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BlueChipMom
Follower ○○○

Portfolio Critique: New Roth IRA for a 15-year old

After taking a financial class, 15-year old daughter has decided to start a Roth IRA with earnings from an after school job.  We opened a custodial Roth IRA with Charles Schwab and she will put in $100/month.  We are now trying to decide on an appropriate mix of funds.  We are sticking with the no load, no transaction fee funds offered by Schwab (whose customer service was awesome, by the way.)

Obviously she has A LOT of years until retirement and time is on her side.  Should we:

1)  Stick with index funds with very low expense ratios?:  

SWPPX Schwab S&P 500 Index (Large Blend) .02 - 4 star rating  

SWSSX Schwab Small Cap Index (Small Blend) .04 - 4-star rating

SWISX Schwab International Index (Foreign Large Blend) .06 - 3-star rating

2)  Shoot for more managed funds?

LGILX Laudus U. S. Large Cap Growth Fund (Large Growth)  .76 - 4 star rating

TRBCX T Rowe Price Blue Cap Growth (Large Growth)  .70  - 5 star rating

FKAIX Federal Kaufmann Small Cap Fund Institutional Shares (Small Growth) .91 - 5 star rating

SFREX Schwab Fundamental Global Real Estate Index Fund (Large Value) .39 - 5 star rating

3)  A combination of the two?  And if so, how would you piece it together?

    

37 Replies
Reti59
Follower ○○

Re: Portfolio Critique: New Roth IRA for a 15-year old

Hi, BlueChipMom,

Good job, helping your 15 year old open a Roth IRA. The funds in #1 look good. The expense ratio is cheap, which I like, and cover practically the whole market.  Just imagine Mom years from now when time for your now 15 year old retire at 60 or later, that large tax-free income from the Roth.  Wow, it should be in the millions by then; since starting so young. 

JavaJoe
Explorer ○○

Re: Portfolio Critique: New Roth IRA for a 15-year old

My 9 year old has been 100% in VT in her Roth for the last 2 years.  K.I.S.S. with an ultra low ER, global exposure, and 100% stocks.  Make sure your daughter files a tax return to substantiate the earned income requirements.

-JavaJoe

Reti59
Follower ○○

Re: Portfolio Critique: New Roth IRA for a 15-year old

Way to go Joe. At 9 years old ; these Roth millionaires in the making.

JavaJoe
Explorer ○○

Re: Portfolio Critique: New Roth IRA for a 15-year old

For any other accumulators that still have younger kids at home, Fidelity has a great Roth IRA product specifically for kids.  I've had it for two years now with zero issues....

https://www.fidelity.com/retirement-ira/roth-ira-kids

-JavaJoe

retiredat48
Participant ○○○

Re: Portfolio Critique: New Roth IRA for a 15-year old

Hi BCmom.

I started IRAs for my three daughters, each at age 12.  Now in their late forties, growth amounts to a legacy of retirement for each.

Here's my guidance:

Yes...to a Roth IRA.  (However, if they get into a tax bracket of 12% or more later in life, use Trad IRAs...long story why)

yes...do file annual income tax returns for the kids, showing earned income.  They will pay zero tax.

I suggest use 100% stock funds...no bonds.

Use ETFs or index funds...and actively managed funds if expense ratios are low.  Very low.  Vanguard and a few others have such funds.  

In fact, I consider you should open the account at Vanguard...as the top recommended investment family for  low expense ratio investing...performance of index type funds...and a broad host of ETF Funds.  People are voting with their feet; Vanguard is tops for new fund inflows.  You will receive Vang'd information flows...always good to have a couple sources of financial infpormation.

Here's a top fund to consider in the mix: VSS, Vanguard's International Small Cap  ex USA Fund.  Hold it forever...compounding.

Good luck.

R48

 

BruceM
Participant ○○○

Re: Portfolio Critique: New Roth IRA for a 15-year old

Should we

1)  Stick with index funds with very low expense ratios?:  Yes

2)  Shoot for more managed funds? No

What your daughter has most others do not have is time. Lots of time. You can run this out in Excel, but her greatest impediment to portfolio growth over her working years up to retirement will be expenses, not investment management. Her time line is so long all managed returns will regress to the mean or more likely, underperform the mean after expenses. 

Her best bet is indexed funds, heavily weighted to growth over the next 20 years or so, with a gradual transition to a higher percentage of fixed income to protect her gains. Regularly rebalance (usually once per quarter, but this timing can vary) to realize gains and purchase the depressed indexes.

The most import thing to learn here is patience and discipline....and sticking with the plan.

BruceM

 

JavaJoe
Explorer ○○

Re: Portfolio Critique: New Roth IRA for a 15-year old


@retiredat48 wrote:

"yes...do file annual income tax returns for the kids, showing earned income.  They will pay zero tax."

 

No necessarily, depending on the source and nature of income (W2 vs self-employment).

retiredat48
Participant ○○○

Re: Portfolio Critique: New Roth IRA for a 15-year old


@JavaJoe wrote:

@retiredat48 wrote:

"yes...do file annual income tax returns for the kids, showing earned income.  They will pay zero tax."

