3 Fund Portfolio: How To Save For Retirement With Just Three Investments
Retirement planning can often feel like an unwanted experience of choice overload. Workplace (k)s typically serve up more than a dozen mutual funds you must choose from for your retirement investment portfolio. And if your retirement planning includes saving in an individual retirement account (IRA), you may have thousands of mutual funds at your fingertips.
Take a deep breath—you can get all the asset allocation and diversification you need with a three-fund portfolio. Yep, just three funds is all it takes to ace your retirement savings.
What Is a 3-Fund Portfolio?
A three-fund portfolio is a simple—yet smart—way to create a diversified retirement savings plan by focusing on stocks (one U.S. fund and one international) and bonds (one U.S. fund).
Why that ratio? Over time, stocks have delivered better returns than high-quality bonds and cash. The annualized return for large U.S. stocks dating back to is around %, adjusted for inflation. Meanwhile bonds, like year U.S. Treasury notes, for instance, have provided inflation-adjusted annualized returns of %, according to data compiled by New York University professor Aswath Damodaran.
Each of these far outpace cash’s long-term performance, which generally struggles to keep up with inflation. And adding in an international stock fund that includes companies in developed and emerging markets further diversifies your stock holdings while positioning you for growth potentially uncorrelated with the rest of the U.S. stock market.
But there’s a catch. (Of course.) While domestic and international stocks generally trend upwards, from time to time stocks fall in value. Owning some bonds along with stocks can be a great way to calm your investing nerves during inevitable dips and bear markets. When stocks are falling, quality bonds typically hold their ground—and may even rise in value.
In short, you can get the growth of stocks and the calming protection of bonds with a three-fund approach.
Why Should You Build a 3-Fund Portfolio?
A three-fund approach is a bit of a Goldilocks solution. It gives you most of the diversification of an all-in-one solution, like a target date fund, where all of the investments are chosen for you. But it also grants you more control over the investments you put your money in, which helps you craft an asset allocation that reflects your personal desired level of risk.
For example, if you are in your 20s or 30s, a target date fund tied to your expected retirement age will typically start you out with 90% invested in stocks. While that’s indeed smart in the abstract (you’ve got decades until retirement, so you definitely have plenty of time to ride out bear markets), it may make you too antsy during down periods. That’s where a personalized three-fund portfolio may come in handy.
On the flip side, you also need to think through if it continues to be a good fit once you hit your 50s, says Beau Henderson, founder of RichLife Advisors in Gainesville, Ga.
A target date fund’s composition typically increases its bond holdings as retirement nears. A target date fund for those retiring in likely has just 10% or so invested in bonds whereas one for those aiming for a retirement might have 40% or so riding on bonds.
“If 10 years out from retirement you review where you are at, and you are confident Social Security and a pension might cover most or all of your income needs in retirement, then maybe you don’t need the 40% or 50% bonds that are common in [target date funds] for people nearing retirement,” he says.
You could correct this discrepancy, then, with a riskier mix in a three-fund portfolio.
Three-Fund Portfolio Disadvantages
If you go the three-fund route, you need to stay on top of your overall portfolio and handle rebalancing to make sure your portfolio retains the right mix of stock and bond funds as the market waxes and wanes. (Rebalancing is built into target date funds; you don’t have to do anything.)
And while a three-fund portfolio offers solid asset allocation, you may be missing out on a few other asset classes that can deliver another layer of diversification, such as real estate or gold, or adding some diversification to your bond holdings by owning a mutual fund that invests in Treasury Inflation-Protected Securities (TIPS).
Still, a three-fund portfolio is a retirement-savings example of how not to let the pursuit of the perfect be the enemy of the good. Trying to build and watch over a portfolio with lots of moving pieces can be a chore. The three-fund approach gives you plenty of diversification and more control than a one-fund approach.
How to Build a 3-Fund Portfolio
Here’s how to save for retirement using the three-fund strategy:
Decide on Your Asset Allocation Mix
It’s up to you to decide what percentage of your money you want to invest in each of your three funds.
The first step is to decide how much overall you want to invest in stocks and how much in bonds. The younger you are, the more you typically want to rely on stocks for long-term retirement savings. In your 20s and 30s that generally translates to somewhere in the vicinity of 80% in stocks and 20% in bonds.
Chances are your workplace plan or the brokerage where you have your IRA has a free online tool to help you hash out the right asset allocation mix.
For the stock portion of your portfolio, you will need to make one more asset allocation choice: how much to invest in U.S. stocks and how much to allocate to international ones. Allan Roth, founder of Wealth Logic, a financial advisory firm in Colorado Springs, Co., makes the case for a three-fund portfolio in his book “How a Second Grader Beat Wall Street.” He suggests considering allocating two-thirds of your stock portfolio to U.S. stocks and one-third to international stocks.
Focus on Broad-Market Index Funds
“Your goal is to own the market, not beat the market,” says Henderson. Think that’s settling? It’s anything but. Morningstar’s annual review of active vs. passive funds shows that over the long term, very few actively managed funds, where professional investors handpick each investment, manage to do better than low-cost index funds that simply try to replicate the market’s overall performance.
