The CONNsumer: Investment Portfolios Could Make the Difference Between Wealthy or Weeping | THE CONNECTICUT STORY
Don’t lose faith, America. The millennials are coming.
The “Netflix and chill” generation as future leaders of the free world? Can’t wait.
But take a look. Shaped by the Great Recession and burdened with a record $1.3 trillion student debt and lower earnings than previous generations, they’re living longer with their parents or renting instead of owning as they delay marriage. They’re also building their savings. That’s smart.
A Bank of America report earlier this year found close to half of Americans between ages 23 and 37 now have at least $15,000 in savings. One in six has saved more than $100,000.
Yet they still worry about money — 73 percent, according to that same report — and, after watching what happened to their parents in the financial crisis a decade ago, hesitate to invest their savings in the stock market.
To borrow a time-tested exhortation from baby boomers: Get over it!
“When it comes to investing,” says Derek Sabine of Newpointe Wealth in Stamford, who is both a financial adviser and a millennial, circa 1982, “the sooner you start, the better off you are likely to be.”
First, if your employer offers a 401(k) match, whether it’s 3 percent or 6 percent of your salary, take it. In relatable terms, it’s a buy-one, get-one deal: For every dollar you commit to your 401(k), your employer will match it to a specific percentage of your salary.
Put the rest of your investible money in a Roth IRA, after-tax contributions up to $5,500 each year — $6,500 for people over 50 — that offer tax-free earnings and withdrawals as you age. (A traditional IRA’s contributions are tax-deductible but withdrawals in retirement are taxed as ordinary income.)
Here are four sample Roth IRA portfolios — at least three recommended by the CONNsumer — for the starter investor, young or old. The listings include the ticker symbol and associated fees, where applicable.
Why the fees? Choosing a lower-cost, exchange-traded fund over a conventional mutual fund can make a huge difference. Let’s say a 25-year-old puts $5,500 each year into a fund that charges 1.2 percent in fees — $120 per $10,000 — and adds $5,500 to the Roth IRA annually until retirement at age 65. Assuming a 7 percent annual return, the historical average, that person would have $247,000 less at retirement than the person who invested the same amount in a fund that charged only 0.12 percent.
One and Done
Vanguard LifeStrategy Growth (VASGX, 0.15 percent)
Long-term growth, with 80 percent stocks and 20 percent bonds, in an exchange-traded fund that combines four Vanguard index funds: Total Stock Market, Total International Stock, Total Bond Market II and Total International Bond. This moderately aggressive fund, with returns averaging close to 9 percent the past 15 years, should be attractive to even the cautious young investor.
As you age or become more risk-averse, move money into other LifeStrategy funds, Moderate Growth (VSMGX) or Conservative Growth (VSCGX), that increase the percentage of bonds in the portfolio.
“A rule of thumb for the moderate investor,” Sabine says, “is 60 percent stocks and 40 percent bonds. An aggressive investor would be more like 85 percent stocks and 15 percent bonds.”
Be Like Buffett (Almost)
1. Domestic: iShares Edge MSCI Min Vol USA ETF (USMV, 0.15), 60 percent of the portfolio
2. Foreign: Vanguard Total International Stock Index Fund (VGTSX, 0.17), 30 percent
3. Bonds: iShares TIPS Bond ETF (TIP, 0.20), 10 percent
Investment guru Warren Buffett advocates a simple portfolio with 90 percent in a fund that tracks the S&P 500 and 10 percent in treasuries, or government securities. That’s a guaranteed long-term winner, but it’s an all-American portfolio. Here, iShares Edge tracks low-volatility, lower-risk U.S. equities, Vanguard adds both developed and emerging international markets and iShares TIPS tracks Treasury Inflation-Protected Securities. (TIPS offer protection against inflation: when the inflation rate increases, so does your principal.)
“Remember,” Sabine says, “it’s important to outpace inflation even as you age.”
The Savvy Investor
1. Domestic: Schwab Total Stock Market Index (SWTSX, 0.09), 40 percent
2. Foreign: Vanguard Total International Stock Index Fund (VGTSX, 0.17), 15 percent
3. Emerging markets: iShares MSCI Emerging Markets ETF (EEM, 0.72), 10 percent
4. Vanguard Short-Term Inflation-Protected Securities ETF (VTIP, .06), 15 percent
5. Vanguard Real Estate Index Fund ETF Shares (VNQ, 0.12), 20 percent
The most sophisticated portfolio in this roundup, adding to our Buffett-like portfolio real estate and a sharper focus on emerging foreign markets. (The real estate fund tracks a real-estate investment trust, or REIT, index of companies that own or operate income-producing properties.)
1. Craft Brew Alliance (BREW)
2. Bitcoin Investment Trust (GBTC, 2.0)
3. SPDR S&P 500 Fossil Free Fuel (SPYX, 0.25)
4. The Scotts Miracle-Gro (SMG)
Go with what you know, right? OK, here’s the portfolio with some kick. Start with the Craft Brew Alliance, a company that owns Widmer Brothers Kona, Omission and Resignation craft breweries. Grayscale Bitcoin Investment Trust adds exposure to the cryptocurrency (note the high fees) without the buy-sell-store hassle. Fossil Free Fuel, which eliminates companies that own fossil fuel reserves, is a socially conscious investment statement for believers in climate change.
Marijuana is perhaps the most notable growth industry of this generation, with legal sales expected to reach $22 billion in 2021 — up from $6.9 billion in 2016. But what would mom think about an investment in a marijuana-growing company?
Mom probably doesn’t know that hydroponic gardening is a great way to grow medical marijuana. A Miracle-Gro subsidiary, Hawthorne Gardening, makes products for grow-without-soil applications. Sweet!
This portfolio sounds like a lot of fun, but it’s NOT for The CONNsumer — Bitcoin is too volatile and the craft-brewing trend, lamentably, won’t last.
As millennials know, it’s all about comfort level.
This article appeared in the April 2018 issue of Connecticut Magazine.
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