
whether or not you can contribute to a Roth IRA on different brokerages.
The simple answer is yes. This is how it would play out. You can contribute up to the max for one year
on, say, M1 Finance. Then you can decide to contribute up to the max on fidelity the next year. Then you can contribute up to the max on Vanguard the following year. So by the end of that third year, you would have three different Roth IRAs with three different brokerages, and there is no problem with that. You can take it one step further. If you decide, hey, out of these three, I actually like M1 finance
better than the other two, you can convert the
Roth IRAs with Fidelity and Vanguard into your
M1 Finance Roth IRA. You can also split up your contribution for the same year among
different brokerages. So if for this year you want
to say contribute $4,000 to an M1 Finance Roth IRA and the remaining $2,500
into a Fidelity Roth IRA, then you can do that without any problems.
The only thing you
cannot do is try to game the system by saying contributing $6500 into an M1 Finance Roth IRA and $6500 into a Roth IRA with another brokerage. You cannot exceed the maximum
amount allowed per year across all of your Roth IRAs on all of your brokerage accounts. Technically, you could do that since all of the brokerages aren't talking
to each other to keep track of what you are contributing, so you have to self-manage this. I would highly, highly recommend making sure
that you do not do this, whether it's on purpose or on accident. I don't know what the penalty is for this, but all I know is that you do
not want to get caught trying to defraud the government
in any way, shape, or form. Long-term investing is the name
of the game with a Roth IRA. This money is for when
you are in retirement, so make sure to take that into account when investing this money. No gambling it on stocks
that random YouTubers are promoting. I think the two or three fund portfolio is perfect for your Roth IRA, which you can learn more about
in these videos to your left.
There's a bunch of free stocks and resources down in
the description below to help with all of your personal finance and investing needs. I'll see you in the next one, friends, go..
Big Problem With Fidelity Index Funds – Zero Fee Funds Explained
Jason 0 Comments Retire Wealthy Retirement Planning
– Fidelity offers zero fee index funds. Can you believe it? They're such a kind,
privately held company that's willing to give
up a bunch of profit to help out the little guy
investor like you and me. – So you're telling me
there's a chance? Yeah. – Ah, not so fast. – What?!
– As with most things, there's a bit of a catch, and the Fidelity zero fee
index funds are no different. So, let's go through what you need to know about these things, then we'll stack up each one
to its fee based competitor. Before we get too deep into it, I need to say that I am by no means implying that you should
sell these index funds if you currently hold them. You could be investing in
much worse financial products, like anything that Cathie
Wood has her name attached to. I'm basically going to be giving you a peak behind the curtain of
these zero fee index funds to show you what isn't so
obvious on the surface, In 2018, Fidelity started offering four different index funds where they charge you $0 to own them.
These four funds consist of
a large cap, total US market, extended market and
international index fund. At first glance, this seems
like an odd thing to do, because they already offer
an S&P 500, total US market, extended market and
international index fund where they charge you to own them. Yes, the fees for these funds
are extremely cheap as it is. But by offering these zero fee funds, they're in direct
competition with themselves.
I can promise you they're not doing this out of
the goodness of their hearts. To help uncover why they're doing this we just have to follow the money, but not the money that they
don't make from these funds, the potential money that they could make in other areas of their business by offering you these zero fee funds. These funds are what you would consider to be a loss leader for Fidelity. Kind of like how Costco sells their rotisserie chickens for a loss to the tune of being out $30,000,000 to $40,000,000 per year. The goal for Costco, and
Fidelity in this case, is to get you into their ecosystem so that they can sell you on more profitable products and services. If you are already through
the doors of Costco to buy your unhealthy, corn-fed,
GMO, rotisserie chicken, then you're more likely
to buy additional items. If you are already investing
in Fidelity's zero fee funds, then you're more likely to use them first if you are looking for
a financial advisor, annuity, life insurance
or more expensive funds. This of course won't
work for every customer.
But the lost leader business model doesn't need to have a 100% success rate. They just need a small portion of people to buy these more expensive
products and services. Once Fidelity has you in the doors and investing into their funds, they lock you into
their umbrella even more by penalizing you if you wanna move to a
different investment platform. These Fidelity zero
fee funds are exclusive to their investing platform and cannot be bought on or transferred to any other platform. With their other fee based index funds, you can transfer those out of Fidelity and onto any other platform like Vanguard, Charles
Schwab or any of the others. They'll usually come with a transfer fee, but this is par for the
course no matter where you go and which fund you decide to move.
With these zero fee funds,
you have to sell them if you wanna move your
investment somewhere else, which means that you might
have to pay capital gains taxes if they're held within a
taxable investment account. It might not be a big
deal to you right now, but if for some reason
at a point in the future you become unhappy with
Fidelity, then you're screwed. Before I tell you my biggest issue with these zero fee funds, please help and support this channel, and my dog, Molly, who
actually just tore up her leg and had to get stitches, by
hitting that thumbs up button.
The word index fund
gets thrown around a lot by these large investment
institutions nowadays because of how successful
they've been over the years. At this point, a lot of people understand the power of investing in index funds. But not all index funds
are created equally, and it's not so obvious unless
you know what to look for. Technically, you could create your own custom stock market index. And if I wanted to create a
fund that tracks your index, then I could call it an index fund. The problem is that you are
most likely an unknown person with an unknown track record
and an unproven process. There's a couple levels of trust that need to exist
within this whole process between the financial index provider, the index fund and the investor. My fund needs to trust
your indexing process, and the potential investors within my fund needs to have some level of trust in how my fund attracts your index. There's a few different well-known and trusted
financial index providers that index fund creators like Fidelity, Vanguard and Charles Schwab pay a licensing fee to to create their fee based index funds.
The Fidelity zero fee index
funds are a lot different in that they don't want to
have to pay the licensing fee to these trusted index providers because they need to cut corners to reduce the cost to run their funds. Because if they're still
doing a bunch of work and you are not paying
them to do that work, they're gonna cut corners
wherever they can. But they still need to
track some sort of index to be able to call
themselves an index fund. To do that, Fidelity has created
their own internal index, which is what their zero fee funds track.
This might not seem like a big deal, but their indexing methods haven't been around for very long, which means that they are unproven. I'm also not sure how
I feel about Fidelity creating the index that
their zero fee funds track. Having an unassociated
third party index provider at least gives a little
bit of separation of power within the whole process. To show you why I'd prefer 75% of the fee based Fidelity index funds over the zero fee index funds, let's compare them against each other so I can show you the biggest differences. For the total market index we have the zero fee index fund FZROX and the comparable fee
based index fund FSKAX. The stock style for both are pretty close so there's really no issue there. Next, we can look at the
total holdings for each one. The zero fee fund holds 2,655 stocks, while the fee based fund holds 3,998. For me, I want my index funds, especially my total market index funds, to hold as many stocks as possible.