With a three-fund approach, focus on index funds that take a broad-market approach. Look for “total” in a fund name. For example, the Vanguard Total Stock Market Index fund owns U.S. large caps, mid caps and small caps. That’s more diversified than the Vanguard Index fund that owns only the large caps in the S&P stock index.
There are also broad total market index international stock funds as well as “total” bond funds.
Keep Your Costs Low
Most mutual funds and ETFs charge an annual fee called an expense ratio. “Fees are the one thing that are totally in your control,” says Henderson. “It’s easy and important to use low-cost index funds.” The higher the fee, the less money you have available to grow and compound over time.
Be Sure to Rebalance
From time to time, you will need to check if the performance of your funds has caused your portfolio’s asset allocation to stray from your target. For example, after a strong run for stocks, you may find that your intended 80%/20% mix of stocks and bonds is now 90%/10%. You can get back to your desired asset allocation by selling shares of the fund that has grown too big and reinvesting shares in the fund(s) that are lighter than your target. You’ll need to perform similar maintenance as your asset allocation changes as you near your target retirement date.
Note: When you exchange shares within a retirement account—(k) or IRA—there is no tax due on your gains.
Alternatives to the 3-Fund Portfolio
If all that three-fund work caused your eyes to start glazing over, one fund, such as a target date fund, may be the right choice.
Or for younger investors who are sure they don’t need a slug of bonds for when stocks are tanking, Henderson says a two-fund portfolio that is divided between U.S. stocks and international stocks is a solid option.
That can also work for older investors who are confident that they can cover their retirement living expenses from guaranteed income sources such as Social Security and a pension and prefer to keep their retirement portfolio focused on long-term growth.
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- When choosing investments, think about how comfortable you are with risk.
- Make sure that the amount of any stocks, bonds, and short-term securities in your asset mix reflects your time frame for investing and the associated need for growth.
You've contributed to an IRA—congratulations. The next step is to invest that money—and give it the potential to grow. Fidelity believes one of the best ways to do that over the long term is by considering an appropriate amount to invest in a diversified portfolio of stock mutual funds, exchange-traded funds (ETFs), or individual stocks as you plan and implement an investment strategy that fits your time horizon, risk preferences, and financial circumstances.
As a general rule, the more time you have to save, the greater the percentage of your money you can consider allocating to stocks. For those closer to retirement, a healthy allocation to stocks may still be appropriate. These days retirement may last for decades, so the money will likely still need to grow for many years even after you retire.
It's important that the stock exposure you select matches your comfort with risk, your investment timeframe, and your financial situation.
How risk tolerance affects the amount allocated to stock
With creating your asset mix, you should feel comfortable that the ups and downs of the stock market won't undermine your ability to reach your long-term goals. That way you'll be less likely to panic and sell when stocks fall—because doing so can lock in losses and could make it harder to recover and reach your goals.
How much risk can you stomach? Take a look at the worst case market scenarios for the 4 different investment mixes shown below. During the worst market year since , the conservative portfolio would have lost the least—%, while the aggressive portfolio would have lost the most—%. The chart also shows how each investment mix performed over a long period of time, in different markets. The average return: % for the conservative vs. % for the aggressive mix.
Choose an investment mix you are comfortable with
Data source: Fidelity Investments and Morningstar Inc, (). Past performance is no guarantee of future results. Returns include the reinvestment of dividends and other earnings. This chart is for illustrative purposes only. It is not possible to invest directly in an index. Time periods for best and worst returns are based on calendar year. For information on the indexes used to construct this table, see Data Source in the footnotes below. The purpose of the target asset mixes is to show how target asset mixes may be created with different risk and return characteristics to help meet an investor’s goals. You should choose your own investments based on your particular objectives and situation. Be sure to review your decisions periodically to make sure they are still consistent with your goals.
How age affects how much to invest in stocks
Why every year counts
Hypothetical pretax growth of one IRA contribution
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This hypothetical example assumes the following: (1) one $6, IRA contribution made on January 1, (2) an annual rate of return of 7%, and (3) no taxes on any earnings within the IRA. The ending values do not reflect taxes, fees, or inflation. If they did, amounts would be lower. Earnings and pretax (deductible) contributions from a traditional IRA are subject to taxes when withdrawn. Earnings distributed from Roth IRAs are income tax free provided certain requirements are met. A distribution from a Roth IRA is tax-free and penalty-free, provided the 5-year aging requirement has been satisfied and one of the following conditions is met: age 59½, disability, qualified first-time home purchase, or death. IRA distributions before age 59½ may also be subject to a 10% penalty. Consider your current and anticipated investment horizon when making an investment decision, as the illustration may not reflect this. The assumed rate of return used in this example is not guaranteed. Investments that have the potential for a 7% annual rate of return also come with risk of loss.
Age can also be used as an initial guideline when determining how much to invest in stocks when you're investing for retirement. That's because the longer the money will be invested, the more time there is to ride out any market ups and downs. That could help realize the potential for growth in your investments, which may be an important factor in saving enough for retirement. In general, the younger you are, the heavier your investment mix could tilt toward stock—as much as you are comfortable with and fits with your time horizon, risk preferences, and financial circumstances. The chart shows how a $6, IRA investment could grow to $64, over 35 years.
