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Comment by patio11 | Hacker News Reader

A Roth IRA, maxed every year, is my main form of "real" investment. I try to put about 75% into index funds and 25% into handpicked stocks, which are my concession to desire to gamble.

I don't buy bonds or CDs -- I'm young enough that short-term loss is a non-event, since nothing short of "my children are starving on the street" will induce me to touch the Roth ahead of schedule. Wild volatility doesn't matter because I only check the account about once a year anyhow -- the only concern is maximizing expected 40-ish year returns.

I generally try to keep a few thousand in cash to cover unexpected expenses, although my discipline with that has left something to be desired as of late. (I'll say this for being a salaryman: I never had to deal with wild swings in my paycheck, and haven't quite mastered the trick of doing so yet.)

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You should absolutely max your Roth first every year, as you can use the account for a first home purchase and qualified education expenses in addition to retirement. (We'll have a lot of this sort of stuff on Blueleaf as we get closer to launch. If there are specific questions, we can write answers/articles for them.)

You can pull money out of a Roth investment (IRA or 401(k)) at any time without penalty because the tax is not deferred. You pay normal income tax on all the contributions you make in the year you earn the money.

Only up to contributions, not gains. But for most young people, you're right: contributions > accumulated gains.

...I don't buy bonds

A lot of people would argue that even for a young person a portfolio with a small bond allocation is actually less risky with higher returns then a 100% allocation to stocks.

Actually, expected returns will be slightly lower but well worth it as the reduction in risk from the diversication away from 100% equities is huge. E.g. 20% in bonds will barely diminish expected returns whilst significantly reducing your overall risk.

Not always true, According to WSJ http://blogs.wsj.com/marketbeat/2011/02/07/depressing-chart-... "Through the close of trading Monday, the investors in 7-10 year Treasurys would have seen a return of 76% percent over the last 10 years, versus a return of 17.4% for stocks. So you could have socked your money in supersafe U.S. Treasurys and reaped a risk-free 80% gain. "

1. a lot of people argue for things without backing it up.

2. it depends what you mean by "risk". arguments claiming bond allocation in your portfolio are less "risky" describe risk as "volatility of returns", which in finance are measured over shorter intervals than 40 years.

patrick is specifically accepting short term volatility in return for the higher EV of returns.

the marketplace prices debt instruments (especially US treasury issued) over the long term with cheaper expectations for returns specifically because it has lower variance of returns.

So why not move even further up the risk chain to all Emerging Markets or invest at greater then 100% equity by using leverage? Fact is, adding a small amount of fixed income investments smooths investment returns and has very little effect on total return whether you accept standard deviation variance as a measure of "risk" or not.

For young people financial theory advises against investing excess capital in bonds and for investing in stocks[1]. The idea is that in the long run stocks have a higher return then bonds and the volatility doesn't matter much (agian this applies only to excess capital). If your portfolio does go south, you've plenty of time to earn some extra income and if things go up you can hit a home run.

In practice people tend to increase their relative holdings in stocks, this is highly risky since it's much harder to make up losses and the end of your working life.

For me: Where I live a special accounts for retirment do not exist so I don't have an opinion on those.

The excess cash I'm now started earn will be invested in simple ETF's. They provide good diversification for a small price.

[1] So good for you!

I prefer to invest in individual stocks and not a fund. Funds do give you some protection, but they will also limit your upside. I prefer the risk/reward trade-off of investing in individual stocks and options.

I am still relatively young so my risk profile is more on the risk seeking side right now. I'll seek out more of the funds when I'm 35+, married with children, and have more to lose.

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