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A Twenty-Eight Year Old's Roth

|Includes:Apple Inc. (AAPL), CSX, F, GE, INTC, SCHD, STO, WFM

Five years ago this month, I was transitioning between my current and previous employer. I was only 23 years old at the time yet had already begun contributing to a Roth IRA. I was wanting to move these funds out of the old account to my new 401k, however my new employer did not offer a Roth (only traditional). And so I was given the choice of:

  1. keeping the funds in the old account;
  2. moving to a Roth that I managed on my own; or
  3. cashing it out,

Being the young cash-starved kid I was in July of 2008, I cashed it out. I cannot even recall what I spent the money on. Maybe girlfriends, maybe a new TV... And then in the fall I watched as the market crashed. I was cheering up and down how I had made the smart move, ignorantly patting myself on the back, not thinking to the fact that this ongoing event was effecting my family.

Christmas of 2008

I watched as my grandparents who were both in their mid-sixties at the time saw many of their investments halved. And during Christmas of 2008, I was having a conversation with my Grandfather who had worked most of his life for railroads and I learned that he had 25% of his portfolio in CSX. I was so shocked and wondered why he had sat still and watched as stock prices dived. And that was when he gave me the best investment advice I have probably ever heard.

He explained that he had never once sold a single CSX share. He had faith in the company and he knew that the price at the time was not it's actual value. At this point in the conversation, I brought up the ~$2500 or so dollars that I had spent away. And my grandpa said something to the effect of, "You do realize you could buy 250 shares of CSX for that, right now?" I did a quick calculation and thought about the company's true value. About railroads, and their staying power. And about my grandpa, who had owned shares that dated back to 1970s. I decided this was going to my investment philosophy too. To continually invest in companies I believe in.

And so in January of 2009 with the advice and help of my grandfather, I opened a self-managed Roth IRA. He told me that he would match any amount I was able to put in. With a contribution of $500 from myself and another $500 from him, I made my initial buys within my Roth: 50 CSX and 50 GE.

Contribution Strategy

My general strategy has been to contribute as much of my excess cash as possible to my Roth. This includes both regular income and some inheritance. Since 2009, I have averaged between $4000 and $5000 a year in contributions.

Between downturns in stocks I like, I purchase ETFs (SCHA, SCHB, SCHD, SCHG). Because I use Charles Schwab, I can purchase these ETFs commission free. They also have a very low expense ratio vs. other ETFs. These act as cash accruing holdings which I then will sell in the future and translate the capital into additional stock holdings. In addition to purchasing these ETFs, I have also recently began adding to a 2050 Target mutual fund (MUTF:SWNRX). I buy shares of this with excess cash every payday. This may seem like a Schwab commercial, but it is a true advantage and I would advise others to look into it with their current brokers. This strategy has allowed my contributions to often grow a couple of percentage points before the become a stock purchase.

An example of how this could have worked on a general payday within the past few months:

  • $200 Cash Contribution into Roth IRA

  • Purchase Diversified ETFs - Total $181.00

    • 1 SCHA @ 42.00 - $42.00 (Small-Cap)

    • 1 SCHB @ 37.50 - $37.50 (Broad Market)

    • 1 SCHG @ 37.50 - $37.50 (Growth)

    • 2 SCHD @ 32.00 - $64.00 (Dividend/Value)

  • Purchase $19.00 of SWNRX

After several months of contribution to these ETF positions, I may have built up enough for a stock buy. For example, in December of 2012, I began purchasing SCHD, SCHG, SCHB, and SCHA regularly every paycheck. Most of these positions were closed out a few weeks ago and translated into my current STO position.

Current Roth IRA

As of 6/3 Open Prices

  Shares Price $ Value $ Portfolio % Yield
AAPL 13.035 $450.73 $5,875.18 16.87% 2.75%
CSX 187.205 $24.91 $4,663.28 13.39% 2.40%
F 250.817 $15.93 $3,995.51 11.47% 2.56%
GE 437.605 $23.37 $10,226.83 29.37% 3.24%
INTC 161.469 $24.88 $4,017.35 11.54% 3.57%
STO 75 $22.62 $1,696.50 4.87% 5.13%
WFM 50 $52.00 $2,600.00 7.47% 0.77%
SCHD 29.31 $33.28 $975.44 2.80% 2.61%
SWNRX 48.417 $10.73 $519.51 1.49% --
Cash   $250.00 $250.00 0.72%  
TOTAL     $34,819.60 100.00%  

*Note SCHD, SWNRX and Cash.

Portfolio Diversification

One of the hard parts about getting the Roth off the ground is the want (or need) to diversify. With only so much cash available, I have had some growing pains in my attempts to split my account between holdings. For a very long time, I had only holdings in GE and CSX. And while I wanted to, I could not both continually purchase more shares of these two 'core' stocks as well as buy new positions. Finally in early 2011, I decided to begin buying a third and fourth stock, SBUX and BBT (my bank at the time).

In January of 2012, my grandfather passed away from thyroid cancer which he had battled for several years. I inherited an amount of money, which I placed a large sum into my Roth. 2012 became the first year that I have fully maxed out my contribution. I sold my SBUX shares which I felt were teetering on a tumble in favor of diversifying and purchased F, AAPL, MDT, and DB. And then this year I have closed DB, MDT, BBT and shaved F slightly, swapping them for more tangible starter positions in WFM, INTC, as well as adding to my GE and AAPL positions. The final piece coming last week when I opened my position in STO. And now my general goal is to add to these equities over the next few years. Those that make it through the next series of steps are surely to be with me for life.

Lessons Learned

Overtime, I have attempted to max out my Roth Contribution every year and have diversified my positions slightly. While I still trade in my brokerage account, most of my investments sit warmly in my Roth. Yet, I have not been immune to poor decisions. For instance, last summer I made the decision to begin buying AAPL. This is the most glaring of mistakes. Others have been selling certain positions too early and swapping too often. However, one testament always stands. I don't sell CSX.

In early September, I plan to write another synopsis of my Roth.

Disclosure: I am long AAPL, CSX, F, GE, INTC, STO, WFM, SCHD.

Additional disclosure: I may initiate an additional long position in STO over the next 72 hours.