Roth-IRA: Set it and forget it

[kfh227]

my wife and I want to change our Roth-IRA holdings to be mo0re of a set and forget type system.

 

She doesn't know what she wants but I think she wants a low fee index fund.  or to be tied to Bonds.

 

I think what makes the most sense is to invest in well run conglomerates like Farifax and Berskhire.

 

So, I will ask the board.  What is the best set and forget strategy for a Roth-IRA?

 

I'm looking at a 20-25 year horizon.  I know that I have to keep an eye on anything I invest in.  I just want to minimize risk and maximize reward.

[Palantir]

Try a set of index funds, that seems to be the best bet for you.

[Packer16]

In terms of set and forget, index funds are pretty hard to beat.  The main issue I see with even a compounder portfolio is manager risk and the research involved in this.  Many of us here like to doing this kind of thing so the incremental cost is small but for those who do not the cost and risk can be high.  Index funds also are the cheapest and this can make a big difference over time. 

 

Once you are set on index funds you still have alot of questions to ask.  First is how much bonds do you want in your Roth?  This should be based upon your volatility tolerance for your total portfolio and what portion your Roth is of your total portfolio.  Second is US vs. International.  US is great for innovation and shareholder rights but maybe not as much growth and international is opposite.  International will also cost you more.  Finally, whether you want to a tilt (an example is small and value stocks versus the S&P 500).  Tilts will in general cost you more than non-tilts but that is not always the case, the Vanguard SCV has an expense ratio of 8bp and has beaten most funds in its SCV peer group. 

 

In terms of funds, I would start with Vanguard funds and compare any other funds to Vanguard in terms of costs.  They key parameter I see here is cost so it is pretty easy to compare the commodity products to each other buy the cheapest.

 

Packer

[kfh227]

I wish the USA just went back to pensions.

[oddballstocks]

An index fund

[Guest wellmont]

psh

[augustabound]

Set it and forget it is the strategy behind the Canadian Couch Potato portfolio.

Essentially a basket of etf's rebalanced annually to your risk tolerance and diversification preference.

[innerscorecard]

Why would you invest differently in your Roth IRA and in your taxable accounts? They are both simply containers for investments, with the exception that you don't pay taxes on realized gains in your Roth IRA, since you have contributed to it with after-tax income.

 

In fact, it would be better to do your active investing in your Roth IRA, as ERICOPOLY has done, and have index funds in your taxable accounts, yet you are doing the opposite!

[Jurgis]

+1 to what innerscorecard said.

 

To comment on Packer16's post: I found that international index funds suck unfortunately. It seems that either international indexes are crappy or international markets are inefficient or both. I think both.

 

So it's easy to run US index funds and possibly US bond index funds. I'm still on the fence about US bond index funds - I think active managers might be better, but the cost differential of active bond funds vs index might affect return more than for stock funds.

 

International stock and bond funds are much tougher, since possibly you want actively managed ones...

[Guest longinvestor]

my wife and I want to change our Roth-IRA holdings to be mo0re of a set and forget type system.

 

She doesn't know what she wants but I think she wants a low fee index fund.  or to be tied to Bonds.

 

I think what makes the most sense is to invest in well run conglomerates like Farifax and Berskhire.

 

So, I will ask the board.  What is the best set and forget strategy for a Roth-IRA?

 

I'm looking at a 20-25 year horizon.  I know that I have to keep an eye on anything I invest in.  I just want to minimize risk and maximize reward.

Your thinking is correct if you're confident of picking the right vehicle to compound. Your wife is also correct if she recognizes that she does not have the skills to pick. Mathematically, there is strong evidence that over the long term horizon, both "active" as commonly used and fees to have someone else do it for you haven't worked out. If you can pick correctly and forget, it is likely to beat all else. Low cost index fund is just a better alternative to paying more for active management. It sounds like you are a DIY type.

 

Also, if Roth is the last bucket you are going to reach into in your lifetime, (my plan too),compounding + the above become even more relevant.

 

Perhaps you can proportionately allocate per your individual wishes. There are more important things at home than a mere return.

 

 

 

[fisch777]

If you are going to use active managers, it makes sense to hold them in Roth to avoid taxes on capital gain and div distributions that you otherwise are forced to pay in a taxable account.

 

I see the rationale for index funds, but I do think there are a few concentrated active mutual funds that are likely worth the extra cost.  By holding them long-term in a Roth, you are also paying the manager to make allocation decisions for you: holding cash, buying/selling opportunistically.  You obviously don't get this with an index fund.

[bargainman]

Also could pick a target date fund, they are the target for 'set and forget' investing...