Here’s how Jeremy Schneider’s $4.5 million portfolio looks right now:
But if he could go back in time and do it all over again, here’s how he says it would look instead:
VFIFX is a target date index fund — Schneider’s new investment of choice. “The target date index fund is actually, truly the most optimal, simple, low-cost investment strategy,” says Schneider, who created a website and online community called “Personal Finance Club.”
Schneider got his start like many beginner investors, mistakes and all. “In my early 20s I did some dumb stock picking stuff on eTrade, which was the Robinhood of the day,” says Schneider. “It was just like throwing spaghetti against the wall, buying and selling random stocks without any serious rhyme or reason.”
But the mistakes came with an upside for Schneider, who learned valuable lessons he now regularly shares on Personal Finance Club. His main advice boils down to two basic tenets: live below your means, and invest early and often.
Why Target Date Index Funds?
Target date index funds are an investment strategy based on the target date, which is the year when you want to access your money and retire. A target date index fund is actively managed to alter the fund’s risk allocation as the target date approaches.
For example, if you’re young and have a long investing timeframe, you probably want to start with a portfolio heavily-allocated to stocks for their growth potential, Schneider says. But stocks can be risky and susceptible to sudden market swings, so as you age, it’s good to transition some of your investment toward bonds, which are lower-risk and provide income stability.
A target date index fund manages that allocation and transition for you. So instead of changing your investments and rebalancing your allocations manually over the years, “you can buy a single package called a target date index fund, which has those things inside it, and sets the asset allocation based on your age,” he says.
Schneider has been balancing and reallocating his investments on his own, and says a target date index fund not only would have saved him a lot of time and effort, but his portfolio also would have performed better. “For my tricky choosing of seven different funds, all I got was a much more complicated portfolio to manage, and an underperformance of about 0.87% per year.”
Here’s a look at how Schneider’s portfolio of seven index funds performed compared to a target date index fund since 2015:
How to Choose a Target Date Fund
Schneider warns that not all funds with a target date are index funds— some are actively managed and come with much higher fees. Make sure you pay attention to any fees that are being charged and choose a true target date index fund.
Here are Schneider’s steps for getting started with a target date index fund:
- To get your target date, add 65 or 70 to your birth year. For example, if you were born in 1990, you might choose a fund with a target date of 2060. Remember, the longer the time frame you choose, the more aggressive your fund will be for longer.
- Google “[name of your brokerage] target date index [year from the previous step]”. Match your fund to your brokerage to eliminate trading fees. For example, if you’re using Vanguard, choose a Vanguard target date index fund.
- On the Google results page, find the ticker symbol for that fund. You can also use Schneider’s reference table of target date index funds for the three big brokerages.
- Check to make sure the fund’s expense ratio is below 0.2%. If it’s 0.5% or higher, the fund is probably actively managed, which adds cost that eats into your investment return.
- Invest in your chosen target date index fund.
Schneider’s Top Tips for Investing Beginners
Schneider says beginner investors should invest their money in five steps for maximum tax advantages and returns:
1. Invest in your 401(k) up to your employer match
If your employer offers a 401(k) or other employer-sponsored retirement account, your first step is to invest up to that match because “it’s an instant return on your money,” says Schneider. Within your 401(k) and other retirement accounts, you can invest in a target-date index fund. With an employer-matched 401(k) you’ll get even more bang for every dollar you invest.
2. Invest in a Health Savings Account (HSA)
This account offers a triple tax benefit. “Money goes in tax-free, money grows tax-free, and money spends tax-free on qualified medical expenses,” says Schneider.
Not to be confused with a flexible spending account (FSA), contributions to an HSA can be invested and rolled over each year— meaning you could leave money there for the long term just like any other investment.
3. Roth IRA
A Roth IRA is a tax-advantaged individual retirement account. The money going in is always after-tax dollars. Your investment grows tax-free in the account until you reach 59 ½, at which time you can take distributions without paying taxes on it.
You must make less than $125,000 per year to be able to contribute up to the maximum for an IRA. Married couples filing jointly must make less than $208,000 to participate. The maximum amount you can contribute to a Roth IRA per year is $6,000 or your taxable income for the year, whichever is lower. For married couples, each spouse could contribute up to $6,000.
4. Go Back to Your 401(k) and fill up the rest of it after your employer match
Usually, contributions to a 401(k) plan are excluded from your taxable income, so you’ll pay taxes when you withdraw it. You can’t take the money from that account until you’re 59 ½, though there are ways of getting around that if you really need to.
However, there are also Roth 401(k)s, which work similarly to a Roth IRA in that your withdrawals later are tax-free. The contribution limit for both traditional and Roth 401(k) accounts was $19,500 in 2021.
5. Brokerage Account
After you’ve taken advantage of all of the tax-advantaged accounts at your disposal (steps 1-4), you can open up a traditional brokerage account to keep investing outside of these accounts. Schneider uses Fidelity, but there are plenty available to choose from.