All else equal, as you get closer to retirement, you may want to adjust your allocation. Being too aggressive could be risky as you have less time to recover from a market downturn. As a general rule, in the absence of changes to risk tolerance or financial situation, one's asset mix should become progressively more conservative as the investment horizon shortens. However, investing too conservatively could limit the growth potential of your money. So, it may make sense to gradually reduce the percentage of stocks in your portfolio, while increasing investments in bonds and short-term investments.
But don't forget that growth remains important even as you approach and then enter retirement—after all, your retirement could last 3 decades or more. But with retirement nearer, investors must balance that need for growth against the need to protect what they have saved.
To learn more about building an asset mix that fits you, read Viewpoints on Fidelity.com: How to start investing
How financial situation can affect how much to invest in stocks
If your goal is retirement in 20 years, your ability to take risk in a retirement account would be higher than in the account you use to pay your monthly bills. Your retirement account has time to recover from setbacks, and any immediate losses could be recovered. In your bill-paying account, a loss could very well jeopardize your ability to pay rent next month.
If the outlook for your financial situation seems uncertain, it can make sense to have a relatively lower allocation to stocks.
What kind of investor are you?
Don't have the time, expertise, or interest it would take to choose investments and maintain an appropriate mix of investments in your IRA? Consider a professionally managed target date or asset allocation fund.
Target date funds let an investor pick the fund with the target year closest to their expected retirement. The target date fund manager then selects, monitors, and adjusts the investment mix over time. Asset allocation funds can be another simple way to diversify your portfolio using a single fund. In these funds, the manager sets and maintains a fixed asset mix.
For those doing it on their own, a diversified mix of investments is important. That way, a portfolio isn't dependent on any one type of investment, although diversification does not ensure a profit or guarantee against loss. If you want to do it yourself, consider funds that hold a mix of investments in companies both big and small, from different parts of the world, and in different industries and sectors.
Low-fee investments that simply track the broad market through a benchmark index, may also be worth considering.
When saving for something really big, like retirement, it's important to get invested as soon as possible. That's because time is one of your biggest assets when investing for the long term.
Here are 3 ways to help get started when investing in an IRA.
- Use our tools.
Get an analysis of your current portfolio, assess your financial situation, and find ideas to help you create an appropriate investment strategy in our Planning & Guidance Center.
- Choose investments.
For those who want to invest in mutual funds or ETFs, there are a number of ways to choose.
- Search and compare funds with Mutual Funds Research.
- Get ideas with Fund Picks from Fidelity®.
- Search and compare ETFs.
- Let someone else do the work.
For those who prefer to have an investment professional manage an IRA, learn about Fidelity managed accounts.
Put your money to work
Across most investment time frames, investing for growth matters. The potential for growth in your investment mix can be vital to helping you save enough to live the life you want in retirement. Ultimately, the appropriate asset mix is one you can live with—one that reflects your risk tolerance, investment horizon, and financial situation.
The Best Roth IRA Investments
The best Roth IRA investments are the ones that can take advantage of the way the retirement vehicles are taxed. There are no upfront deductions on contributions, but your investments grow tax-free inside the account. And withdrawals in retirement? They're tax-free, too—even on the earnings.
To take full advantage of the Roth IRA's tax-sheltering properties, it's best to hold investments that would otherwise trigger substantial taxes. Investments with high growth potential, big dividends, or high levels of turnover are prime candidates.
- Some investments take better advantage of a Roth IRA's unique characteristics.
- Overall, the best investments for Roth IRAs are those that generate highly taxable income, be it dividends or interest, or short-term capital gains.
- Investments that offer significant long-term appreciation, like growth stocks, are also ideal for Roth IRAs.
- The Roth's tax sheltering characteristics are useful for real estate investments, but you'll need a self-directed Roth IRA for that.
- Tax-exempt assets and low-risk cash equivalents are wasted in a Roth IRA.
Roth IRA Investment Options
A Roth IRA can hold any financial asset that a traditional IRA holds. In fact, aside from life insurance and collectibles, Roth IRAs can hold just about any financial asset, period. However, when it comes to investing in Roth IRAs, not all assets are created equal.
Although they share the same tax-advantaged structure, Roth IRAs differ from the traditional variety in several important ways. The biggest difference: Roth IRA contributions are made with after-tax, not pre-tax, dollars. So you won't get an income tax deduction the year you make them. But you do get tax-free withdrawals in retirement.
Also, unlike traditional IRAs, you aren't obligated to take distributions at a certain age from a Roth IRA. With no required minimum distributions (RMDs), your account keeps growing if you don't need the money. And when the time comes, you can pass it on to your beneficiaries.
The unique characteristics of the Roth IRA mean that some investments suit it better than others. Below is a breakdown of the most common types of assets—and which types are the best to hold.
The size of assets held in Roth IRAs in , out of $ trillion in IRA accounts total.
Source: Investment Company Institute.
The Best Mutual Funds for Roth IRAs
Mutual funds offer simplicity, diversification, low expenses (in many cases), and professional management. They are the darlings of retirement investment accounts in general, and of Roth IRAs in particular. An estimated 18% of Roth IRAs are held at mutual fund companies.
When opting for mutual funds, the key is to go with actively managed funds, as opposed to those that just track an index (or passively managed funds). The rationale: Because these funds make frequent trades, they are apt to generate short-term capital gains.
