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Lower Broadway: Empty the Tip Jar and Start Investing

11

February 7, 2014 by Kate Dore

LowerBroadway

Photo credit: Westervin

Lower Broadway or “Lower Broad” is Nashville’s popular entertainment district showcasing some of the city’s most talented musicians who play for tips only. Lower Broadway will also be an ongoing investment series where I attempt to generate passive income through aggressively saving a large portion of my average salary.

Ready for my big secret? There really wasn’t a whole lot of strategy involved when I transferred my Roth IRA from Fidelity to Vanguard and purchased index funds last summer.

I had been holding my money in a Fidelity Freedom target date mutual fund for a few years, but knew that Vanguard index funds were significantly cheaper, so I impulsively made the switch. Once I moved the money, I wasn’t sure what to do next, so I looked at the holdings of the Vanguard Target Retirement 2050 Fund (VFIFX) and allocated my money into the two largest funds (VTSAX and VTIAX) in their portfolio. Purchasing the funds individually would be cheaper over the lifetime of the account, and would force me to rebalance annually as I grew older. I skipped the bond fund mainly due to my age (29) and my high risk tolerance.

Overall, I have been been satisfied with the performances of VTSAX and VTIAX, and feel really good about their expense ratios (.05% and .16%, respectively). Since I’ve already made the maximum Roth IRA contribution for 2014, I should really just sit back, relax, and stop obsessively checking the cost basis for these funds!

What I’m feeling slightly insecure about is my taxable investment account. Currently, I’m 100% invested in Vanguard 500 Index Fund Investor Shares (VFINX). While this is only 33.391 shares, I’m planning to contribute another $17,300 over the course of this year and this month’s contribution will be larger than usual ($1,458 monthly contribution + $1,250 tax return = $2,708). I need to think more strategically and diversify a bit.

Here are some index funds I’m considering adding to the mix:

Vanguard Total Stock Market Index Fund Investor Shares (VTSMX)
Vanguard Value Index Fund Investor Shares (VIVAX)
Vanguard Small-Cap Index Fund Investor Shares (NAESX)
Vanguard Small-Cap Value Index Fund (VISVX)

I’m not ready for ETFs and I’m still not motivated by bonds. My dividends and capitol gains are not longer being automatically reinvested so I can use those to help rebalance, as well.

My long term goal is to generate enough passive income to retire early, however, I need to keep my strategy low maintenance while I am still building skills for my career. For this reason, I’m sticking with index funds rather than buying individual stocks for now.

Readers: What does your portfolio look like? What do you think of my choices?

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11 thoughts on “Lower Broadway: Empty the Tip Jar and Start Investing

  1. SavvyJames says:

    Your choices look reasonable and the low expenses are key. You can’t really go wrong with a company like Vanguard. Quick question, When you state, “My long term goal is to generate enough passive income to retire early….” do you really mean “portfolio” income?

    • I’d like to generate a decent stream of passive income through my taxable account. I’m not entirely sure what my definition of “early retirement” is yet, but I’m only 29. My Roth IRA money will be extra. Thanks for your comments!

  2. Can I ask why you say you are not ready for ETFs? When it comes to index funds, there is not all that much difference between mutual funds and ETFs. I believe mutual funds are generally a little less tax efficient, but with index funds the difference is usually minimal. For instance, the ETF counterpart (VOO) to VFINX has an expense ratio of .05% compared to .17%.

  3. The majority of my investments are held in Vanguard Total Stock Market Index Fund Investor Shares (VTSMX) and they have performed very well (especially last year)

  4. I think that was a smart move- I actually did the same thing, buying some of the major holdings of the target date funds but in an index to take advantage of the lower expense ratio. Since you’re going to contribute such a large amount to a taxable account, can I ask if there are any other ways you could contribute the same sum, but to a tax-advantaged account? Anything to pay less to Uncle Sam.

    • I’m not sure about lowering my taxable income. Any ideas? I have no 401(k), pension, or HSA. I’m considering opening a 529 account to save for some education expenses, but I’m not sure what my other options are.

  5. […] I mentioned that I’m not ready to start investing in Exchange Traded Funds (ETFs) in my first Lower Broadway post, Green Money Stream politely pointed out that my hesitation was unnecessary, and that I should […]

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