“The one that gets a lot of press that isn’t my favorite is Robinhood,” says Schneider. “And one of the biggest reasons is they don’t offer a Roth IRA, and so it’s got this crop of young millennials investing for the first time, and paying taxes they don’t need to because they’re investing in a taxable account instead of in a Roth IRA.”
Within each of these accounts, Schneider reiterates the importance of choosing index funds. “It’s common sense, optimal investing.”
Here’s What Jeremy Schneider’s Portfolio Looks Like
Though he wishes he’d recognized the power of a target date strategy sooner, Schneider’s “tricky choosing” has still shown good results, not to mention all the lessons he shares with his followers. Here’s a closer look at Schneider’s overall portfolio, as well as things he wants other investors to know for their own strategies:
Index Funds: $2,362,000
The bulk of Schneider’s investment portfolio and investing success comes from index funds, he says. “Optimal investing is buying and holding low-cost index funds,” says Schneider. “That’s why I bought a portfolio of like five or six ETFs.”
Beginner investors should put their “first thousand, their middle thousand, and their last thousand” into index funds, says Schneider, and he’s doing that through target-date index funds going forward. “Target-date index funds. That’s where I’m putting all my future money.”
Index funds are low-cost, simple, and accessible for many investors. They give you broad exposure to large segments of the market, which helps mitigate your own risk when investing, because your money isn’t tied to a single stock or asset.
Here are the ETFs Schneider is invested in:
- ITOT (Total U.S. Stock Market): $706,000
- IJR (U.S. Small Cap): $495,000
- IEFA (Non-U.S. Stock Market): $405,000
- FSRNX (U.S. Real Estate): $231,000
- IEMG (Emerging Markets): $230,000
- IFGL (Non-U.S. Real Estate): $98,000
- VFIFX & FIPFX (Target-Date Index Funds): $134,000
Real Estate: $1,219,000
Aside from index funds, Schneider says the other main thing he invests in is real estate.
“I think those are the two things that provide income and growth and value,” says Schneider. “Those are how you build wealth through compound growth.”
Schneider used to be involved in a house-flipping company, but didn’t like the hassle. He continues to invest in real estate, however, through syndicated investment deals, which allow him to pool funds with other investors to invest in larger-scale projects like apartment complexes, which other people actively manage.
Real estate investing can be different for different people. It might mean buying long-term rental properties, flipping houses, or hosting a property on Airbnb. Unlike the passive growth you can make from investing in index funds, Schneider says with real estate, “the harder you hustle the more likely you are to get back. It’s much more active than index fund investing.”
Schneider says he doesn’t enjoy the active work of real estate, so he prefers syndicated investments that don’t require that active hustle. Schneider also owns his home outright with no loan, which is calculated into his total investment value.
Bond Funds: $541,000
Schneider owns $541,000 of a single bond fund: BCHYX. The fund is a California (where Schneider lives) tax-free municipal bond fund. He views this bond fund, which is state and federal tax-free, as a middle-term solution for holding money.
Just like an index fund lets you invest in multiple stocks at once, a bond fund lets you invest in multiple bonds to decrease your risk. They can hold bonds of varying length, issuers, and sectors.
“There’s this question I always struggle with where people say ‘hey, I’m not sure when I’m going to need this money,’” says Schneider.
He says if people need money in a few weeks or a month, they should “absolutely” invest that money in a savings or checking account, ready to spend. If they might not need that money for 10-plus years, invest it into index funds. But that middle ground of maybe you need that money in a year or two, “that’s where my bond fund comes in,” he says. “That’s my ‘I might need it soon, but I’m not sure’ money.”
Schneider holds his bond fund in Fidelity along with his other funds.
Individual Stocks: $128,000
Today, Schneider only owns individual shares of two companies, and says individual stock picking is just “exposing yourself to greater risk and volatility, without a greater expected return.” In other words, Schneider says smart long-term investors should ditch the meme stocks and get-rich-quick investing mentality.
Instead, you should choose index funds every time, because that way you’ll have “diversified away all risks of owning individual stocks, and then guaranteed yourself your fair share of growth of the entire stock market. That’s why I buy index funds.”
Schneider keeps $36,000 in cash as part of an emergency fund and part of his ongoing budget. An emergency fund is for any unplanned expenses, or emergencies, that may arise. A high-yield savings account is a great place to keep your emergency fund.
Schneider says if there’s any chance you need money quickly then definitely keep it in a checking or savings account where it’s easily accessible. He keeps track of his cash flow and budget using YNAB (You Need A Budget).
Schneider refers to his cryptocurrency allocation as a “rounding error.” His investment is purely to just “scratch the itch or avoid some FOMO,” he says.
Experts advise to never put more than 5% of your portfolio in cryptocurrency (Schneider’s investment is approximately 0.00044% of his overall portfolio) and never at the expense of any other financial goals like investing traditionally for retirement and paying off high-interest debt.
Schneider does not endorse or recommend any of these cryptocurrencies, but owns a little each of: Bitcoin, Ethereum, Cardano, Litecoin, and Bitcoin Cash. (Experts recommend beginners stick with the two most well-known cryptos, Bitcoin and Ethereum.)