The zero fee fund fails to do this. Lastly, the portfolio turnover
for each is different. This is important to know because the higher portfolio turnover means more stocks are
being bought and sold which is going to cost you money. The zero fee fund is at 4%, while the fee based fund is at 3%. Not a huge difference, but for me, I prefer to keep
this as low as possible. I also like the option
of investing in the fund that charges 0.015% to track
a larger number of stocks, instead of only sampling 2,600 stocks like the zero fee fund does. For the large cap index, we have these zero fee index fund FNILX, and the comparable fee
based index fund FXAIX. The stock style for both of these are pretty darn close as well so there's nothing too concerning here. Since both of these are large cap only we see that the total
holdings are about the same, which it should be. For the portfolio turnover, we see that the Fidelity
S&P 500 index fund is at 2%, while the zero fee
large cap fund is at 5%.
I personally choose to
pay the extra 0.015% to hold the true S&P 500 index fund. We see the biggest divergence with the extended market index funds. For this comparison we have these zero fee index fund FZIPX and the fee based index fund FSMAX. As you can see, the stock
styles are way different. The stock style for FSMAX is more in the mid and small cap range with a tilt towards growth. FZIPX is more in these small cap stocks with a tilt towards value. The sector breakdown
for the fee based fund has more money going into technology, while the zero fee fund has more money going into
everything else except tech. Once again, the fee based
fund holds more stocks, which I like, at 3,703 of them, while the zero fee fund
only holds 2,143 stocks. The turnover ratios make me
sick just looking at them. 18% for the fee based fund
and 25% for the zero fund. I am not a huge fan of
any extended market funds, so I prefer to stay
away from both of these. The last zero fee fund that we have is the international index fund FZILX. We'd wanna compare it to the fee based international
index fund FSPSX.
Stock style for both
are basically identical. The sector exposure between them both are all over the place. So, I'll throw up a screenshot so you can pause the video
to see it for yourself. The holdings are a lot
different than you'd think. The zero fee fund holds 2,377 stocks, while the fee based fund
only holds 832 of them. One of the big reasons the
zero fee fund holds more stocks is because it encompasses both developed and emerging markets, while the fee based fund
excludes emerging market stocks and only focuses on developed market. Believe it or not, I kind of like the zero fee
international index fund a little bit more because I prefer developed
and emerging market stocks to get more diverse exposure. The only things I don't like about it is the 8% turnover ratio, as well as the fact that you're kind of stuck
in the Fidelity ecosystem if you hold these zero fee fund. Make sure to hit that thumbs up button to support the channel before you go. If you wanna see my preferred
Fidelity index funds or Vanguard ETFs that you can purchase on the Fidelity platform, then watch these videos to your left next.
I'll see you in the
next one, friends. Done..
The $65,000 Roth IRA Mistake To Avoid
Jason 0 Comments Retire Wealthy Retirement Planning
– I've seen too many of
you making some mistakes when it comes to investing
in your Roth IRA. One of them could cost you
$65,000 and the other one could cost you almost $500,000. You guys are seriously going
to make my beard turn more gray than it already is if
you don't knock it off. So let me show you what to watch out for, that way, you don't lose more money than you have to and
I can save a few bucks on hair dye for a couple more years.
A Roth IRA is a self-directed
retirement account where you can contribute after
tax dollars to be invested. Since the money going in is taxed, the growth of your investments are not taxed and the money withdrawal from the account are never taxed either, as long as you don't try to pull out some of the money before the age of 59.5. There is no such thing
as a joint Roth IRA. So if you and your spouse
want to contribute to one, then you'll have to do it individually, hence the name Individual
Retirement Account. If you both have enough
earned income separately, then you can each invest up to the $6500 limit for the year. If one of you works and the other doesn't, but you file a joint tax return, then the person working can, of course, contribute to a Roth IRA and
your spouse can contribute to a Spousal Roth IRA as well. Remember, these accounts are
owned by the individual person and on paper, not co-owned by both people.
I want to try to encourage you to max out your Roth IRA every single year, if possible, because if you
don't do it for that year, then in the future you
cannot go back and contribute for a previous year once that time limit has passed. A Roth IRA is one of those accounts where I would bend over backwards to make sure that I can
put in the full amount allowed every single year. In my order of operations for
what to do with your money, I have maxing out a Roth
IRA right after investing up to your employer match and HSA. That is how important
this type of account is. The good news with this
is that you actually have a timeframe of 16
months to contribute for each calendar year. So if we are in 2023
right now, then you have from January 1st, 2023, up until
when taxes need to be filed for that year to contribute,
which in this case, would be April 15th, 2024.
That's how it is every single year, so ignore the actual dates in my example and pay more attention to the timeframes since the date taxes are due
will change by a few days from year to year. Most brokerages will ask
you which year you want to contribute to. For example, I personally
invest using M1 Finance, which you can check out down
in the description below, and also get a deposit bonus as well. If I contributed to my Roth
IRA through them right now, then they would ask if I wanted the money to go towards 2022 or 2023, since at the time of recording this, we haven't hit the date
where taxes are due. This is great because it
gives you some extra time beyond the current year to
contribute Roth IRA money for that year.
Before I tell you the next mistake that I see way too many people making, please help support my dog Molly by hitting that thumbs up
button and sharing this video with anyone you think it would help. Once you deposit money into your Roth IRA, there's one more extremely important step you need to do that I see a ton of people missing, and that is
actually investing the money. I can't tell you how
many people I've talked to over the years who just put money into the account assuming
it would automatically grow, or knowing that they
needed to invest the money, but just forgetting to do
it because life happens, and things naturally slip out of our mind, only to check their account
balance years later, realizing that it hasn't grown in value because they didn't invest the money.
Stop the nonsense here and
just set up auto investing within your investment account, and if you're waiting because you think that you can time the market
to buy in at a lower price, you can't, because it's
nearly impossible to do, so just to get the money
invested right now. If you know how you want to
invest the money, then great. If you don't, then I personally
like the two fund portfolio for people who are in
the accumulation phase of investing and in the
three fund portfolio for when you're closer to
retirement or in retirement.
I'll have a link to a
playlist then I made just for you where I teach you
about both of those portfolios down in the description below
and above my head as well. When you contribute to a Roth IRA, all of your money is not
locked up until 59.5. You can withdraw the
contributions that you've made before that age without paying a penalty, but you cannot withdraw any of
the gains within the account. For example, if you've contributed $6500 and the account has grown to $10,000, then you can withdraw
the $6500 contribution, but you cannot touch the $3500 gain without paying a penalty until 59.5. I've gotta interject for a second to give my personal opinion on this. While withdrawing money
penalty-free is an option, I want to encourage you not to do this. To be brutally honest, I think that doing this
is one of the dumbest, most irresponsible, short-sighted
things that you can do.
