I’ve been investing for about three years now. By all standards, I’m a novice investor. While I’m probably decades ahead of my peers, many of my own readers have been at it longer than me. But, investing isn’t all about being the most knowledgeable or oldest. It also takes discipline, consistency, risk, and many other things to be successful. Regardless of my experience, I am learning something new every day and that counts for something. Most experienced investors have trouble relating to college graduates who don’t know why a stocks goes up or down, or other stock market basics.

Just recently I started to take an honest look at our investment portfolio. As anyone would expect from a couple who has only been investing for three years, it’s still very small. But, I figured it was time to evaluate where our money is housed, what type of return we are getting, and how much we are paying to put our money where it is. In doing so, I realized one important thing: we’re paying WAY TOO much for the type of funds that we are using.


How I Originally Decided Where to Invest

When I originally opened my Roth IRA 3 years ago, my wife already had one opened. Her father, fortunately, had instructed her to invest while she was in college, and I can’t complain. That’s important because it gave me a starting point of where to put my money. I was young (well, I still amand was afraid of making a bad decision, but I was determined not to fear keep me from investing. Because of this, I figured out that my wife’s Roth IRA was entirely invested in a target date retirement fund and did the same with mine. I followed this investing strategy until recently.

By all standards, the fund has produced on par with the market, almost exactly. This year I’ve seen great returns, as have most other investors. So, why in the world would I change that now?

After I realized that the fund was earning almost the exact same returns (juts a little bit less), I started to consider the entire picture. Even if I am earning similar returns as the market index, I am paying almost twice as much by using a target date fund than I would be if I were invested in an index that follows the market.

Calculating the Costs of Target Date Funds

After I realized that I was paying extra money for the choice of using target date retirement funds, I figured it was important to determine exactly how much I was paying to simple use these funds to invest. There are a number of ways to do this calculation. I could easily estimate how much I will contribute over the next 35 years, calculate the rate of return, and then do a complicate calculation based on the approximately .7% fee for the fund.

But this takes time. Instead, I turned to Personal Capital. Personal capital not only helps you track your net worth, but it can also help you evaluate your portfolio. It has a neat tool to evaluate the impact of fees on your retirement earnings. With just our Roth IRAs, we were paying over $200 per year. Over the course of the next 35 years, we would pay over $50k in fees – and that’s without considering any additional investment on our parts. $200 per year may not sound that bad right now when we are earning more than that in positive returns, but what’s going to happen when we experience a bad year.

Pay lots of money to lose money? I don’t think so!

Paying twice the fees that are necessary just doesn’t sound reasonable, especially when we could see a negative year. I would much rather limit the fees as much as possible without taking away from the return on my investments.

Moving My Investments to an Equally Passive, Less Expensive Investment Fund

As a result of realizing how much money we could save by moving to more affordable funds (or with lower expense ratios), I decided it’s time to make some changes. I could continue on being satisfied with the nominal fees, or I could do some research, find different funds that will perform just as well over the next twenty years (if not better) that also have drastically lower fees.

That’s exactly what I did.

Instead of using a target date retirement fund, I am moving half of the money into an index fund and the other half into a dividend fund. The index fund has an expense ratio of less than half of the target date retirement fund. By moving at least of my portfolio to an index fund, we will lower my expenses by at least 1/4. I’m also choosing to use the dividend fund so that I can focus on building a dividend portfolio – which will allow a little more stability and provide a tax-free income source.

The downside of this move away from the target date fund is that I will have to manage my investment allocation as we get older. The good thing is that given we do not want to retire for several decades and our recommended allocation is a high percentage of stocks. The time in between now and retirement also mean that we have enough time to recover from any possible future losses.

While part of me is worried about taking my money out of the target date fund and actually doing my own asset allocation, I also know that my target date fund isn’t safe from a down market. We experienced this in the most recent stock market crash, and have seen moderate returns that almost match the market. Given this fact, I suspect that our net return will automatically be higher. But then again, I’m just a novice – but not for long.

Readers, how do you invest your Roth IRAs?