The last step to opening a Roth IRA is picking and funding your investments. Since I decided to open my account with a discount broker and create a DIY portfolio, this process was a little more involved for me than it might be for you. If you choose to go with a robo-advisor, it will be automatic!
Today, I will walk you through the steps I took to pick my investments and choose how much money to put into each one.
But first, I have a really important disclaimer. I am not a registered investment professional or financial planner. This means I cannot recommend any sort of investment to you. Any information I provide here is for educational purposes only. My investment decisions are personal and serve my own goals which may be totally different from yours. If you seek further assistance or information, please check out all the wonderful resources available online, utilize a robo-advisor, or check out a traditional financial advisor.
What Am I Investing In?
When I opened my Roth IRA, I put $200 in the account. My goal for Roth IRA contributions this year is to contribute all the money I make side hustling. This initial $200 is from a recent freelance job that I’ve been working on.
Once the $200 was added to the account, there was one last step before I became an investor: pick my investments and divvy up my money between all of them. This is also called “asset allocation”.
Index Funds
The investments I chose were all low-cost index funds. Index funds are basically a broad “basket” of different securities including stocks and bonds. Within one index fund there could be hundreds or thousands of different securities.
When you buy into an index fund, you own a tiny slice of every security in the fund. This gives you the benefit of diversification. In order to buy all of these different securities yourself, you’d have to have a lot of money and time, but doing it through an index fund is quick, easy, and cheap.
Additionally, if one stock in the fund does really badly one year, that will be balanced out by the good performance of other stocks in the fund. The end result is that the performance of the index fund will end up closely resembling the performance of whatever market it replicates.
Since markets tend to grow over the long-term, index funds are a great way to capture that growth for your own portfolio without taking on the added risk of picking individual securities.
My Picks
Even though there are probably hundreds of index funds to choose from, I picked only three to put my money in
1. The first is a “Total Stock Market Fund”. This essentially gives me ownership of every single stock on the U.S. stock market.
2. The next is a “Total U.S. Bond Fund” and you guessed it, through this fund, I have a slice of every single bond in the U.S.
3. Lastly, I picked a “Total International Fund” this basically holds all the stocks in countries other than the U.S.
As you can see, the investments I chose are very broad. They touch almost every part of the public markets in the world. I did this intentionally since I have never invested my own money before. I wanted to choose funds that would give me a lot of exposure to different assets and lower the risk that I will be put too much of my money in one thing.
Although I’m not disclosing the exact funds that I am investing in, you can easily find an array of similar funds by googling the names provided above. Generally, all large brokers offer their own version of these fund types!
How Did I Split Up My Money?
So now that I told you what I’m investing in, I’ll break down where each of those $200 went.
| Fund | % Allocated | $ Allocated |
| Total Stock Market | 72% | $144 |
| Total International | 21% | $42 |
| Total U.S. Bond | 7% | $14 |
As a general rule, your allocations should line up with your time horizon (how long you want your money to stay in the investments) and your risk tolerance (how willing you are to ride out the ups and downs of the market).
These allocations are pretty aggressive. Essentially, I’ve put more than 90% of my money into domestic and international stocks. If you were to look up “rules of thumb” for a 22-year-old, the allocation may fall somewhere closer to 90%-80% towards stocks. I describe myself as risk averse in real life but risk tolerant when it comes to investing. I’ve been thinking and talking about this stuff for over two years through my internship experience in the investment industry, so I feel very confident about the market’s ability to perform over long time horizons. With that said, every investor has to decide their allocations for themselves.
When forming your own allocations, there are a couple of things you can use to guide your choice:
1. The rule of 100. To use the rule of 100, you subtract your age from 100 and that should be the % that you allocate towards stocks.
2. Mimic a target date fund. To help guide me in my asset allocation, I studied the asset allocation of the target date fund offered by my broker. This gave me a great detailed asset allocation between stocks, bonds, and international assets which I then tweaked given my time horizon and risk tolerance. The great thing about this method is that you can get pretty much the same investment returns without paying the premium associated with a target date fund!
At the end of the day, asset allocations are a tool to help you be disciplined as an investor. There is no “right” allocation that will magically double your money. The most important thing when it comes to asset allocations is to MAINTAIN them. This is why you must rebalance your portfolio frequently.
What’s Next?
Do you want to know the weirdest thing about becoming a first-time investor? It’s just waiting. That’s right. Now that my money is sitting in this account, it will be there for probably 40 more years. That’s crazy to think about.
As far as growing this account, I plan on contributing all of my side hustle income that I earn this year. Depending on what type of 401k plan my employer offers once I start work in January, I will then decide if I want to continue contributing to my Roth IRA.
Other than continuing to put money away in this account, I don’t plan on changing much about my asset allocation or investments. This means that when I contribute more money, I will buy into the same funds I outlined above at the same allocations that I started with. Every year I will rebalance to make sure my portfolio stays aligned with my goals.
Want More?
You can follow my investing journey and get money and adulting content straight to your feed by following me on Instagram @twocentswithjulia! Send me a message to say hi!