Withdrawing just $6500
worth of contributions would cost you $65,000 in
future investment growth. So when any money is
taken out of this account before retirement, think
about how it's actually going to cost you 7,800 Chipotle burritos, or 65 new Apple iPhones, or anything else that you would buy for that amount of money. And yes, I am fully aware
that you can do a penalty-free early withdrawal up to
$10,000 before the age of 59.5 for a first time home purchase. But this is just as stupid as withdrawing your contributions early
because that $10,000 is costing you over $100,000
in future investment growth when you pull that money out. Average annual home appreciation over the past 12 years has been 6.11%, and the US stock market
has returned 12.27%. Leave your money in the freaking Roth IRA and go earn that $10,000 that
you need to buy the home. Responsible investing takes time, like five or 10-plus years, and this money needs time to grow.
The second you withdraw
any of your contributions, you are cutting down that tree before it even has a chance to grow fruit. Once you withdraw
contributions from the past, you cannot replace that
money in the future. I get that emergencies happen in life, so that's why you need
to have money set aside in an emergency fund to
pay for those things. Do not, under 99.999% of circumstances, use your Roth IRA money for anything other than when you retire. One thing I see way too many people doing is investing in a
taxable brokerage account before they have their Roth
IRA maxed out for the year.
This is a huge mistake from a tax savings
perspective for some of you because of how each account is taxed. With a Roth IRA, you invest with money
that's already been taxed, so the money can grow tax-free
and be withdrawn tax-free. With a taxable brokerage
account, you are paying taxes for the ongoing dividend
distributions every single year. Then you have to pay capital gains tax when you go to withdraw the money.
Since the money within
a Roth IRA will grow and can be withdrawn tax-free, realistically, you want
this account to get as large as possible, but not at the expense of
your personal risk tolerance. You should not take on
additional levels of risk by investing in more
risky, unprofitable stocks that random YouTubers have been pumping over the past few years or actively manage funds to
try to achieve higher returns. 99% of people, including
myself, cannot handle investing in something with a
high risk and potential, potential, high return. So don't even bother. The money in this account
is for retirement, so is it really worth it to risk that 60-year-old's financial wellbeing because you decided to gamble with their money right now? I doubt it. Some of you might be over
the income limit to be able to contribute to a Roth IRA, or some of you will be at
that point in the future as your income grows. You can still contribute to a Roth IRA to take advantage of the tax-free growth by doing a backdoor Roth. To simply explain the process,
all you do is contribute to a traditional IRA.
Do not invest the money yet. Then contact your brokerage
to have them convert the money to a Roth IRA. Now, I have done it with M1 Finance before and it was extremely easy. It only took I think two or three days for the money to get into my Roth IRA. Only do this if it makes sense based on your current tax rates
and future financial plans. There's two things that you can do. if you are someone who thinks that you might be over the income limit, but you are not going to 100%
know until the year is over. Number one, you can
either wait until January of the following year,
like we talked about in one of the previous mistakes that
I mentioned, or number two, you can just contribute the
money to a traditional IRA, then do a backdoor Roth within
the year to get the money into the account so it can be invested.
That way, if you are
over the income limit, you've already done the backdoor Roth. If you're under the income limit, no big deal 'cause you had to pay taxes on that money that was going
into the Roth IRA anyways. A question I get a lot is
whether or not you can contribute to a Roth IRA on different brokerages. The simple answer is yes. This is how it would play out. You can contribute up to the max for one year
on, say, M1 Finance.
Then you can decide to contribute up to the max on fidelity the next year. Then you can contribute up to the max on Vanguard the following year. So by the end of that third year, you would have three different Roth IRAs with three different brokerages, and there is no problem with that. You can take it one step further. If you decide, hey, out of these three, I actually like M1 finance
better than the other two, you can convert the
Roth IRAs with Fidelity and Vanguard into your
M1 Finance Roth IRA.
You can also split up your contribution for the same year among
different brokerages. So if for this year you want
to say contribute $4,000 to an M1 Finance Roth IRA and the remaining $2,500
into a Fidelity Roth IRA, then you can do that without any problems. The only thing you
cannot do is try to game the system by saying contributing $6500 into an M1 Finance Roth IRA and $6500 into a Roth IRA with another brokerage. You cannot exceed the maximum
amount allowed per year across all of your Roth IRAs on all of your brokerage accounts. Technically, you could do that since all of the brokerages aren't talking
to each other to keep track of what you are contributing, so you have to self-manage this. I would highly, highly recommend making sure
that you do not do this, whether it's on purpose or on accident. I don't know what the penalty is for this, but all I know is that you do
not want to get caught trying to defraud the government
in any way, shape, or form.
Long-term investing is the name
of the game with a Roth IRA. This money is for when
you are in retirement, so make sure to take that into account when investing this money. No gambling it on stocks
that random YouTubers are promoting. I think the two or three fund portfolio is perfect for your Roth IRA, which you can learn more about
in these videos to your left. There's a bunch of free stocks and resources down in
the description below to help with all of your personal finance and investing needs. I'll see you in the next one, friends, go..
5 Best Fidelity Index Funds To Buy and Hold Forever
Jason 0 Comments Retire Wealthy Retirement Planning
– In this video, I'm gonna go through the five best Fidelity funds to buy and hold forever. Now you're going to notice that all of the Fidelity zero index funds are missing from this top five, because they aren't really what they appear to be on the surface. Later in the video, I'll send you to another video I made uncovering their dirty little secret. First up is the Fidelity
500 Index Fund, FXIAX. There's only a few funds that I would consider foundational fund that most people should hold.
And if you prefer Fidelity funds, then this would be one of them. FXAIX tracks the S&P 500, which is made up of the
500 largest U.S. stocks, based on market cap. All a market cap is is the total number of outstanding shares multiplied by the price of the stock. These 500 stocks represent about 80% of the U.S. market cap. So these companies are what really moves the price of the overall stock market. To put it into perspective, there's about 4,300
publicly traded U.S. stocks. That means once we remove the largest 500, the remaining 3,800 only account for 20% of the total U.S. market cap. Everyone loves to talk
about the upside potential, and we'll cover that in just a minute. But I personally like to call out the downsides as well, because what you do during those times will have the biggest impact on your future returns.
