February 7, 2014 by Kate Dore
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?