These are taxed at a higher rate than long-term capital gains. Keeping them in a Roth IRA effectively shelters them, since earnings grow tax-free.
The Best Stocks for Roth IRAs
Individual stocks are another asset type commonly held by Roth IRA accounts. In fact, Roth IRA investors are more exposed to equities than their traditional IRA counterparts. Of course, the equity universe is huge. But the types of equities (and equity mutual funds) best-suited to a Roth fall into two basic categories: income-oriented stocks and growth stocks.
One is income-oriented stocks—common shares that pay high dividends, or preferred shares that pay a rich amount regularly. Typically, when you hold stocks in a non-retirement account, you pay taxes on any dividends you earn. Depending on whether they're qualified or nonqualified, the rate could be as high as your regular income rate.
But, as with the actively managed mutual funds mentioned above, holding these within a Roth shields them from that annual tax bite. In fact, as long as you obey the Roth withdrawal rules, you won’t ever pay tax on those dividends or any other earnings.
Growth stocks are small-cap and mid-cap companies that seem ripe for appreciation down the road. Normally, their serious growth would trigger a tax bite, albeit at lower long-term capital gains rates (usually 15%).
But it won't matter that these stocks are worth substantially more when you cash them in after retirement. If held in a Roth, you won't owe any taxes on them at all.
Remember, the whole strategy of the Roth IRA revolves around the assumption that your tax bracket will be higher later in life. Also, growth stocks can be volatile, so keeping them in a long-term retirement account that can withstand the ups and downs of the stock market over the long haul mitigates the risk.
Investors who trade equities frequently should also consider doing so from their Roth IRA. Doing so can shield any short-term profits and capital gains from taxes.
The Best Bonds for Roth IRAs
When they think of income-oriented assets, many investors think bonds. Interest-paying debt instruments have long been the go-to for an income-oriented stream. About 7% of Roth IRA balances are allocated to bonds and bond funds.
Corporate bonds and other high-yield debt are ideal for a Roth IRA. It's the same principle as with the high-dividend equities—shield the income—only more so. You can't invest interest payments back into a bond in the way you can reinvest a dividend back into shares of stock (a strategy to avoid taxes in regular accounts). The Roth's tax protection is thus even more valuable here when receiving cash flows from interest or dividends that would normally be subject to taxation in non-Roth accounts.
The Best ETFs for Roth IRAs
What about exchange traded funds (ETFs), that rapidly ascending rival to mutual funds? Certainly, these pooled asset baskets that trade like individual stocks can be sound investments. They offer diversification and good yields at much lower expense ratios than mutual funds.
The only caveat is that, because most are designed to track a particular market index, ETFs tend to be passively managed (that's how they keep the costs low). As a result, they invest infrequently, so you don't really need the Roth's tax-sheltering shell as much.
Still, it wouldn't hurt to have them in your account. Low annual fees and expenses—we're talking % to %—is not the worst idea in the world, when it comes to your rate of return.
Many ETFs are index funds, which aim to match the performance of a benchmark collection of securities, like the S&P There are indexes—and index funds—for nearly every market, asset class, and investment strategy.
As with investing in individual stocks, the ETFs to look for would be those that invest in high-growth or high-income equities.
The Best Real Estate for Roth IRAs
Individuals have two ways to invest in real estate:
- Indirectly, by owning securities that own property
- Directly, by owning property themselves
Indirect Real Estate Investments
Real estate investment trusts (REITs), publicly-traded portfolios of properties, are big income-producers, though they also offer capital appreciation. REITs invest in most kinds of real estate, including:
- Apartment buildings
- Cell towers
- Medical facilities
- Office buildings/office parks
- Shopping centers and malls
While most REITs focus on one type of property, some hold a variety in their portfolios.
REITs are required to pay at least 90% of their income—usually derived from rents—each year as dividends to their shareholders. Normally, these dividends are totally subject to taxes, at the ordinary-income rate. But not if they're held in a tax-sheltered Roth.
Direct Real Estate Investments
You can invest in real estate using REITs, or you can go straight to the source. It’s possible to own single-family homes, multiplex homes, apartments, condos, co-ops, and even land for a Roth IRA. But you'll need a self-directed IRA to do so.
To invest in actual property, your Roth must be a self-directed IRA. You’ll need an IRA custodian that specializes in these types of accounts.
There are very specific rules regarding real estate in an IRA. For example:
- You can’t claim personal deductions for property taxes, mortgage interest, depreciation, and other expenses related to the property.
- The IRA (not you) owns the real estate. All expenses and repairs must be paid with IRA funds. And you have to buy the property using funds from the account.
- You can’t maintain the property yourself (no sweat equity). You have to pay someone else, using IRA funds.
- You and your family can't benefit directly from the property—like using it as a residence, office, or vacation home.
Be sure to do your homework (or work with a financial advisor) to make sure you’re in compliance. Otherwise, you could lose any tax advantages associated with holding real estate in an IRA.
What Not to Invest in a Roth IRA
Since Roth IRAs offer a tax shelter, there's no point in putting tax-exempt assets in one. Case in point: municipal bonds or municipal bond funds.