Because the Fidelity 500 Fund has only been around since 2011, we'll be looking at the S&P 500 drawdowns to get a larger sample size. The largest drawdown started in 2007, due to the financial crisis. This fund would've seen a 51% drawdown, which means that if you
had $1 million invested, then at one point, it would've
been down to $490,000. This portion of your portfolio would've taken about three
and a half years to recover. The next largest drawdown was in 2000, where it had a drawdown of 45%, and took a little over
four years to recover. The third largest drawdown was in 2020, due to the health crisis, where that drawdown was 20%, and took four months to recover. A four-month recovery period is comical, so do not expect that
happening in the future, because they're not very common. Although past returns are irrelevant, because we are investing for the future, they're always good to be aware of. After taxes and sales, FXAIX has had a one-year return of 9.5%, three-year return of 15%, five-year return of 13%, and 10-year return of 12%. This is one of the lowest-cost
S&P 500 index funds, coming in at an expense
ration of .015% per year.
For everyone $1,000 invested, you're only paying 15 cents per year. These are everything with investing, because they eat into your returns, so keeping these as low as possible is extremely important. If you look at the sector breakdown, 28% of this fund is held in technology, followed by financial services, healthcare, and consumer cyclical. While some might say that
it's overweight in technology, that's only because those
companies are so dominant. This is the nice thing about a fund that tracks an index. There's no opinions about what should or shouldn't be added, because the market and
size of the business determines that for you. If the businesses in one sector start to shrink in size, then this fund will reflect that and replace those stocks
with what should be there.
The top 10 holdings are made
up of a ton of companies most of you recognize: Apple, Microsoft, Amazon, and Alphabet. These 10 make up about 30% of the total Fidelity 500 portfolio, which is perfectly fine because they're all solid companies. And when they eventually shrink in size, they'll automatically fall down this list and be replaced with
the next best company. The Fidelity 500 Index is for anyone who is looking to match the performance of those largest U.S. companies. Because they make up 80% of
the total U.S. market cap, they're what really moves the market. This index fund has a nice
mix of large cap stocks that are at the upper limit
between value and growth, with a leaning more towards growth stocks. This is good if you're looking to invest for portfolio growth with the safety that comes along with those larger, more stable companies. If we take a look at the stock weighting, 39% are large cap growth, 26% are large cap blend, and 19% are large cap value.
The downside of this fund is that you're missing out on those mid and smaller-cap stocks. While it's not a huge downside, it's still something to be aware of. If you are enjoying this video so far, then help support my dog
Mali and this channel by hitting that thumbs up button. If you're someone who
wants to take advantage of those 500 stocks, plus the additional thousands of stocks traded on the stock market, then you'd want to think about investing in the Fidelity Total
Market Index Fund, FSKAX.
Before we get too deep into it, I'll have to admit that I
am biased towards this fund and any other total U.S.
stock market index fund, so keep that in mind while I'm going through
this one specifically. FSKAX does exactly what the name says, invests in the total U.S. stock market. That means your money is invested among pretty much every
U.S.-based stock out there. At this point, it's made up of a little over 4,000 companies, and growing every year as more businesses go public. Since it holds that many stocks, your money is diversified among large-, mid, and small cap companies. When you invest in an
index fund like this, you're betting on the future
of the U.S. as a whole. I know there's a lot of
tinfoil hat people out there who are all doom and gloom
about the future of America. But as long as the businesses
behind these stocks are continuing to innovative,
make money, and grow, there's nothing to worry about. There are naturally going
to be a ton of losers among these 4,000 stocks, so that's why it can beneficial to place bets across the board by investing in this type of fund.
After taxes on distributions
and sale of fund shares, it's had a one-year return of 7%, three-year return of 14%, five-year return of 12%, and a 10-year return of almost 12%. This index fund is extremely low cost, coming in at an expense
ratio of .015% per year. That means for every $1,000 invested, you're only paying 15 cents per year. Looking at the sector breakdown of the Total Market Index Fund, technology is once again dominating at 27% of this fund. The rest of the breakdown is pretty similar to
the Fidelity 500 Fund, with healthcare at 13%, consumer discretionary at close to 12%, and financials at close to 12% as well. Within the top 10 of the Fidelity Total Market Index Fund, we see a ton of names that we recognize, the exact same companies
within this top 10 are in the top 10 of the
Fidelity 500 Fund as well.
The only difference is how much money is allocated to each company. With the Fidelity 500 Fund, 29% was in the top 10. Within the Fidelity
Total Market Index Fund, there's only about 25%
allocated to those top 10. A lot of this has to do with the fact that FSKAX has over 4,000 companies to spread your money across, while the 500 fund only
has to spread your money across, of course, 500 companies. The Fidelity Total Market Index Fund is for the person who wants this ability that comes with investing in
those biggest 500 companies while still gaining exposure
to those up-and-coming, mid, and small cap stocks as well. As you can see, this index fund is considered a blend between
value and growth stocks, with a tilt more towards growth.
While most of the weighting
is in the large cap area, we see that about 18% is in mid caps, and 9% is in small cap stocks. Just like the Fidelity 500 Index Fund, the Total Market Fund is one
of the foundational funds that should be a part
of everyone's portfolio in some form. I personally don't think it makes sense to hold both of them at the same time, because there is some portfolio overlap. Once you have your U.S.
investments covered, the next best fund is the Fidelity Total
International Index Fund, FTIHX. And this fund is currently made up of over 5,000 stocks.
The Fidelity Total
International Index Fund is just like the Total U.S. Index Fund, except the International fund holds stocks that exist
outside of the United States. This fund seeks to
provide investment results that match the total return of foreign developed and
emerging stock markets. FTIHX specifically tracks the MSCI All Country World Index ex U.S., which covers about 85% of global equities outside of the United States. By investing in FTIHX, your money is diversified among different countries, regions, sectors, and even currencies. Since this fund has only
been around since 2016, I looked at the drawdowns from a global ex U.S. stock portfolio. The largest drawdown started in 2007, of course, due to the financial crisis, and ended up down 58%. It took a little over
eight years to recovery. The next largest drawdown started in 2000 due to the dot com crash, where it dropped by 47%, and it took about two and
a half years to recover. The third largest drawdown was in 1990, where it saw a max drawdown of 31%, and took three years and
four months to recover. One-year returns are negative 1%, three-year returns are 6%, and five-year returns are 5%.
Since this is a newer fund, we don't have enough data to
get out to the 10-year returns. The expense for this
Total International Fund is one of the lowest in the industry, coming in at .06%. That means for every $1,000 invested, you'll only pay 60 cents per year. The sector breakdown is a lot different when we compare it to
those first two U.S. funds that we looked at. For this international fund, we can see that the
majority of the holdings are in financials at an
almost 19% allocation, followed by industrials, tech, then consumer discretionary. The top 10 holdings only
make up less than 10% of the overall holdings, which is night and day compared to the first two
U.S. funds that we looked at. For those U.S. funds,
if you don't remember, the top 10 made up about
30% of the holdings. I don't see an issue with this, because there's a little more risk when investing in companies outside of the United States. A lot of these companies
you probably recognize, but once we get out of these top 10, you probably don't recognize
a lot of the companies within this index fund.
