Welcome back to the next edition of “Invest along with me!”. If this is your first time visiting this website, be sure to check out the following posts first:
Last week, I showed you how I funded my IRA. This week, I’ll show you how I buy stocks/assets and which stocks/assets I buy in my IRA. Before we begin, however, we need to talk about asset allocation because that’s a big factor in deciding what to buy.
What is asset allocation?
Quite simply, it’s how you divide your investment portfolio up among assets like stocks, bonds, and cash. Asset allocation is probably the most important factor in determining your portfolio’s short- and long-term risks and returns. The process of determining your asset allocation is based largely on two things: 1) your risk tolerance and 2) your time horizon. I’ve emphasized “your” here because asset allocation is very personal. You have to know yourself and be honest with yourself. If you have a portfolio that consists of 100% stocks, you’re aiming for very high returns, but your risks are also very high. Would you be able to stomach a 50% drop in your portfolio if the market went south? Would you be able to sleep well at night? If you won’t, then you have the wrong asset allocation. The right asset allocation will be a mix of assets that has the highest probability of meeting your goal at a level of risk you can live with.
Sample asset allocations
Here are some allocation models from Vanguard with historical risks and returns:
My Asset Allocation
My current asset allocation is 80% stocks and 20% bonds because I am seeking growth in my portfolio. Within the stocks category, my asset allocation is further broken out as follows:
60% VTI (U.S. stocks)
16% VEU (International stocks, excluding U.S. stocks)
4% VSS (International small cap)
This gives me broad diversification in U.S. and international stocks.
My asset allocation is based on my experience, my risk tolerance, and the fact that I am young (36) and will have time to recover from any market downturns. As I get older and can tolerate less volatility in my portfolio, my asset allocation will likely shift towards 60% stocks and 40% bonds. Remember that asset allocation is very personal. What works for me might not work for you.
How to determine your asset allocation
If you don’t know what your asset allocation is, there are a number of online questionnaires that can help you figure out the right asset allocation for your investment goals. The one from Vanguard can be located here (you don’t need to have an account with Vanguard to use it): https://personal.vanguard.com/us/FundsInvQuestionnaire
Once you know your asset allocation, you have a plan for investing.
From there, it’s just a matter of calculating how much to allocate towards each fund depending on how much you have to invest. I’ve created a simple Excel calculator to help me calculate this. You can access this free calculator here (you will need to save a copy so you can make edits to the spreadsheet).
Now it’s just a matter of logging on to Vanguard to execute these purchases. Here is the step-by-step guide to do that in Vanguard:
1. Log on to Vanguard at https://investor.vanguard.com/my-account/log-on.
2. Once you are logged on, hover over “My Accounts” then click on “Balances & holdings”.
3. The balances from your IRA and/or Roth IRA will appear. Click on the “Buy and sell” link, then select “Trade Vanguard ETFs (and non-Vanguard ETFs).
4. Make sure the correct account is selected. Select “Buy” for “Transaction type”. Enter the stock symbol and the number of shares. Select “Market” for the “Order type” then click on “CONTINUE”. You will have another chance to review the transaction on the “Review and submit” page that pops up next. It’s not pictured below, but when you get to that page, review the transaction to make sure everything is correct, then click on “SUBMIT” at the bottom.
5. If this is your first purchase for your IRA/Roth IRA account, Vanguard will ask how you would like your account documents delivered. I like to have them sent to my email (to save some trees) so I chose the first option. Select your preferred delivery method, check off “I have read, understand, and agree to the terms of the consent agreement for electronic delivery”, then click on “CONTINUE” at the bottom.
6. A summary page will appear. Click on “Trade Vanguard ETFs (and non-Vanguard ETFs)” to make your next purchase. You will repeat the process for the other fund purchases.
7. Here we are repeating the process, but we’re buying VTI now.
8. Review and submit the transaction.
9. Click on “Trade Vanguard ETFs (and non-Vanguard ETFs)” again for the next purchase.
10. Repeat the process to buy VEU.
11. Click on “Trade Vanguard ETFs (and non-Vanguard ETFs)” again for the next purchase.
12. Repeat the process to buy VSS.
And that’s it! Below “Account Information” you will see a summary of all of the transactions that took place.
In the next post, we’ll talk about rebalancing and portfolio maintenance.
If you have any questions, just leave a comment below.