Money market funds, CDs, and other low-risk, cash-equivalents investments are also ill-suited for a Roth, but for a different reason. What's to shelter in an asset that isn't generating much interest, to begin with? And the liquidity they offer is wasted in an account you aren't going to touch for years.
Annuities are more complicated cases. It depends on how soon you anticipate taking distributions from the Roth. Placing a tax-deferred annuity inside a tax-sheltered IRA on its face doesn’t make a lot of sense if you've decades to go before taking the payouts.
The advantage of a steady, guaranteed tax-free income stream at retirement, however, might justify this strategy—if, say, you're within five years of closing that office door.
Roth IRA Asset Allocation
In terms of how you should allocate assets, that depends on a range of factors, including your age. In general, younger investors have a long-term investment horizon. They would typically allocate more retirement assets to growth- and appreciation-oriented individual stocks or equity funds.
Conversely, those who are retired or close to retirement would typically have a higher allocation of their investments in bonds or income-oriented assets, like REITs or high-dividend equities.
Get Help From the Pros
If you don’t have the time, interest, or expertise to shop for and select investments for your IRA, you have several other options.
One is to put all your IRA money into a single target-date fund. These are designed to work toward the year you plan to retire, automatically rebalancing along the way. They’re named by the year you expect to retire. If that’s , for example, you would select a target-date fund, such as the Vanguard Target Retirement Fund (VFORX).
Another option is to use a robo-advisor. That’s a digital platform that builds and manages a portfolio or ETFs using algorithm-driven models. In most cases, you’ll pay a management fee of about %. However, some brokers such as Charles Schwab provide this service for free.
Finally, you can work with an investment professional who can manage your IRA for you. Many brokerages offer managed accounts. An annual advisory fee typically covers the ongoing management of your money, including investment selection, rebalancing, personal service, and support.
No matter which route you choose, find out ahead of time which fees you’ll have to pay—including expense ratios, commission fees, and account fees—and what they’ll cost you each year. Left unchecked, these fees could quickly erode your earnings, leaving your nest egg a lot lighter come retirement.
The Bottom Line
Overall, the best investments suited to Roth IRAs are those that:
- Generate high taxable income, be it dividends or interest
- Have high or frequent turnover, generating short-term capital gains
- Offer substantial growth/capital appreciation
These investments can truly take advantage of the way the IRS taxes income. And that means more money in your nest egg come retirement.
Here's the Best Way to Invest a Roth IRA in Your 20s
Q: I just rolled over a Roth (k) from my previous employer into a Roth IRA. How diversified should my Roth IRA investments be? How do I select the right balance being a year-old? – KC, New York, NY
A: First, good for you for reinvesting your retirement savings. Pulling money out of your (k) can do serious damage to your retirement prospects—and that's a common mistake that many people make, especially young investors, when they leave their employers. According to Vanguard, 29% of (k) investors overall and 35% of somethings cashed out their (k)s when switching jobs.
Cashing out triggers income taxes and a 10% penalty if you’re under 59 ½. And you lose years of growth when you drain a chunk of savings. Cash-outs can cut your retirement income by 27%, according to Aon Hewitt.
So you’re off to a good start by rolling that money into an IRA, says Brad Sullivan, a certified financial planner and senior vice president at Beverly Hills Wealth Management in California.
At your age, you have thirty or more years until retirement. With such a long-time horizon, you need to be focused on long-term growth, and the best way to achieve that goal is to invest heavily in stocks, says Sullivan. Over time, stocks outperform more conservative investments, as well as inflation. Since the s, large cap stocks have posted an average annual return of about 10% vs. 5% to 6% for bonds, while inflation clocked in at 3%.
Granted, stocks can deliver sharp losses along the way, but you have plenty of time to wait for the market to recover. A good starting point for setting your stock allocation, says Sullivan, is an old rule of thumb: subtract your age from and invest that percentage of your assets in stocks and the rest in bonds. For you, that would mean a 80%/20% mix of stocks and bonds.
But whether you should opt for that mix also depends on your tolerance for risk. If you get nervous during volatile times in the stock market, keeping a higher allocation in conservative investments such as bonds—perhaps 30%—may help you stay the course during bear markets. “You have to be comfortable with your asset allocation,” says Sullivan. “You don’t want to get so nervous that you pull your money out of the market when it is down.” For those who don’t sweat market downturns, 80% or 90% in stocks is fine, says Sullivan.
Diversification is also important. For the stock portion of your portfolio, Sullivan recommends about 70% in U.S. stocks and 30% in international stocks, with a mix of large, mid-sized and small cap equities. (For more portfolio help, try this asset allocation tool.)
All this might seem complicated, but it doesn’t have to be. You could put together a well-diversified portfolio with a few low-cost index options: A total stock market index fund for U.S. equities, a total international stock index fund and a total U.S. bond market fund. (Check out our Money 50 list of recommended funds and ETFs for candidates.)
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Another option is to invest your IRA in a target-date fund. You simply choose a fund that’s labeled with the year you plan to retire, and it will automatically adjust the mix of stocks, bonds and cash to maximize your return and minimize your risk as you get older.
That’s a strategy that more young people are embracing as target-date funds become more available in (k) plans. Among people in their 20s, one-third have retirement savings invested in target-date funds, according to the Employee Benefit Research Institute.