When we look at region breakdown, about 70% of the money is diversified among European and
emerging market companies. The Fidelity Total International Index is perfect for someone who
wants to get that broad exposure to anything outside of the U.S. As with any stock-based index funds, there are many risks to be aware of. Those can range from political, economical, regulations, currency, and interest rate risk. The good news is that FTIHX is more concentrated in
stocks that are larger, with a blended mix
between value and growth. The Fidelity U.S. Bond Index Fund, FXNAX, is perfect for the conservative
side of your portfolio. At this point, it has about 8,400 holdings from 593 issuers. It tracks the Bloomberg
U.S. Aggregate Bond Index, which holds a mixture of U.S. treasuries, corporate bonds, and
mortgage-backed securities. Max drawdowns for bond index funds look drastically different
from stock-based index funds, which is exactly how things should look.
The largest drawdown
started at the end of 2020, where it was down 7.77%, and it still hasn't recovered. The second largest was in 2013, where it went down 3.87%, and took nine months to recover. The third largest was in 2016, where it was down 3.5%, and it took nine months to recover. For a one-year period, this fund is down 2.74%. Three-year returns are at .87%, five-returns are at 1.08%, and the 10-year return is at 1.21%. The Fidelity Total U.S. Bond Fund is extremely low cost at .025% per year. That means for every $1,000 invested, you're paying 25 cents. This bond index is mainly diversified among three different types of bonds. 39% is in U.S. treasuries, 27% are in mortgage-backed
security pass-through bonds, and 24% are in corporate bonds. If you are someone who is building a three-fund portfolio, then you're going to need a bond fund. Now this is a great index fund to fill the gap in that type of strategy.
Don't sleep on bonds, because they still serve the same purpose as they always have, to reduce volatility
within your portfolio. Now this is especially needed when you are getting closer to retirement. I'll have my three-fund portfolio video linked up down in the
description, above my head, and at the end of this video as well. Real estate has had great
returns over the years, so if you're looking to gain more exposure to that asset class on the
Fidelity investment platform, then the Fidelity Real
Estate Index Fund, FSRNX, is the one that I prefer. Time out real quick, because after reviewing
my notes on this one, I am calling an audible in
the middle of this recording to pull this one off of my top five list.
This fund isn't tracking
the underlying index as well as I thought it was. On top of that, the fund manager is trading the underlying stocks like it's an actively managed fund, which could result in higher trading costs for investors like you. The turnover rate is 53% for this fund. This basically means that
they're buying and selling off 53% of the holdings
within a 12-month period. Compare that to the Vanguard
Real Estate Index ATF, where the turnover is only 7%, and I cannot, with good conscience, recommend the Fidelity
Real Estate Index Fund. If you want a real estate
fund on the Fidelity platform, then go with the Vanguard version, VNQ. Be honest, I don't like any of the other Fidelity funds, either, so I don't have a replacement
for the Real Estate Fund. Don't forget to hit that
thumbs up button before you go. My video on why you should avoid the Fidelity zero fee index funds will be linked to your left and in the description of this video a couple of days after
this one's released.
If you prefer Vanguard funds that you can purchase on the
Fidelity investment platform, then, to your left, I'll also have my top five video on those..
The $65,000 Roth IRA Mistake To Avoid
Jason 0 Comments Retire Wealthy Retirement Planning
– I've seen too many of
you making some mistakes when it comes to investing
in your Roth IRA. One of them could cost you
$65,000 and the other one could cost you almost $500,000. You guys are seriously going
to make my beard turn more gray than it already is if
you don't knock it off. So let me show you what to watch out for, that way, you don't lose more money than you have to and
I can save a few bucks on hair dye for a couple more years. A Roth IRA is a self-directed
retirement account where you can contribute after
tax dollars to be invested. Since the money going in is taxed, the growth of your investments are not taxed and the money withdrawal from the account are never taxed either, as long as you don't try to pull out some of the money before the age of 59.5.
There is no such thing
as a joint Roth IRA. So if you and your spouse
want to contribute to one, then you'll have to do it individually, hence the name Individual
Retirement Account. If you both have enough
earned income separately, then you can each invest up to the $6500 limit for the year. If one of you works and the other doesn't, but you file a joint tax return, then the person working can, of course, contribute to a Roth IRA and
your spouse can contribute to a Spousal Roth IRA as well.
Remember, these accounts are
owned by the individual person and on paper, not co-owned by both people. I want to try to encourage you to max out your Roth IRA every single year, if possible, because if you
don't do it for that year, then in the future you
cannot go back and contribute for a previous year once that time limit has passed. A Roth IRA is one of those accounts where I would bend over backwards to make sure that I can
put in the full amount allowed every single year. In my order of operations for
what to do with your money, I have maxing out a Roth
IRA right after investing up to your employer match and HSA. That is how important
this type of account is. The good news with this
is that you actually have a timeframe of 16
months to contribute for each calendar year. So if we are in 2023
right now, then you have from January 1st, 2023, up until
when taxes need to be filed for that year to contribute,
which in this case, would be April 15th, 2024.
That's how it is every single year, so ignore the actual dates in my example and pay more attention to the timeframes since the date taxes are due
will change by a few days from year to year. Most brokerages will ask
you which year you want to contribute to. For example, I personally
invest using M1 Finance, which you can check out down
in the description below, and also get a deposit bonus as well. If I contributed to my Roth
IRA through them right now, then they would ask if I wanted the money to go towards 2022 or 2023, since at the time of recording this, we haven't hit the date
where taxes are due. This is great because it
gives you some extra time beyond the current year to
contribute Roth IRA money for that year. Before I tell you the next mistake that I see way too many people making, please help support my dog Molly by hitting that thumbs up
button and sharing this video with anyone you think it would help.
Once you deposit money into your Roth IRA, there's one more extremely important step you need to do that I see a ton of people missing, and that is
actually investing the money. I can't tell you how
many people I've talked to over the years who just put money into the account assuming
it would automatically grow, or knowing that they
needed to invest the money, but just forgetting to do
it because life happens, and things naturally slip out of our mind, only to check their account
balance years later, realizing that it hasn't grown in value because they didn't invest the money. Stop the nonsense here and
just set up auto investing within your investment account, and if you're waiting because you think that you can time the market
to buy in at a lower price, you can't, because it's
nearly impossible to do, so just to get the money
invested right now.
If you know how you want to
invest the money, then great. If you don't, then I personally
like the two fund portfolio for people who are in
the accumulation phase of investing and in the
three fund portfolio for when you're closer to
retirement or in retirement. I'll have a link to a
playlist then I made just for you where I teach you
about both of those portfolios down in the description below
and above my head as well.
