After the TSP, I invest my money in Betterment and Vanguard. I track all of my investments with Personal Capital. I also wrote a short, 2 hour book summarizing this site. You can buy it here.
I get at least 1 email a day from my readers. I try to respond to everyone eventually with a personal email from me. I cannot afford a personal assistant so do not think you are getting a canned response. I try to respond to all my readers’ inquires within a week, depending on my TDY and work schedule.
Many of my reader’s questions are relevant to other people, so rather than keep them archived in my inbox I will usually ask permission to share the question and my answer with the audience. Here is an email I received:
I saw your post on Reddit and have read some of your site and love the advice you have given. I am 24 years old and a 2d Lt in the USAF. I have paid off my student loans and am getting an O-1 salary while going to medical school at USUHS.
I was wondering with regard to the Roth IRA, which funds exactly you recommend investing in? As of right now I have my funds in the USAA Nasdaq 100 Index fund, but was not sure if I should switch to Vanguard like you said, and if so, which funds to select and how much it would cost to switch from USAA? I am also contributing about 20% of my base pay to the Roth TSP, and was wondering if you would suggest selecting the L2050 or a different one?
Thanks so much!
First of all, as a medical student (and especially a military med student) you must read The White Coat Investor blog and also buy the 87% 5 star Amazon rated book. Dr. James Dahle writes well about achieving financial independence rapidly and living a rich life as a medical professional. He also became a doctor through military medicine, similar to what you are doing.
A few questions for you:
- Why the NASDAQ 100 index fund (USNQX)?
- What makes you think the 100 largest stocks on the NASDAQ exchange are going to outperform the U.S. stock market as a whole?
- Why do you think technology stocks are going to outperform the market for the next 10, 20, or 50 years?
If you struggle to answer these questions, start taking a good hard look at your asset allocation. Here is mine for reference. An asset allocation should cover all of your accounts. In my case, my Traditional and Roth TSP, my Traditional and Roth IRA, my SEP IRA, my wife’s T&R IRA, my Betterment account, and my taxable accounts. (I easily track all of them for free with Personal Capital.)
My asset allocation may not be appropriate for everyone, so here are a few more good ideas from the Bogleheads. Pick an allocation, have a good reason for picking it, and then stick with it for at least a few years. If you are thinking of changing it, have a good reason.
While USNQX may seem to be an index fund, really you are just tilting towards technology stocks. It’s not a broad market index fund. This induces market sector risk. Rather than putting all your eggs in one sector (technology), why not diversify across all sectors with the Vanguard Total Stock Market Index Fund (VTSAX)?
Take a look at the top ten holdings of the USNQX: Apple, Microsoft, Amazon, Facebook, Alphabet (AKA, Google, and two classes of Google shares), Intel, Cisco, and Amgen. All technology stocks. While some of these are also the top ten holdings of VTSAX, USNQX is missing a solid chunk of the US market. If that is what you are going for, fine. But have a good reason for deviating from the total market index.
Costs ALWAYS Matter
USNQX carries an expense ratio of 0.57% (57 basis points). Over 50 years, with a 6% investment return, you will lose 25% of your returns to fees! Costs are the number 1 determinant of your returns.
Minimize your costs. If you can get your costs down to around 0.10% (10 basis points), you can keep 95% of your returns, rather than 75%. In the example above, that is nearly a quarter million dollars! You can run the data for yourself here.
Costs are one of the few things you can control when investing. It is imperative to keep them as low as possible to give yourself the highest probability of investment success.
My Asset Allocation Recommendation
Get out of USAA for your Roth IRA. The costs are too high. Liquidate the assets inside the USAA Roth IRA, and rollover the account to Vanguard. Vanguard should be able to help you with the paperwork and it should be a fairly painless process. The cost of switching should be minimal. I do not believe Vanguard will charge you anything. USAA may charge you a bit (probably under $50) for leaving them.
Select an intelligent asset allocation. The most basic is picking a stock/bond ratio. Then choose the Vanguard funds that represent the stock and bond markets you want to index. I use VTSAX and VBTLX (Total Stock Market and Total Bond Market). I also throw in a dash of international stocks with VTIAX.
Again, check out my asset allocation from last year. It probably will not change much this year. It may not be appropriate for you, so do your own research. I am quite heavy on equities, with the understanding that my portfolio will be more volatile.
As for the TSP, the costs are the lowest in the world. You really cannot go wrong picking any TSP fund, when it comes to costs. Well done contributing 20%. Keep that savings rate high and you will achieve FI in no time as a doctor.
If you do not know what you want to do for asset allocation, pick the Lifecycle Fund with the further date out (L2050 at the time of this writing). Then, learn more about asset allocation if you want to set up your own. I recommend the Bogleheads guide or William Bernstein’s book. If you don’t care to learn about asset allocation, a Target Date Retirement or Lifestrategy fund from Vanguard and the Lifecycle fund from the TSP will serve you just fine.
John Bogle recommends just your age or your age minus ten in a total bond fund, the rest in a US total stock market fund. Warren Buffett’s advice to his wife’s estate manager after he passes away is a 90% S&P 500 Fund (basically total US stock market) and 10% in government bonds. It really is that simple.
I recommend (of course) reading my book, but also John Bogle’s book on indexing. A Random Walk Down Wall Street should also set you on the path towards index investing zen. The two previously mentioned books should be available at your local library. Hopefully mine will soon be as well.
2 Websites I Use to Achieve Financial Independence Faster
I have investment accounts all over the place. To keep track of all of them in one place I use Personal Capital. It combines all of my accounts, shows me where I may be overpaying in fees, and provides beautiful charts showing my overall asset allocation and performance.
I use Personal Capital to track my Roth and Traditional TSP, Vanguard IRAs, banking accounts, SDP, and my Betterment taxable account, all in one place. It's free, secure and presents me with a one-stop dashboard so I can see all my money on one site.
Read my full review of Personal Capital and see how easy it can be to manage your investments in one place. Trust me, once you try it, you'll love it.
P.S. - If you have over $100,000 of assets and a 401k, you really need to run the Personal Capital 401k Fee Analyzer.
The best way I know to achieve financial independence is to keep your investments simple, diversified, automatic, and low-cost. Costs eat into your returns like you wouldn't believe! A 1% difference in expense ratios can mean $100,000s lost to fees over a lifetime of investing.
Even if you're a DIY (do-it-yourself) investor like I am, you need to check out Betterment. You can read my full review here, but the bottom line is for only $250 per $100,000 invested (0.25% expense ratio) you get simple, diversified, and automated investing. In addition every account now gets free Tax Loss Harvesting+ features, which should increase returns for the average investor more than the minuscule management fee.
If you're not a DIY investor or are just getting started with investing, then you definitely need to check out Betterment. It's what I recommend to my family and friends who aren't strong investors or don't care to learn about asset allocations, diversification, or rebalancing.