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.
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
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)
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.
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?