When you contribute to a Roth IRA, all of your money is not
locked up until 59.5. You can withdraw the
contributions that you've made before that age without paying a penalty, but you cannot withdraw any of
the gains within the account. For example, if you've contributed $6500 and the account has grown to $10,000, then you can withdraw
the $6500 contribution, but you cannot touch the $3500 gain without paying a penalty until 59.5. I've gotta interject for a second to give my personal opinion on this. While withdrawing money
penalty-free is an option, I want to encourage you not to do this.
To be brutally honest, I think that doing this
is one of the dumbest, most irresponsible, short-sighted
things that you can do. Withdrawing just $6500
worth of contributions would cost you $65,000 in
future investment growth. So when any money is
taken out of this account before retirement, think
about how it's actually going to cost you 7,800 Chipotle burritos, or 65 new Apple iPhones, or anything else that you would buy for that amount of money. And yes, I am fully aware
that you can do a penalty-free early withdrawal up to
$10,000 before the age of 59.5 for a first time home purchase. But this is just as stupid as withdrawing your contributions early
because that $10,000 is costing you over $100,000
in future investment growth when you pull that money out. Average annual home appreciation over the past 12 years has been 6.11%, and the US stock market
has returned 12.27%.
Leave your money in the freaking Roth IRA and go earn that $10,000 that
you need to buy the home. Responsible investing takes time, like five or 10-plus years, and this money needs time to grow. The second you withdraw
any of your contributions, you are cutting down that tree before it even has a chance to grow fruit. Once you withdraw
contributions from the past, you cannot replace that
money in the future. I get that emergencies happen in life, so that's why you need
to have money set aside in an emergency fund to
pay for those things.
Do not, under 99.999% of circumstances, use your Roth IRA money for anything other than when you retire. One thing I see way too many people doing is investing in a
taxable brokerage account before they have their Roth
IRA maxed out for the year. This is a huge mistake from a tax savings
perspective for some of you because of how each account is taxed. With a Roth IRA, you invest with money
that's already been taxed, so the money can grow tax-free
and be withdrawn tax-free.
With a taxable brokerage
account, you are paying taxes for the ongoing dividend
distributions every single year. Then you have to pay capital gains tax when you go to withdraw the money. Since the money within
a Roth IRA will grow and can be withdrawn tax-free, realistically, you want
this account to get as large as possible, but not at the expense of
your personal risk tolerance. You should not take on
additional levels of risk by investing in more
risky, unprofitable stocks that random YouTubers have been pumping over the past few years or actively manage funds to
try to achieve higher returns.
99% of people, including
myself, cannot handle investing in something with a
high risk and potential, potential, high return. So don't even bother. The money in this account
is for retirement, so is it really worth it to risk that 60-year-old's financial wellbeing because you decided to gamble with their money right now? I doubt it. Some of you might be over
the income limit to be able to contribute to a Roth IRA, or some of you will be at
that point in the future as your income grows. You can still contribute to a Roth IRA to take advantage of the tax-free growth by doing a backdoor Roth.
To simply explain the process,
all you do is contribute to a traditional IRA. Do not invest the money yet. Then contact your brokerage
to have them convert the money to a Roth IRA. Now, I have done it with M1 Finance before and it was extremely easy. It only took I think two or three days for the money to get into my Roth IRA. Only do this if it makes sense based on your current tax rates
and future financial plans. There's two things that you can do. if you are someone who thinks that you might be over the income limit, but you are not going to 100%
know until the year is over. Number one, you can
either wait until January of the following year,
like we talked about in one of the previous mistakes that
I mentioned, or number two, you can just contribute the
money to a traditional IRA, then do a backdoor Roth within
the year to get the money into the account so it can be invested.
That way, if you are
over the income limit, you've already done the backdoor Roth. If you're under the income limit, no big deal 'cause you had to pay taxes on that money that was going
into the Roth IRA anyways. A question I get a lot is
whether or not you can contribute to a Roth IRA on different brokerages. The simple answer is yes. This is how it would play out. You can contribute up to the max for one year
on, say, M1 Finance. Then you can decide to contribute up to the max on fidelity the next year. Then you can contribute up to the max on Vanguard the following year. So by the end of that third year, you would have three different Roth IRAs with three different brokerages, and there is no problem with that.
You can take it one step further. If you decide, hey, out of these three, I actually like M1 finance
better than the other two, you can convert the
Roth IRAs with Fidelity and Vanguard into your
M1 Finance Roth IRA. You can also split up your contribution for the same year among
different brokerages. So if for this year you want
to say contribute $4,000 to an M1 Finance Roth IRA and the remaining $2,500
into a Fidelity Roth IRA, then you can do that without any problems.
The only thing you
cannot do is try to game the system by saying contributing $6500 into an M1 Finance Roth IRA and $6500 into a Roth IRA with another brokerage. You cannot exceed the maximum
amount allowed per year across all of your Roth IRAs on all of your brokerage accounts. Technically, you could do that since all of the brokerages aren't talking
to each other to keep track of what you are contributing, so you have to self-manage this.
I would highly, highly recommend making sure
that you do not do this, whether it's on purpose or on accident. I don't know what the penalty is for this, but all I know is that you do
not want to get caught trying to defraud the government
in any way, shape, or form. Long-term investing is the name
of the game with a Roth IRA. This money is for when
you are in retirement, so make sure to take that into account when investing this money. No gambling it on stocks
that random YouTubers are promoting. I think the two or three fund portfolio is perfect for your Roth IRA, which you can learn more about
in these videos to your left.
There's a bunch of free stocks and resources down in
the description below to help with all of your personal finance and investing needs. I'll see you in the next one, friends, go..
Why The 3 Fund Portfolio Is King
Jason 0 Comments Retire Wealthy Retirement Planning
– There's a very easy do it
yourself method to investing that not only out
performs the vast majority of retail and professional investors, but it also saves you a ton of time, energy and money along the way, and that investing method
is called, wait for it, the three fund portfolio. In this video I'll show you
what makes this way of investing so successful, the steps to properly create this portfolio in your account, which aren't always so obvious. I'll give you a list of the funds needed to create the portfolio, and then I'll show you the
actual historical returns based on a few back tested
three fund portfolios that I put together. If you get some value from this video, then please hit that thumbs up button. If not for me, then please
do it for my dog, Molly, because she's starring at me right now waiting for me to get done filming so that we can go outside and play. The three fund portfolio is made up of, you guessed it, three different funds. Nothing more and nothing less.
As with anything, you can
of course customize it beyond those three if you want, but the results may vary
based on how many shares of speculative investments that you decide to add beyond those three. The three types of funds consist of number one, a total U.S.
stock market index fund, which essentially holds every single stock traded on the stock market. We're talking small cap, mid cap, and large cap stocks, which makes up around
4,000 U.S.
