A friend and I were discussing retirement accounts the other day and he asked my advice on what to invest in for both the short term and the long term. After 20 years of investing, I am increasingly arriving at an exceedingly boring answer when it comes to those long term investments: ETF’s which track a big index.
These ETFs can be for the S&P 500 (VOO) or for all the stocks on the New York Stock Exchange (VTI), the point is that you buy shares of an ETF that follows a broad index and don’t touch it.
My Own Example
Taking this into consideration, my friend asked me what my best investment had ever been. Now, I have invested in some aggressive stuff in my day. I made a 40% return in 2011 speculating on Greek bank stocks, I invested in US Bancorp, Bank of America and Wells Fargo at the height of the crisis and have made 200% and 300% returns on those investments.
These weren’t my best investments ever though, they were great, but not my best ever. I missed out on a lot, I was too focused on my industry (finance) since I knew it so well during the crisis and missed many of the deals on stocks like Google and Amazon.
For this reason when I really think of my best ever investment, it actually does have all those stocks I just mentioned and more (except for the Greek banks). That investment was a mutual fund, which is now an index fund that is the primary investment of my Roth IRA.
The Story of My Roth
Before I get into the investment, it’s worth noting the story behind my Roth IRA. I was a little hesitant to reveal the numbers before I decided to write this post but I feel that showing the missteps and the eventual payoffs over time are beneficial to people who can learn from what I did right and what I did wrong when it came to investing.
I wasn’t always a savvy personal finance advocate and avid investor. However, I did have a parent that was. My father gave me a small but great gift when I started my first job in high school: a Roth IRA. Basically the Roth IRA is intended to be an after tax investment vehicle for working people that grows tax free.
There is an income limit of $122,000 for single people and $193,000 for people married and filing jointly in 2019. Above these limits you cannot contribute to a Roth IRA. You are also limited on the amount you can put in, this year the cap is $6,000 and it bumps up every few years with inflation.
If you make lower amounts, you can contribute up to the cap or as much as you made that year. For example, one year in college I only made around $2,000 from side work while I was in school, in this case I still would have been able to contribute $2,000 to a Roth IRA.
So my father put some small amounts into my Roth IRA every year I worked while I was young. Think of it as seed money and once I was out of school and had a “real job” it was my responsibility to fund it myself.
The Roth IRA was completely invested in the Fidelity Fund mutual fund (FFIDX). It’s one of the most popular Fidelity mutual funds and tracks the S&P 500 as it’s benchmark.
Building My First Nest Egg
My first job after graduate school in July of 2007, I saved diligently but did not invest in a 401k since I didn’t have much and was going to contribute to the Roth IRA on my own anyway.
You have until April 15 of the next year to contribute to the Roth IRA and have the contribution count for the previous tax year.
Now to analyze my own contributions and my returns on my Roth IRA, I was able to dig up some old statements since Fidelity only keeps statements for 10 years. From these, I see that I contributed the maximum amount all at once for the 2007 year on March 19, 2008.
Before I contributed that amount, the little bits that my father had chipped in for about 9 years since I was 16 amounted to $11,795. Not bad for starting straight out of school and not having a 401k.
To give you a visual of what I did and what the balance looked like. I have created a table with the dates, balances at particular dates as well as the level of the S&P 500 on those dates for reference. Unfortunately due to the statement format, I don’t have the investment balances on the day I made contributions but the level of the S&P that day gives you a decent proxy.
Source: Marketwatch and author’s calculations
These figures above represent the calm before the storm because in September of 2008, the crisis really accelerated as Lehman Brothers went bankrupt and AIG was teetering on default. The markets went into a free fall from September to December of that year.
Source: Yahoo Finance
This is when all my training and knowledge of stock market history came into play. The stories of John Templeton buying a share of every company on the stock exchange during the depression flashed before my eyes and I decided to tune out the media and everything that was going on and start strategically investing in my Roth, knowing that this may be the chance of a lifetime.
I am proud to look back on what I did. Over the course of 2 months starting in January 2009 I started investing a few thousand into the Fidelity Fund hoping I could catch the bottom of the market. I missed it by 2 days. The Dow Jones bottomed out on March 6th and the S&P bottomed out on March 9. On March 11, I invested $1,300 in my Fidelity Fund followed by $1,000 on March 19 and $700 on March 23 which exhausted my contribution for the 2008 tax year.
Source: Marketwatch and author’s calculations
Using the total monthly return of the S&P 500 as a proxy, those investments have returned about 16% annually for the past 10 years and about 350% total. In other words, that $3,000 I invested in March of 2009 is worth about $13,500 today. The January investment wasn’t bad either, returning 300% and I estimate to be about $8,000 today. That would give my $5,000 investment in those month a worth of $21,500 today.
I was able to contribute again in 2010 and maxed out that year as well, which has also paid off over the years.
Source: Marketwatch and author’s calculations
What I Could Have Done Better
Besides switching my investment to an ETF from a more expensive and underperforming mutual fund, I could have continued to invest for the 2009 tax year after I reached my 2008 limit in March of 2009.
My excuse at the time for these two was first laziness to not shift to a different lower cost fund and in terms of the contribution, I was worried I would lose my job that year as millions did, so I held off on my 2009 contribution until I felt my job was more secure and I had a tax return coming. Keep in mind I had just been laid off the year before I made those contributions in 2009.
Once 2010 came around, I invested up to the maximum again in two installments for the 2009 tax year in March and April of 2010.
A Victim of My Own Success
Unfortunately (or fortunately) for the next 8 years I was not able to contribute to my Roth IRA as my income exceeded the cap. In the mean time though, the power of compounding took over and I continued to see growth.
In 2018 I had a job change as well as a change of heart in terms of my investment. I finally followed my own advice and rolled my old 401k and Roth IRA over to Vanguard. Due to the fact that I want the Roth to compound as much as possible, I placed it in two new funds: The Vanguard Small Cap Index Fund (VSMAX) and the Vanguard International Growth Fund (VWIGX). Since I can handle the volatility and small cap stocks tend to have higher growth over time, I am banking on seeing these grow even more in the coming years (due to my workplace policy I have to place the funds in mutual funds and not ETFs unfortunately).
I was able to add a contribution finally in early 2019 due to my job change and am amazed to see that just with 8 contributions over 11 years, my little extra nest egg has grown to $73,155.
Source: Marketwatch and author’s calculations
Conclusion
I am not sharing this to gloat about my salary or to show off about my returns. The point of this is to show that anyone, with the right discipline and knowledge can see great returns on their investment without any esoteric knowledge or secret strategy.
If you can afford a few trips a year or a new car then you can afford to retire. Taking a long term perspective and riding out the storms of choppy markets are key to seeing your few extra bucks turn into something real for your retirement.
Keep in mind as well that these funds will never be taxed again under the current rules and there is no required drawdown age. I can even pass it on to my child if I pass at say, 85 and don’t use it. The Roth IRA is a powerful vehicle for wealth for those that have the chance to use it. I highly encourage those that can get one to do so and contribute now.
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