Keeping your investments in a Roth is also smart. The money you put into a Roth is withdrawn tax-free. What's more, you're likely to have a higher tax rate at retirement, which makes Roth IRAs especially beneficial for younger retirement savers.
Still, you can't beat a (k) for pumping up retirement savings. You can put away up to $18, a year in a (k) vs. just $5, in an IRA—plus, most plans offer an employer match. So don't hesitate to enroll, if you have another opportunity, especially if the plan offers a good menu of low-cost investments.
If that's the case, look into the possibility of a doing a "reverse rollover": transferring your Roth IRA into your new employer's (k), says Sullivan. About 70% of (k)s allow reverse rollovers, according to the Plan Sponsor Council of America, and a growing number offer a Roth (k), which could accept your Roth IRA. It will be easier to stay on top of your asset allocation if you've got all your retirement savings in one place.
Read next: This Is the Biggest Mistake People Make With Their IRAs
Portfolio example ira roth
In this article, we discuss the 10 best Roth IRA stocks to buy according to Reddit. If you want to skip our detailed analysis of these stocks, go directly to the 5 Best Roth IRA Stocks to Buy According to Reddit.
Roth IRA accounts have been an attractive savings vehicle for many Americans over the past few years, providing account holders with privileges and benefits not afforded to traditional accounts. For example, those who have invested in the account can expect tax-free growth and tax-free money withdrawals provided certain conditions are met. The true value of these accounts lies in their use as a retirement fund, incentivizing savings when young by stipulating a five-year no withdrawal rule for additional advantages.
On average, these accounts offer returns of seven to ten percent each year. Some of the factors influencing these returns, which can vary greatly, are risk, portfolio diversity, and the retirement timeline, among others. Billionaire Peter Thiel, who is one of the most recognizable names in the world of finance, recently made waves in the media as news outlets revealed how he had turned a small Roth IRA account into a multi-billion dollar entity over the course of just two decades, highlighting the potential these accounts offer provided investment choices are wise.
Non-profit investigative journalism house ProPublica, based in New York, released a report on June 24 detailing how Thiel had converted a Roth IRA account worth $2, in into a $5 billion one by , highlighting that Thiel would not be liable to pay tax on the money provided he did not withdraw money from the account till he reaches a previously stipulated approached retirement age. To put things into perspective, ProPublica underlined that an average Roth IRA account was worth only around $39, in
Thiel made the impossible possible through the use of investment acumen, buying up shares in his startup PayPal back in when they were still cheap, realizing the explosive growth potential they offered, and using the Roth IRA to shield the gains on these from taxes. Internet platforms like Reddit have been buzzing with Thiel-related mentions since the report was published. Retail investors, who comprise the majority of users on platforms like WallStreetBets, an investment-focused Reddit subgroup, all have their novel ideas to follow Thiel.
Some of the firms that these Redditors recommend as a Roth IRA investment include Tesla, Inc. (NASDAQ: TSLA), Apple Inc. (NASDAQ: AAPL), and Shopify Inc. (NYSE: SHOP), among others. It remains to be seen how well these stocks do in the long-term, given the stock volatility that is defining trading these days. The entire hedge fund industry is feeling the reverberations of the changing financial landscape. Its reputation has been tarnished in the last decade, during which its hedged returns couldn’t keep up with the unhedged returns of the market indices. On the other hand, Insider Monkey’s research was able to identify in advance a select group of hedge fund holdings that outperformed the S&P ETFs by more than percentage points since March Between March and February 26th our monthly newsletter’s stock picks returned %, vs. % for the SPY. Our stock picks outperformed the market by more than percentage points (see the details here). We were also able to identify in advance a select group of hedge fund holdings that significantly underperformed the market. We have been tracking and sharing the list of these stocks since February and they lost 13% through November 16th. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to. You can subscribe to our free newsletter on our homepage to receive our stories in your inbox.
Photo by Yiorgos Ntrahas on Unsplash
With this context in mind, here is our list of the 10 best Roth IRA stocks to buy according to Reddit. These were selected keeping in mind the number of mentions on Reddit forums, the returns offered on investments over the past year, and hedge fund sentiment around each.
Best Roth IRA Stocks to Buy According to Reddit
NIO Inc. (NYSE: NIO)
Number of Hedge Fund Holders: 28
NIO Inc. (NYSE: NIO) is an electric vehicle manufacturer based in China. It is placed tenth on our list of 10 best Roth IRA stocks to buy according to Reddit. The stock has offered investors returns exceeding % over the course of the past twelve months. In quarterly delivery results posted earlier this week, NIO revealed that it had delivered close to 22, vehicles in the second quarter of , an increase of over % compared to the second quarter of
On June 29, investment advisory Citi maintained a Buy rating on NIO Inc. (NYSE: NIO) stock, revising the price target to $72 from $58 on the back of expectations for strong delivery numbers for the second quarter of
At the end of the first quarter of , 28 hedge funds in the database of Insider Monkey held stakes worth $ billion in NIO Inc. (NYSE: NIO), down from 34 in the preceding quarter worth $ billion.
Just like Tesla, Inc. (NASDAQ: TSLA), Apple Inc. (NASDAQ: AAPL), and Shopify Inc. (NYSE: SHOP), NIO Inc. (NYSE: NIO) is one of the best Roth IRA stocks to buy according to Reddit.