Based companies. Number two, a total
international stock index fund that excludes stocks
that are headquartered within the United States. These are stocks that make up developed and emerging international economies, and are equal to roughly
7600 different stocks. And finally, a total U.S.
bond market index fund, which consists of a
mixture between maturities that are short,
intermediate and long term. In total, there's a little
over 10,000 of these.
When you own a total market index fund, you basically have money invested in essentially every single stock and bond traded on the stock market. Between these three funds, you'd hold a little more
than 21,500 different stocks and bonds across the world at the lowest cost possible. You're instantly diversifying your money by only having to worry about purchasing three different funds. As Jack Bogel, the guy
who introduced the first index fund to retail
investors like us once said "Why look for the needle," meaning those individual winning stocks, "when you can just buy
the whole haystack." By investing in these
three types of funds, there is zero overlap when it comes to stocks and bonds. Portfolio overlap happens when you invest in multiple funds that hold the exact same stocks, which in turn makes you less diversified than you might think you are. An easy way to remember this is when diversification decreases, your risk will increase.
Only having to own three
different investments sounds pretty simple, right? – Yep. – Like so simple that you
don't even need to pay one of those expensive
professional advisors- – What? – To pick your investments that will most likely underperform the market
in the long run, right? – Yep. – Did we just become best friends? – Do you wanna go do karate in the garage? – It's no secret that advisors
make money off of you, because that's how they get paid. And the amount that
they're paid comes directly from the returns of your investments. There's two main ways that
they make money off of you. Number one, by charging you
either an ongoing percentage based on your account balance, which I've seen on average is about 1%, or a flat fee no matter
the size of your account.
And/or number two, by
getting a cash kickback from the company that manages the fund they're having you invest in. I don't know if you caught that, but it sounds like there might be a little bit of a conflict of
interest for that one, right? Of course there is, but naturally they're gonna
try to hide that from you. If an investment advisor
told you to invest in the same three low cost
funds for the rest of your life, would you be willing to
pay them an ongoing 1% fee every single year? Would it be worth paying
them $20,000 in fees? Because if you invested $10,000 today, and paid them 1% per year for 30 years, then the total fees that you would pay from the annual fees plus
the opportunity cost, would add up to $19,800.
Now, let me put that in terms
that we can all understand. That equals $2,475 Chipotle burritos. Yes, you heard me correctly. You would pay more in fees
than that initial $10,000 that you invested. I don't know about you, but I wouldn't be willing to give up over 6.5 years worth of
daily Chipotle burritos for them to do something as simple as put me into a three fund portfolio. They wanna make it as
complicated as possible to make it appear like they're doing something
productive with your money by constantly fiddling with your portfolio to justify charging you 1%. If they knew that you knew that it was as easy as buying
three low cost index funds, then they'd be out of a job, which is why you most likely only hear this sort of good advice from a fiduciary financial advisor because they are legally obligated to act in your best interest. And the trust worthy ones
usually only charge a flat fee as opposed to an ongoing yearly fee. Not all non-fiduciary financial advisors are professional scumbags, but we do have to acknowledge the fact that their incentives aren't aligned with helping you make the
best investment decisions.
Investing in a three fund portfolio reduces the amount of time that you need to spend with
and pay a financial advisor whose goals aren't aligned with yours. But avoiding a shotty advisor isn't the only reason to
use a three fund portfolio. It's also a good way to avoid the risk that comes from an active fund manager that's handling how money's invested within a mutual fund that you invest in. Low cost total stock market index funds held within a three fund portfolio are passively managed funds, which means that they funds managers aren't choosing what
to buy, sell and hold.
Actively managed funds on the other hand, are run by people who
are choosing which stocks to buy, sell and hold. To successfully pick the right stock combo to outperform a basic total
stock market index fund, these fund managers need
to have some level of skill to achieve that out performance. But time after time the data shows that it's nearly impossible
to successfully do this over long periods of time. The hot fund manager
everyone talks about today turns out to be the loser of tomorrow that everyone eventually forgets about. In a paper published in
the journal of finance called luck versus skill in the cross section
of mutual fund returns, Fama and French found
that "On a practical level "our results on long term performance "say that true out performance "and net returns to investors "is negative for most if
not all active funds." In the paper they did admit that when returns are
measured before costs and expense ratios there
is stronger evidence of manager skill, but this is irrelevant though because you're not
getting into these funds without paying a fee.
It's like saying I have this
awesome new electric car but there's nowhere for
me to charge the thing so I can't really turn it on and drive it. All I can do is look at it. – Look at that, that's nice and shiny. – Which brings up another advantage that the three fund portfolio has. The three index funds
that make up the portfolio are extremely low cost. The price for each can
vary from fund to fund, which we'll cover in just a minute, but compared to most
other funds out there, they're the lowest since
they're passively managed. For example, the Vanguard ETF versions have an expense ratio of 0.03%, 0.08% and 0.035%.
That means for every $10,000 invested you're paying an expense of $3, $8 and $3.50 per year. A study from the Financial
Research Corporation called Predicting Mutual Fund Performance set out to determine
if there were any ways to predict the future
performance of a mutual fund. They tested 10 different predictors like past performance,
morning star ratings, expenses, turn over, manager tenure, asset size and a few more things. They came to the conclusion
that the best way to reliably predict the
future performance of funds was by looking at the expense ratio and nothing else.
They call a favorable expense ratio an exceptional predictor for bonds, and a good predictor for stock funds. Based on this research, if you wanna pick a successful fund, then ignore everything else, and just look for the one with the lowest expense ratio. And lucky for the three fund portfolio, those three total stock market index funds are about as low cost as they get. Hang tight because I did
all of the legwork for you by putting together a list of the exact tickers
that you might wanna use. I'll cover those in just a minute. It was cold in here, and now it's hot, so the jacket had to come off. When it's all said and done, the biggest selling point of a three fund portfolio
is that it's just easy.
Literally dummy proof. Contributing money to
your investment account on a regular basis, and spreading that money among
only three funds is easy. Rebalancing once per year
across only three funds is easy. When it comes to withdrawing
money when you're older, you only have to pick between
three funds to sell off, which is easy. When choosing what to invest in, you only have three funds to worry about, which is easy. Investing isn't complicated at all, but for some reason we
like to make it out to be more than it actually is. There is zero correlation between spending a bunch of time trying to pick stocks or mutual funds, or spending a bunch of
money on an advisor, and an increase in your
investment returns. Successful investing has more
to do with your psychology than anything. Stick with the three
fund portfolio process, and get on with living your life because the returns will
take care of themselves. The first step in building
your three fund portfolio will be to choose the three
funds that you'd wanna use. Here's a list of the exact
funds that you'd wanna hold deponing on which investing
platform that you use.
