Our 2018 Investment Plan

Our 2018 Investment Plan

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As we continue through our first purposeful year of FIRE planning, we are sharing some high level thoughts about our investment plan for this year.

Personal Capital

We started using Personal Capital (review here) to help us keep track of our income, expenses and net worth. It has good dashboards for tracking your asset allocation and net worth. If you’re looking for a better way to stay organized, sign up and give it a try.

Traditional 401(k) Plan

The 401(k) maximums went up in 2018 from $18,000 to $18,500. We each plan to max out contributions in 2018.

  • QL has her 401(k) invested in two Vanguard funds, one large-cap and one small-cap
  • Tran has his 401(k) invested in a Vanguard S&P 500 index fund



Roth IRA

We will be funding a backdoor Roth IRA for QL. She has a small IRA from her first job, so we’ll pay taxes on that and work that into the mix. We’ll post more details about the steps for doing so once we have completed it in the coming weeks.

When we retire, the contributions (but not the gains) will be available to us before 59.5, tax free.

I will not be doing the backdoor Roth IRA as I have an IRA balance of ~$170,000. If I were to fund $5,500 in a Roth IRA this year, I’d have to pay taxes on ~97% of the $5,500. I don’t want to do that now as we are in a high marginal tax bracket. We will wait until we are in a lower tax bracket to optimize my IRA/Roth IRA mix.

Upon further research, I will be rolling my IRA into my company 401k later this year so I can do a Roth IRA conversion without further increasing my AGI. I’ll write a post later to describe the thought process and execution.

Core Brokerage Holdings

The remainder of our savings will go to our Fidelity brokerage account. We will continue to build our position in the Vanguard Total Market ETF (VTI). We also have small holdings of Vanguard Dividend Growth ETF (VIG) and iShares Dividend Growth ETF (DGRO). We like VTI because of the dividend yield and greater exposure to FANG stocks.

I work for a broker-dealer so I have to operate within certain boundaries. If I did not have these restrictions, I would alter my behavior slightly.

  • Instead of Fidelity, I would use Vanguard as my trading platform. Vanguard provides you with 25 free trades each month if you have over $50,000 on the platform. Plus, on Vanguard, its own ETF trades are always free. At Fidelity, you have to pay $4.95 for each Vanguard ETF trade. Fidelity does give you free trades on certain ETFs from iShares, but the ETFs almost always have lower liquidity than Vanguard’s comparable ones.
  • I am unable to purchase new shares in individual companies. If I were able to do so, I would split my VTI purchases 50/50 with shares of Berkshire Hathaway (BRK.B)

Current Holdings

We have some single stocks in our portfolio that I acquired before I started working at the bank. We will be shifting out of some of those holdings and re-allocating proceeds from the sales to VTI. We will continue to hold a few individual names because we either like them or they are in a taxable account and capital gains treatment from a sale currently would be unfavorable.

Parting Thoughts

In the economic research that I read, caution is being suggested for 2018.

For example, one economist thinks the US economy today is like that of Japan in the 1980s. I understand the concern and agree with the elevated risk level, but I think our immigration policies and birth rates make our economic state incomparable to Japan’s in the 80s. Here is some birth rate data from the World Bank. Unless our birth rate starts to plunge over the next five years, I think that concern is overstated.

Also, the Fed is expected to hike 3x this year. If that does occur, the yield on the 10-year treasury should go above 3% and we should expect portfolio managers to move some of their clients’ assets away from high-yield bonds and the equity markets in favor of a better yield/risk relationship.

That said, I remain bullish on the US stock market in 2018. I think P/E multiples are higher than they actually are because earnings estimates and guidance will increase from the recent tax legislation, lowering multiples.

If a downturn does indeed occur in 2018, then it will be unfortunate, but we will surely buy the dip. Economic progress can be viewed like compound interest. Viewed in small increments of time, little progress appears to be made. Viewed over a long time horizon of many decades, significant expansion has taken place, not without corrections, and the economy has trended up. I believe it will continue.

We may be in the midst of one of the longest bull market runs in history, but there are few better places to store your wealth than in a diversified portfolio of U.S. stocks.

 

How are you shifting your 2018 investment plan, if at all? 

Comment(8)

  1. Hi, this website information is great! How did you accumulate that much money in your IRA already? I’m curious to hear your investing strategy..or did you forgo 401k contributions? thanks!

    1. The amount I have in my rollover IRA isn’t as high as it could be. I started working in 2007 and maxed out my 401k contributions each year. I ended up taking a couple years off and then going to graduate school, so there are four years of 401k contributions missing. My strategy was/is simple:

      1. Invest early in life
      2. Max out your 401(k) to shield income from taxes and receive the company match
      3. Buy index funds and ETFs; avoid high management fees at all costs
      4. Trust in the power of compound interest/returns

  2. Got it – in the original article when you said that had a balance of ~$170k in your IRA (which impressed me considering IRA contributions are limited to ~5k annually and I know you are not 50 yrs old)….you meant a combination of IRA/401k funds vs. $170k IRA plus some amount (not mentioned) in your 401k savings.

    Just another question..As for your further research…if you roll your IRA/401k savings of ~$170k into your company’s 401k and then backdoor Roth IRA that whole amount..arn’t you creating an immediately taxable event that you will need to pay into?

    1. Let me try to be more clear with how I ended up here today.
      – I started working in 2007; worked through 2010 maxing out my 401k each year (~$70k total)
      – When I left my job, I rolled that 401k over into an IRA so that I could pick stocks and ETFs (~$170k today)

      When I roll my IRA (~$170k from above) into my current company’s 401k, it is going from one tax-deferred account into another, so it is a non-taxable event. You might be confusing this action with rolling my current IRA into a Roth IRA; that action would be considered a taxable event and the entire ~$170k would be considered ordinary income (VERY bad decision).

  3. Ok, thanks for the clarification. I think the wording in your article was slightly confusing to me
    “I will be rolling my IRA into my company 401k later this year so I can do a Roth IRA conversion without further increasing my AGI.”

    I take this to mean you can’t have a preexisting IRA account to do a Roth IRA backdoor conversion?

    1. Yes. Let’s say I try to backdoor Roth convert $5,500 with the $170,000 outstanding. 5500/170000 or 3% of the $5,500 would not be taxed. 97% of the $5,500 would be subject to tax even though I am contributing after tax dollars.

      Looked at another way, the IRS is treating it as if you tried to convert ~$5,500 of your IRA to a Roth IRA. If you did do an IRA to Roth IRA conversion, it would increase your AGI because it would be treated like ordinary income.

  4. Hi, very informative post! How do you diversify your porfolio? I tend to put more money in individual stock. Would you recommend put more in ETF instead? I am currently holding some shares of Vanguard S&P 500 ETF (VOO).

  5. We hold a small number of diversified ETFs. We also still hold a good amount of single stocks but I’m targeting to exit a lot of those positions this year in favor of rolling those funds into our ETFs.

    Diversification doesn’t come in a one size fits all for everyone. You need to think about asset classes and what you hold within each of those.

    For asset classes some people recommend a 70/30 stock/bond mix, while others a 100/0. This will depend on your risk tolerance.

    For composition, some people are very comfortable actively trading single stocks. I don’t think I can beat the market over the long run so I hold more ETFs.

    That said, I have higher risk tolerance so we are at about a 90/10 allocation today and we prefer ETFs over single securities. You will have to think about what you are comfortable with given your knowledge, skills, and risk tolerance.

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