In its Q2 investor letter, McLain Capital, an asset management firm, highlighted a few stocks and NIO Inc. (NYSE: NIO) was one of them. Here is what the fund said:
“Nio, Inc. (NIO): It’s stock up % since the beginning of June on no news, and one of our more troublesome short positions, the Chinese electric vehicle manufacturer is valued at a whopping $17bln on trailing revenue of only $bln. In , the business ran a % gross margin, a % EBITDA margin & burned ~$bln in cash in The stock has become one of the most popular stocks among retail traders with approximately , accounts holding the name just on the popular Robinhood trading platform.”
9. Plug Power Inc. (NASDAQ: PLUG)
Number of Hedge Fund Holders: 25
Plug Power Inc. (NASDAQ: PLUG) is ranked ninth on our list of 10 best Roth IRA stocks to buy according to Reddit. It is an energy company specializing in hydrogen fuel cell systems. The company’s shares have offered investors returns exceeding % over the course of the past year. In earnings results for the first quarter, posted on June 22, the firm missed market expectations for earnings per share but beat on revenue, reporting gross billings of $73 million.
On June 30, investment advisory RBC initiated coverage on Plug Power Inc. (NASDAQ: PLUG) stock with an Outperform rating and a price target of $ Joseph Spak, an analyst at the firm, said the valuation of the company was justified since it had a long runway for growth.
Out of the hedge funds being tracked by Insider Monkey, New York-based investment firm DE Shaw is a leading shareholder in Plug Power Inc. (NASDAQ: PLUG) with 12 million shares worth more than $ million.
Just like Tesla, Inc. (NASDAQ: TSLA), Apple Inc. (NASDAQ: AAPL), and Shopify Inc. (NYSE: SHOP), Plug Power Inc. (NASDAQ: PLUG) is one of the best Roth IRA stocks to buy according to Reddit.
In its Q2 investor letter, Massif Capital, an asset management firm, highlighted a few stocks and Plug Power Inc. (NASDAQ: PLUG) was one of them. Here is what the fund said:
“We also closed our short position in Plug Power this quarter as the market was subsumed with enthusiasm over their recent acquisitions, resulting in an almost 80% rally in the stock over ten trading days. Our decision to exit was painful at the time as we were forced to reconcile with a collective exuberance that was (and is, in our opinion) not grounded reality. In hindsight, it was the correct decision as we avoided most of its recent vertical trajectory.”
8. Teladoc Health, Inc. (NYSE: TDOC)
Number of Hedge Fund Holders: 42
Teladoc Health, Inc. (NYSE: TDOC) stock has returned 12% to investors over the past four weeks. It is placed eighth on our list of 10 best Roth IRA stocks to buy according to Reddit. The firm is a healthcare company that focuses on virtual care. Earlier this month, analysts at investment advisory Piper Sandler dismissed speculation around Teladoc stock being affected by recent news of Amazon, the e-commerce giant, expanding in the health sector.
On May 28, investment advisory Baird began coverage of Teladoc Health, Inc. (NYSE: TDOC) stock with a Neutral rating and a price target of $, indicating an upside potential of close to 9% for the firm and identifying drivers of growth like primary care potential.
At the end of the first quarter of , 42 hedge funds in the database of Insider Monkey held stakes worth $ billion in Teladoc Health, Inc. (NYSE: TDOC), down from 50 in the preceding quarter worth $ billion.
Just like Tesla, Inc. (NASDAQ: TSLA), Apple Inc. (NASDAQ: AAPL), and Shopify Inc. (NYSE: SHOP), Teladoc Health, Inc. (NYSE: TDOC) is one of the best Roth IRA stocks to buy according to Reddit.
In its Q4 investor letter, Carillon Tower Advisers, an asset management firm, highlighted a few stocks and Teladoc Health, Inc. (NYSE:
3 Investment Gurus Share Their Model Portfolios
How do some of the most respected investors on the planet think Americans should be investing their money? NPR talked to three about what a retirement portfolio should look like.
David Swensen Michael Marsland/Yale University hide caption
Chief Investment Officer, Yale University
Instead of just investing in U.S. stocks and bonds, Swensen advocates a broader range of asset classes. He suggests stocks from developed and emerging markets around the world. And he suggests owning real estate through a low-fee fund as a part of your portfolio. In addition to traditional U.S. Treasury bonds, he advises investors to own Treasury inflation-protected securities, or TIPS. In his sample portfolio, he says, some of these slices of the pie will likely rise and fall and rise again at different times and at different rates. So he says to rebalanceat least once a year to maintain your target allocation.
2. Pay the lowest fees possible
Fees can do terrible damage to your investment returns. Even in higher-risk, higher-return asset classes such as stocks you can only expect high-single digit or low double-digit returns over long periods of time. So if you end up paying 1 percent to a financial adviser, and then 1 percent to 2 percent on top of that in mutual fund fees and then adjust for inflation (2 percent to 3 percent a year), you're losing half of your returns or more, Swensen says. The odds, he says, are overwhelmingly in favor of index funds.
