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2014 marks the first year I'm on pace to max out my Roth TSP and Roth IRAs. For the Thrift Savings Plan, I setup automatic deposits on myPay at $1458 per month, which will result in $17,496 invested over the course of 12 months ($4 short of the maximum $17,500 contribution).
For my Roth IRAs, Vanguard offers an excellent “maximum my contribution” service which calculates exactly how much you'll need to contribute each paycheck to maximum your Roth IRA contributions by years end. If you do the math, it should come out to about $230 per paycheck per Roth IRA account. So to maximize both my wife's and my own account, it's about $460/paycheck. This withdraws automatically from my checking account on the 1st and 15th.
Because of these contributions, as well as starting to invest in a taxable investment account, I find myself with a sizable retirement investment which I recently reallocated in accordance with my investment strategy. I'm using Personal Capital to keep track of my Roth TSP, two Roth IRAs (my wife's and my own), my taxable brokerage account, and my SDP account. It's free and easy to keep track of all my investments so I only need to login once, instead of on to multiple websites.
Asset Allocation for a CGO
I like the idea of taking more risk when I'm in my 20s and 30s (by being 90-100% invested in stocks) and then slowly becoming less risky over the years as I approach financial independence. The general formula I'm using is:
120 – (my age) = (% of portfolio in equities)
- Age 20: 100% stocks, 0% bonds
- Age 30: 90% stocks, 0% bonds
- Age 45: 75% stocks, 25% bonds (Permanent portfolio)
My permanent portfolio will be a 75% stock, 25% bond mix, which I will reach at age 45. After that, I'll just rebalance my portfolio annually or if the allocation gets off by more than 5% to maintain the 75-25 stock-bond mix.
This is a bit more aggressive than what many financial advisors recommend (60-40 stock-bond seems to be the norm). But, because the majority of my investments will be locked in the TSP and Roth IRA accounts, I won't be able to touch most of my investments until 20 years after financial independence. Therefore, I'll stay more risky to give the capital the opportunity to grow.
While I haven't had to stomach a major economic downturn yet, I'm confident in my ability to remain calm during another market collapse like 2008. I'll see if I can still say that when I lose hundreds of thousands of dollars.
My asset allocation as of 2014, as a young (but getting older) company grade officer (CGO) for my Vanguard Roth IRA accounts is:
- 74% Total US Stock Market (VTI)
- 19% Total World Stock Market Minus US (VXUS)
- 7% Total Bond Market (BND)
For my Roth TSP account, I hold all five funds in the following ratios:
- 59% C Fund
- 15% S Fund
- 19% I Fund
- 3.5% F Fund
- 3.5% G Fund
TSP Permanent Portfolio
Here's the same permanent portfolio, one in TSP Funds, the other in Vanguard ETFs. I like Vanguard Admiral shares for their low expense ratios, but the ETFs have easier to remember ticker symbols. Both the ETFs and the Admiral Shares contain the same assets. I currently have both my wife's and my Roth IRA accounts with Vanguard, as well as our taxable brokerage account.
It's the same 75% stocks, 25% bonds mix. You have to get a little creative in the TSP to match the VTI Vanguard Total Stock Market Index Fund, but if you want to match it just hold 4x the amount of C Fund as you do of S Fund. This will mirror the VTI fund almost perfectly.
There are several things I like about this asset allocation.
- It's simple. Only three Vanguard Admiral Share Funds to invest in. TSP makes interfund rebalancing easy and automatic contribution investment easy. Rebalancing takes 15 minutes a year. I don't try to time the market or pick winning stocks. I just let the market work for me.
- It's diversified. I own shares in the 5000 largest publicly traded companies in the US. I own shares in Canada, Europe, Asia, emerging markets, all over the world. My bond funds cover the full spectrum of government and corporate debt. I have a portion of my portfolio in the G fund, a unique US government debt asset.
- It's cheap. The TSP expense ratios are 0.027%, or $2.70 per year for every $10,000 invested. The three Vanguard Admiral Shares average at 0.09%, or $9 per year for every $10,000 invested. With these extremely low expense ratios, even a modest return is put into your pocket, rather than your fund managers'. See Vanguard's research on why keeping costs low matters.
- It's automatic. My investments happen every month, without any action on my part. myPay whisks the money from my paycheck into the TSP and Vanguard plucks it out of my checking account before I even notice it's there.
Disadvantages to my portfolio:
- No exposure to real estate. I prefer my real estate to be tangible. I don't like REITs (Real Estate Investment Trusts) and would prefer to invest in real estate by buying property and turning it into AirBnB.
The most important part of any asset allocation or investment plan is to stick with it for the long haul. Constantly trading in and out of stocks, chasing performance, or going after whatever the latest investment fad is fine for maybe 1-5% of your portfolio, but the majority of your retirement savings must be invested prudently and wisely.
Fear is also a major killer of portfolios. Selling too early, selling at the bottom, or buying high can kill your performance and savings. Better to invest methodically, with an eye on the very long term, and ignore CNBC and the daily market news. Don't try and time the market.
How about you, reader? What is your investment strategy, especially if you serve in the military? Have you thought about an asset allocation plan and how to follow it? Any problems you see with my portfolio?