Building My Mutual Funds Roth IRA

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Introduction

As I write lengthy pieces about financial instruments and financial decisions to my over 5,200 followers, I believe deeply in the importance of being transparent. As a reader, I know that I always give less attention to writers without skin in the game. Therefore, I have been writing quarterly updates on my dividend growth portfolio.

One of the main constructive criticisms that I get is that my portfolio is too focused on income, and I need more exposure to growth. I always listen to my readers and try to learn more and improve my skills as an investor. Therefore, I chose to let my Roth be focused on growth stocks.

Starting my Roth IRA was my major financial move for 2020. I opened the account, and I was able to fund it for 2019 and 2020. It’s the only new portfolio I have, and I didn’t liquidate any other investment account in order to do so. The new account gets prioritized until the annual contributions are maxed out.

Why more portfolios?

I would like to have higher diversification in assets. Expose myself to growth stocks as well as more international stocks. My current portfolios lack exposure to these two types of assets, as well as small and medium cap companies. Therefore, the new portfolio will allow me to get an even broader exposure to the market. I am a fan of diversification as a strategy.

Moreover, the new portfolio is comprised of mutual funds, unlike my dividend growth portfolio which is comprised of single stocks. I believe that an investor should diversify his investment strategies. There is no one strategy that is superior to others, and there is no one strategy that fits all.

Since I invest for the long term, and I cannot know how my life will look a decade or more from now, I should diversify my strategy. Sticking to just one strategy is a risk, because, in case I am wrong, it might have a devastating effect on my future return.

Furthermore, as I invest in new strategies and new asset classes, I gain more knowledge. I started investing 13 years ago, and I gain more knowledge every day. As I learn more, I become humbler and understand how little I know. Investing all my funds by myself and with only one strategy is, in my opinion, a sign of very high self confidence, and even a little arrogant. No, I don’t believe I hold all the knowledge, not even close. Therefore, I diversify between money managers, assets, and strategies.

Why Roth IRA

I chose the IRA as it is easy to set up and easy to control. I don’t need an employer, and as self-employed, I don’t need too much paperwork to open an account. In addition, the limited contribution doesn’t bother as it is only one part of my retirement, so as I finish funding it, I start funding other accounts. I opened the account with JPMorgan Chase (NYSE:JPM), and I opened it using their relatively new You Invest accounts.

I am 30 years old, and I think it’s a fair assumption that, by the time I retire, the retirement age will be roughly 70 years old. If I contribute the allowed $6,500 at the end of each year in the coming decades and enjoy a 10% annual return, which is similar to what was achieved by the market in the past decades, this account alone will hold over $2.8 million.

The reason I chose Roth over traditional is that I invest for decades into my future. Roth allows me to use taxed dollars, and in return, I don’t pay any taxes on my withdrawals. When the balance reaches $2.8 million, it means that 91% of it is interest and only 9% is principal. Therefore, the tax benefit is enormous for someone with my investment horizon.

Which strategy to choose

I chose to invest in mutual funds in a way that is similar to what Dave Ramsey is teaching. Ramsey recommends choosing four funds: growth, growth and income, aggressive growth and international. His teaching has been helping millions in the past decades, and I decided I’d give his investment philosophy a shot. However, I chose only growth stocks mutual funds, as my dividend growth portfolio offers enough allocation to income.

Therefore, I invest in international growth, large cap growth, mid cap growth, and small cap growth. I invest for the next 40 years, and I can deal with volatility, so there is no reason why I wouldn’t have additional exposure to volatility and higher long-term returns.

The reasons I chose this strategy are that it’s easy to execute, it has a proven track record, and I gain additional knowledge from it as I invest in different financial instruments and different stocks. I do the actual investing through the mutual funds screener that is offered by You Invest. I pick the mutual funds according to my needs and my goals.

How I chose my funds

Here’s what I was looking for in my funds. I wanted a no-load fund. This is a new strategy for me, and I don’t want to lock on fees in advance. I looked at the tenure of the fund manager. Past performance cannot guarantee future performance. However, I do believe that a successful manager is an asset, and if he can analyze and pick well over a long period of time, he is probably talented and better than average.

I was also looking for funds with 4 or 5 stars ranking by Morningstar. In addition, I made sure that every fund I picked had a long track record of beating the market. I also prefer funds with low turnover and fees, but I wouldn’t rule out a fund for any of the two. I don’t mind rewarding a good manager if he manages to achieve higher returns.

If one of my funds will start to underperform the market for a period longer than a year, I will consider replacing it. I believe that one year is not necessarily a fair time frame to judge a fund, but it will make me start looking for other candidates as its performance is below par and its ranking declines.

These are the funds I picked based on these criteria:

Asset Class

Ticker

Name

US Medium Cap Growth

(MUTF:BPTRX)

Baron Partners Fund Retail Shares

US Large Cap Growth

(MUTF:FBGRX)

Fidelity Blue Chip Growth Fund

US Small Cap Growth

(MUTF:FCPGX)

Fidelity Small Cap Growth Fund

Global Large Cap Growth

(MUTF:FIVFX)

Fidelity International Capital Appreciation Fund

These funds expose me to companies I wouldn’t invest in otherwise. In addition, they use different strategies, and some are less diversified by far. Right now, the best performing fund is the one from Baron. It enjoys the massive surge in the price of Tesla (NASDAQ:TSLA) which comprises of more than 35% of the assets. Again, personally, I wouldn’t invest so heavily in one company, but I can’t argue with an annual return of over 15% since inception.

Conclusion

Diversification is a key. Diversified investment using different financial instrument, different asset types, and different strategies helps mitigate loses if I am wrong. I use this strategy for my Roth IRA as I find it optimal for my goal – maximizing the returns in the next four decades. I use a simple strategy which doesn’t require massive management, and therefore, there is no burden on me as an investor.

So far, I am happy with my investments, as they managed to achieve returns which are superior to the broader market after I deduct the fees. I am going to keep tracking my progress, probably on an annual basis, as unlike the dividend growth portfolio, I expect much less changes and movements in this portfolio.

Disclosure: I am/we are long ALL FOUR MUTUAL FUNDS IN MY PORTFOLIO. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.