All you do is choose one
from the total U.S. funds, one of the total international funds, and one of the total U.S. bond funds. Side note, if you're
building this portfolio within a 401k, then you might not have access to a total
U.S. stock market fund. Now if that's the case, then you should have access to some sort of S&P 500 fund, which you can substitute in its place. You don't have to, but I'd suggest choosing
funds from the same row just to make things a lot easier for you.
As you can see, all
the funds are exclusive to their respective investing platforms except for the Vanguard ETF versions. Those Vanguard ETF's can be purchased on any investment platform, which is why they're my number one choice. To the far left, you can also see that I've ranked each three fund mix. I did that because the more
that I looked into each one, the more I realized that they
are not all created equally. Even though the expense
ratios for each fund within a category is
going to be different, they're not far off enough
to where I'd steer you away from any of them.
The issue I have is that
when the name of a fund says total U.S. stock market index, I would assume that the fund would hold literally every
single stock on the U.S. market. The same goes for the total international and total bond index as well. But the more I started
to look into each one, the more I realized that
that's far from accurate. Most of these funds do not actually hold, quote, unquote, everything. Here's the same list, and next to each ticker symbol I have how many stocks or bonds are held within each one. Based on this info, the only true U.S.
Stock,
international stock, and bond funds are the
ones offered by Vanguard. That's not to say that you
should avoid any of the others, but it's something to be aware of. The returns will most likely be pretty close between all of them, but if you wanna get the closest return to the market as possible, then go with the Vanguard funds. Once again, the good news is
that with the Vanguard ETFs, they can be purchased on any
investment platform out there. The next step will be to
choose an asset allocation. Meaning out of 100%, how
much should go towards each of the three funds. This is quite possibly the
most important decision that you'll have to
make, so pay attention, because it's going to have a direct impact on your expected return and risk level. The more risk you wanna take, for example, the more stocks and less bonds that you wanna hold, the higher expected return. The inverse is also true. So the less risk that you wanna take, i.e., the more bonds and less stocks, the lower expected return. Here's a chart I put together showing you how different stock and bond allocations would have performed over the past 34 years.
On the first line, the 0% stock and 100% bond allocation would have only netted you an average of 5.73% annual return. During the worst year, you would have only lost 2.66%, with a max draw down of 5.96%. On the last line, I tested a 100% stock and 0% bond allocation for 34 years. It gave us an average annual return of basically 10%. But, and this is a big but, you would have had to been able to handle a worst year
return of negative 38%, and a max draw down of negative 52%. That means that if you had
a million dollar portfolio, and you were 100% in stocks, that at one point you would have been down $520,000, and your three fund portfolio
would be worth $480,000. Yes, of course your investments
eventually recovered, but you need to ask yourself if you could handle that kind
of draw down on your portfolio and not panic sell. That point when the portfolio was down 52% was the housing market crash, which started towards the end of 2007. There were a lot of
unknowns during that time. And looking back on it now, we know how things played out. But if you were in the middle of it, then you had zero clue if the whole financial
system was going to crash.
To make things even worse, your portfolio during that time would have been under water for a little over five
years and two months. Let me say that again in a different way. It would have taken your portfolio 1,885 days to fully recover from that $520,000 loss. So you need to ask yourself
could you handle not selling and continuing to invest during that time if you were invested in 100% stocks, because to get that 10%
average annual return over those 34 years, you would have had to of not sold, and continued to invest
money every single month, even when it looked like
there wasn't any light at the end of that tunnel.
That's one of the prices
that you have to pay for that higher average annual return. Always keep that in mind. And I didn't even put in here data of other times it crashed too because that wasn't the only time. There was another time
where I think it was down 43% or 48% as well. Based on the odds and history, we know that it's likely
your portfolio will tank, potentially like that, at some point between now and when you disappear from this earth.
If you want your money to
grow in a meaningful way, then you have to have a decent amount of your money invested into stocks, which means that times like these are going to hurt no matter what. If you don't think that you can handle huge swings like that, but still wanna give your money a fighting chance to grow, then start with a five,
10 or 20% bond allocation within your three fund portfolio. You're also going to
wanna continue investing even when times look really, really ugly in the economy and the stock market. When it comes to how much to put towards international stocks, this is a tricky one that's been debated so many times. And because of that I
refer back to Jack Bogel, the founder of Vanguard on this one. For a long time he was completely against allocating any money towards
international stocks. His thought process was
that if you already own a total U.S. stock market index, then you naturally have exposure
to international markets because a lot of those corporations do a ton of business overseas. But as time went on he changed
his stance a little bit.
He ended up saying that he would be fine if someone held anywhere between 0% and 20% of their portfolio in international stocks. So do what you want with that info. If you're really not sure, then start out with something
like 10% in international, and then adjust it up or down from there. When it comes to
rebalancing your portfolio to get your allocations back
to where they should be, I would only plan on
doing that once per year. Don't worry about doing
it any more than that. One of my favorite investing
platforms that I use, and I love that makes the whole three fund portfolio investing a lot easier is M1 Finance.
I'll have a link in the description of this video to check them out, and also get a free $30 from them. Now it's time to implement
this strategy for yourself. If you have any additional questions beyond what I've covered so far, please leave them down
in the comments below, and I will try to answer every
single one of them for you. But there's two things that I really need to
stress to you though.
Number one, it is extremely important to invest money into
this type of portfolio on a regular basis. Consistency is key. The returns I showed you, are all what happened in the past, and do not give us any indication of how things will play out in the future. For all we know, the returns for everything going forward might be lower. Now if that's the case, then the best thing that you can do is to shove as much money as possible into those investments on a regular basis.
The returns on a 100% stock portfolio might only net you an annual return of 5% as opposed to that 10% that we saw. But I would rather be
earning 5% on a portfolio of $800,000 than one
that's only worth $400,000 because I wasn't investing
on a consistent basis. And number two, there's
going to come a time, most likely multiple times, when things look very dark
and grim within the world, the economy and the stock market. I am talking really, really ugly. Kind of like when we were in the middle of the housing market crash of 2008.
I need you to ignore all of that noise, continue to invest, stay optimistic, don't
fiddle with this portfolio, and stay the course. Corrections and bear
markets will come and go. But I can promise you one thing, if your three fund portfolio is crashing, then everyone else's
most likely are as well. But the only people
who actually lose money are the ones who sell or start messing with their
portfolios during that time because they're the ones who
are locking in their losses by doing those things.
I've met a few people who
sold their investments at the bottom of the housing market crash, and still haven't fully put their money back into the market. Now those people had to push
out their retirement dates another 10 and 15 years because
of that panicked decision. Be sure to hit that thumbs up button before you go. Check out the description
for more resources and playlists to help
with all of your personal finance and investing needs. I'll see you in the next one friends. Done..
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