 

No necessarily, depending on the source and nature of income (W2 vs self-employment).


Joe...to me it is and was not a question of "necessary" from a tax return standpoint.

I wanted to have it fully traceable, if ever challenged in the future, that my teenage kids had actual EARNED income, and duly reported same each year.

Others can decide.

R48

 

aubergine
Participant ○○

Re: Portfolio Critique: New Roth IRA for a 15-year old

I opened a taxable Vanguard account in 1981, from my summer break earnings as a kid.

That $600 in their old school Windsor fund is now about $32,000, with divs and cap gains reinvested.

Unfortunately I had to pay some taxes along the way so that 11+% CAGR is a gross NOT after tax return.

I doubt the next few decades will have returns like that.

My guess is that stocks will earn something like the current div yield + inflation.

But that's still reasonable, especially if it can be plopped into a Roth, which we didn't have back then.

I'll probably end up donating those Windsor shares, since the cost base is lost to sands of time, and we use our DAF.

It's a pretty awesome tool to get a child started on the process this way.

As R48 notes, document things carefully.  I suspect there are way too many middle/upper class folks playing fast and loose with plopping 6k into their 14 year olds account every year.  I've never seen/heard of a bright line test of whether paying kids for chores is really going to count as 'earned income' either.  And most sub 16 year olds are unlikely to get W2 work.  (I just did work for family friends etc.)

JavaJoe
Explorer ○○

Re: Portfolio Critique: New Roth IRA for a 15-year old

R48 - I was responding to your assertion that "they will pay zero tax" which may not be the case.  My daughter had a small tax bill due due to self-employment.  And I agree with the others that properly tracking "earned income" is key.

My daugter has her own small business online, with documented social media, Etsy, banking, and Square accounts along with year-end reporting.  So far she has contributed well under the $6000 threshold which I agree may trip certain audit flags for young kids especially.

-JavaJoe

shipwreckdalone
Explorer ○○

Re: Portfolio Critique: New Roth IRA for a 15-year old

With Global and National debt levels exploding, I would suggest a 5-10% allocation to gold maybe even bullion for someone with a 60 year time horizon.   I realize this is not a popular opinion but one day past the tipping point, my gut tells me we will wake up and all the rules will have changed. Historically gold has been considered a hedge, but going forward could be the appreciable asset.

rila3400
Contributor ○

Re: Portfolio Critique: New Roth IRA for a 15-year old

First, kudos to your daughter for starting a Roth IRA at such an early age!
I would select a U.S. total market equity index fund and a broad-based foreign equity fund.
The following funds are available at Schwab and are worthy of consideration.

Schwab Total Stock Market Index Fund (SWTSX)
T. Rowe Price Overseas Stock (TROSX)

You can combine 65% - 75% SWTSX with 25% - 35% TROSX.

RMinLG
Follower ○○

Re: Portfolio Critique: New Roth IRA for a 15-year old

If I were to go with the Index option, I would somehow find a way to include some TRBCX along with the index funds.  Just a thought.  

BlueChipMom
Follower ○○○

Re: Portfolio Critique: New Roth IRA for a 15-year old

Thanks so much to everyone for the really great replies.  This is exactly the kind of info we were hoping to get.  We read everyone's responses carefully.

It sounds like:  index funds, low expense ratios, careful documentation for tax purposes, remembering to rebalance, and patience/discipline are the way to go!  

We really appreciate some of the specific fund suggestions and also the outside-the-box suggestions such as gold/bullion.  It's nice to have a core portfolio, but nice to have suggestions for places to branch out, too.

We feel really inspired and encouraged!  Thank you so much!  Daughter is a hard worker, straight A student, and goal-oriented.  I hope I'm around for a long time to see what she does with her life, but at least I know she's building a good foundation.  

aubergine
Participant ○○

Re: Portfolio Critique: New Roth IRA for a 15-year old


@shipwreckdalone wrote:

With Global and National debt levels exploding, I would suggest a 5-10% allocation to gold maybe even bullion for someone with a 60 year time horizon.   I realize this is not a popular opinion but one day past the tipping point, my gut tells me we will wake up and all the rules will have changed. Historically gold has been considered a hedge, but going forward could be the appreciable asset.


The issue with gold - in the financial system - is that that's where its vulnerable.  If you really want the hedging properties of gold you will need it in a physical format, sitting in a safe deposit box or something.  I'm not disputing your argument, just pointing out that GLD or whatever kind of financial instrument version has a different set of risks.  

Already Gold in this format will get taxed differently than capital assets.  Do not forget that the US effectively banned civilian ownership of gold between the 30's and 70's.  And taxation is just another (slower moving) variant of expropriation.

JavaJoe
Explorer ○○

Re: Portfolio Critique: New Roth IRA for a 15-year old

I also disagree with the idea of a 15 year old owning some sort of gold fund in a Roth. Time and learning good habits early are your biggest friend. Don't complicate a portfolio with under $50k.