So Swensen says very-low-fee index funds make the most sense for individual investors. He says if you compare performance of higher-priced actively managed mutual funds to lower-cost index funds, "when you look at the results on an after-fee, after-tax basis over reasonably long periods of time," the odds, he says, are overwhelmingly in favor of index funds.
3. Adjust your portfolio as you age
When it comes to investing, Swensen says, "there is no such thing as one size fits all." His model portfolio is "well-diversified, equity-orientedfor long-term investorsand efficientin the sense that it is as good or better than other alternatives," he says. "So my model portfolio should serve most investors well."
Essentially, what Swensen is saying is that when you're investing for long periods of time — 20 or 30 years, for example — you are likely to make more money holding a sizable portion of your portfolio in stocks or other assets with a high expected rate of return. That's because historically, stocks offer greater returns than "safer" alternatives such as U.S. Treasury bonds over the long term. But in the short term, stocks tend to be much more volatile. So as people near retirement age, many investment advisers suggest shifting more assets to the "safer than stocks" category. If the stock market crashes and you need to be spending money out of your portfolio as income in retirement, you don't want to suddenly lose 20 or 30 percent of your savings and be forced to sell stocks at a low price. If you're younger and stocks crash, you can just hang tight and wait for the market to recover.
But it's not all about age. It's also about appetite for risk. "Risk tolerance is specific to each individual. Risk-averse investors may want to hold a combination of the model portfolio and cash, which will reduce overall risk," Swensen says. "As wealth increases, tolerance for risk may increase. As investors grow older, tolerance for risk may decrease. Each individual needs to find a portfolio that matches their risk preferences."
Runs Hewlett-Packard's pension and (k)
Gretchen Tai Courtesy of Gretchen Tai hide caption
1.Active management and fees
"Fees matter, so you should be careful what you choose to pay," Tai says. She says whether you go with active or passive management, try to keep the total fees you are paying in your portfolio at or below percent. That's half of 1 percent. Many financial advisers charge twice that — on top of any mutual fund fees you're paying. But Tai says she doesn't think most people need financial advisers.
"Many plan sponsors offer free investment education to their employees, and that's good place to start," Tai says. "Don't pay for things you can get for free." Other experts say advisers can be useful to help people stay the course and not, say, panic and sell all their stock after a market crash. But all of the top advisers and economists NPR interviewed said you don't want to overpay for a financial adviser.
2. Sample portfolio
Like Swensen, Tai advocates broader diversification than many individual investors often achieve.
3. Adjust your portfolio by age
Given the current interest rate environment, Tai believes that "a more flexible approach" to the traditional age-based rules to bond allocation might be more appropriate. So, Tai says her suggested portfolio is a good approach until you reach retirement age. At that point, she says, investors need to look at their nest egg: If it's big enough to live on along with Social Security, "then it's OK to reduce higher-risk assets such as stocks more quickly to 40 percent." If you haven't saved enough, the options aren't so good. "[You] might need to postpone retirement," she says.
Jack Bogle Courtesy of Vanguard hide caption
Vanguard Group founder
1. Buy a stock index fund and own your age in bonds.
Bogle says to invest through low-cost index funds. (He created the first one after all.) With an index fund you're not paying people on Wall Street to pick stocks for you. Instead, you basically "own all of corporate America," he says — at least, a small slice. And over time, he says, low-cost index mutual funds outperform the vast majority of actively managedmutual funds. Picking winners with stocks is very hard to do, and for ordinary Americans, it just costs too much to invest that way, he says.
"Cost turns out to be everything," Bogle says. "It's just what I've always called the 'relentless rules of humble arithmetic.' "
"Simplicity underlies the best investment strategies. Basic arithmetic works. Keep your investment expenses under control," he says. "Your net return is simply the gross return of your investment portfolio less the costs you incur [such as sales commissions, advisory fees, transaction costs]. Low costs make your task easier."
As for balancing risk and reward depending on your age, Bogle says:
"Let's start with the concept that when we're young, have few assets, are willing to take risks, and seek capital accumulation, we should emphasize common stocks," he says. "But as we age, our assets grow, we gradually become more risk averse, and increasingly seek income, we should emphasize bonds."
One rule-of-thumb is to begin with a bond position similar to our age — 20 percent (or less) in bonds in our 20s, 80 percent bonds in our 80s — and then make adjustments based on your personal circumstances.
Bogle says he's a fan of holding a mix of Vanguard's Intermediate- and Short-Term Bond Index Funds, though of course similar low-cost funds are available out on the market from other firms.
He also suggests investing a portion of your bond allocation in tax-exempt funds if taxes are a concern. For example, Bogle personally uses a mix of Vanguard's Limited-Term and Intermediate-Term Tax-Exempt Funds in his taxable accounts. If you're saving for retirement though in a pre-tax (k) account, this isn't a concern.
2. Factor in Social Security
Bogle says you can justify owning a larger portion of your assets in stocks if you consider that Social Security provides a revenue stream to you in retirement that's safe and stable, much like the Treasury bond category is in your investment portfolio. So he says his basic "own your age in bonds" approach is a good starting point.But if you're paying into Social Security with each paycheck, you can safely own more stock. So if you're 28 years old, you might decide to have, say, 10 or 20 percent in bonds and 80 or 90 percent in stock — depending on your risk tolerance.
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