It would be difficult to convince me there are better options than an all-in-one global 100% equity ETF with ultra low expenses like VT for people under 25.  If the concept of logging in and seeing "I lost money" scares off an early saver, than just start by leaving a bit of cash in there and slowly increasing % over time.

My daughter also found it helpful to play around with a simple visual compound interest spreadsheet/graph where she could play around with different savings amounts while seeing the impact on the back end of the curve at 65+.

The "rule of 72" makes a pretty powerful statement starting at 15 vs 30 for example.

-JavaJoe

retiredat48
Participant ○○○

Re: Portfolio Critique: New Roth IRA for a 15-year old

To the OP and others...regarding gold.

I do not recommend young investors own gold.  Here's why.

Investments are things that EITHER provide current income (like dividends) OR the assets grow over time.

If you buy a gold coin and put it on your desk and stare at it every day for thirty years...then, did it double into two coins?  or into 4 coins?

Of course not...no growth.

Now, did the coin pay you any income, interest or dividends along the way?

Of course not...thus no current income.

IRA assets (tax advantaged spaces) for youngsters are to be GROWTH ASSETS.

Gold can have a purpose, but not in IRAs.  Long story also.

R48

 

 

 

 

shipwreckdalone
Explorer ○○

Re: Portfolio Critique: New Roth IRA for a 15-year old

I was waiting for the pile on :manhappy:

Let me just say I am not a gold bug and never have been, but I am shaking my head and dumbstruck at how America ignores our escalation of debt levels. In 2000 per capita national debt was $20k per person and eighteen years later $60k per person. I am guessing per capita even includes the too young and too old to work. I have often thought if that $60k debt plus interest were transferred to each citizens personal credit card we would vote and think differently. I am assuaged  by the fact Gundlach, Minerd and Drukenmiller all attempt to bring this subject up for awareness/debate.

I guess the difference in my thinking vs consensus opinion is that this problem has no eventual consequences that will affect us (or our children) in our personal lives or standard of living. 

This situation saddens me and gold bullion is the only solution I can offer for those who see this as a risk. The degree of our personal responsibility and involvement will be answered in the fullness of time. To each his own.

I hope I am wrong, but if not gold will be an appreciable asset.

retiredat48
Participant ○○○

Re: Portfolio Critique: New Roth IRA for a 15-year old


@shipwreckdalone wrote:

I was waiting for the pile on :manhappy:

Let me just say I am not a gold bug and never have been, but I am shaking my head and dumbstruck at how America ignores our escalation of debt levels. In 2000 per capita national debt was $20k per person and eighteen years later $60k per person. I am guessing per capita even includes the too young and too old to work. I have often thought if that $60k debt plus interest were transferred to each citizens personal credit card we would vote and think differently. I am assuaged  by the fact Gundlach, Minerd and Drukenmiller all attempt to bring this subject up for awareness/debate.

R48 in bold...hi shipwreckd...

How about this.  I consider you are comingling stocks (ownership shares of companies) with government debt/money.  The two are not codependent.  Companies can operate in any currency...even barter if needed.  Gvt debt is irrelevant.  Remember Gundlach is a bond fund manager (king), and yes, bonds can be greatly affected by gvt money.  More below.

I guess the difference in my thinking vs consensus opinion is that this problem has no eventual consequences that will affect us (or our children) in our personal lives or standard of living. 

This sentence is unclear to me.  This debt problem clearly can affect our standard of living, no??

This situation saddens me and gold bullion is the only solution I can offer for those who see this as a risk. The degree of our personal responsibility and involvement will be answered in the fullness of time. To each his own.

Why only gold as a solution?  What about companies/stocks/stock mutual funds?  Companies have uncanny ways of surviving most things/calamaties.  Even many German companies arose from the ashes of World War II, to do well.  Owning the means of production is the key.

A simple example.  Lets assume massive inflation due gvt debt.  Visa Company does not care.  They take a 0.25% slice of all transactions.  100% inflation means prices double...means Vias doubles its money throughput...means doubling profit.  Get it?  Simply put, companies have pricing power.

Sure, stocks prices can go through bear markets...likely always will.  But the underlying fundamental values are independent of gvt. debt.

I hope I am wrong, but if not gold will be an appreciable asset.

Gold prices tend to stay with currency values.  As noted it has no intrinsic growth or dividend paying value.  So yes, double money/inflation and gold should rise in price...but not necessarily so.  Stocks may have some bumpy rides, but in the long run it always stays with or beats inflation.  Bonds fare horribly.

The bottom line ah ha moment is to never consider your wealth in dollar terms (a currency).  Rather, what do you own, and how much in monthly dividend/income does it pay.  I would be sleepless at night if my total portfolio was in bonds/paper wealth.

Disclaimer:  Age 74, yet I have two large HELOC loans, which I consider puts me on the "right side" of debt/money in this low-rate environment.  I also own a rental real estate property and two other homes, which I put in the "wealth" category.

Glad to discuss.

R48 in bold.

 


 

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