I Roth IRA

Investing
Starter Kit
the ultimate guide to becoming a
tax-free millionaire
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Imagine how it will feel when...

...You have your money invested and you know that it’s working hard and growing for
you... in your sleep!

And you know that no matter what happens to the economy, you’ll know how to handle
your investments, whether that means selling it, buying more, or doing nothing.

That’s true freedom, and that is within your reach right now! Not only will you be able to
confidently talk to your friends, family, and romantic partners about your money - but
you’ll be able to inspire THEM to do better with their money too. With a solid, growing
investment portfolio, you’ll know that you’re doing the absolute best for yourself and your
money.

You DESERVE that!

Getting started with your Roth IRA

There are 3 ways to invest your Roth IRA. The good news? Once you have all the details
(which I’m going to give you in this Starter Kit), you’ll know exactly which investing
strategy is right for you!

Strategy #1: Invest in Target Date Funds

Strategy #2: Invest in Index Funds
Strategy #3: Invest in Individual Stocks

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Strategy #1: Invest in Target Date Funds

This is by far the quickest and easiest way to invest your Roth IRA. A target date fund is a
mutual fund that contains 3-5 different index funds. Essentially, it’s a “fund of funds”.

You’ll usually see a domestic stock fund, an international stock fund, a domestic bond
fund, and sometimes an international bond fund. For example:

FINANCIAL JARGON
What is an index fund?
An index fund is a group of investments (stocks or bonds) that mirror
the components of a financial market index, such as the S&P 500. It
provides diversified, broad market exposure and low fees

The combination of these 3-5 different index funds creates what’s called your asset
allocation. You can think of asset allocation as your pie chart - it tells you what percentage
of your portfolio is in certain types of investments.

Your asset allocation not only determines how much money you can make, but it also
determines the magnitude of the ups and downs you can expect. More stocks = more of a
roller coaster ride (and much bigger gains)!

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Target Date Funds automatically pick an asset allocation for you based on your
approximate age. That’s why every Target Date Fund contains a target retirement year in
its name. For example, the Fidelity Freedom Index 2055 Fund is for anyone who’s about
30 years old and would most likely retire around the year 2055. On the other hand, the
Fidelity Freedom Index 2025 Fund is for someone who’s about 60 years old right now.

2055 Target Date Fund 2025 Target Date Fund

The 2055 fund is more heavily weighted towards stocks than the 2025 fund. That’s
because a 30-year old has lots of time for the stock market to work its magic, whereas an
older person doesn’t have that luxury.

History tells us that over any 16-year period, stock market returns have ALWAYS been
positive… 100% of the time! That means that if you invest in the stock market with a long
time horizon - specifically 16 years or more - you WILL end up with a lot more money than
you started with. That's why the more time you have, the more money you should have in
stocks. The less time you have, the less you should have in stocks.

On the next page, I've provided a list of low-cost Target Date Funds from Fidelity, one of
the most reputable mutual fund companies. They also have $0 investment minimums,
which means you can get started with as little as $100! No excuses ;)

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Name of Ticker
Target Date Fund Symbol

Fidelity Freedom® Index 2030 Fund - Investor Class FXIFX

Fidelity Freedom® Index 2035 Fund - Investor Class FIHFX

Fidelity Freedom® Index 2040 Fund - Investor Class FBIFX

Fidelity Freedom® Index 2045 Fund - Investor Class FIOFX

Fidelity Freedom® Index 2050 Fund - Investor Class FIPFX

Fidelity Freedom® Index 2055 Fund - Investor Class FDEWX

Fidelity Freedom® Index 2060 Fund - Investor Class FDKLX

Fidelity Freedom® Index 2065 Fund - Investor Class FFIJX

This list of Fidelity funds is just a guideline. If you opened your Roth IRA at Fidelity, you should buy Fidelity funds to avoid transaction
fees. If you opened your Roth IRA at Vanguard, you should buy Vanguard funds to avoid transaction fees.

Before investing in any mutual fund, please carefully consider the investment objectives, risks, charges, and expenses. Refer to the
prospectus and read it carefully before you invest. Past performance is no guarantee of future results. This checklist may not be relied
on as investment advice, and any references to specific funds should not be construed as recommendations or investment advice.
Diversification does not ensure a profit or guarantee against a loss.

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Once you invest in a Target Date Fund, you literally don’t need to touch your Roth IRA until
you retire. It’s the ultimate set-it-and-forget-it investment (and they cost a lot less than
using a roboadvisor). Lots of people retire millionaires investing in one Target Date Fund
and nothing else.

However, here’s the one major downside with TDFs: they're cookie cutter. They assume
that your Age = Risk Appetite. It leaves no room for your own personal preferences.

For example, what if…

You want socially responsible investments? 
You want exposure to real estate?
And… my favorite: What if you want to retire early? 

TDFs are a good choice for most people, especially if they won’t invest otherwise. But for
those who want to do even better for themselves, read on…...

Strategy #2: Invest in Index Funds

Remember how the TDF is a “fund of funds” that contains several different index funds?
Well this strategy is similar, except that you’re picking the index funds yourself. It’s DIY. 

It’s kinda like making your own flower bouquet. You can choose the flowers and build the
bouquet yourself, which is the equivalent of investing in index funds. You can also just
grab a ready-made bouquet from the florist, which is the equivalent of investing in a TDF.
The ready-made bouquet is more convenient, but the tradeoff is that you have less
control over what goes into it. This option is good for you if you want more control over
your investments. As a Type A nerd and recovering control freak, I personally like investing
this way.

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The 3 steps to buying index funds for your Roth IRA

Step 1 : First, decide on an asset allocation.

For example, 70% stocks, 30% bonds. Stocks provide growth, bonds provide stability.
If you prioritize stability, keep a bigger percentage in bonds.
If you prioritize growth, keep a bigger percentage in stocks.

In general, the younger you are, the more you should allocate to stocks. However, it’s a
very personal choice! You get to call the shots. As a starting point, here are some popular
asset allocations to consider:

Recommended by Jack Bogle, founder of Vanguard

100 minus Your Age = Stock Allocation 
i.e. If 30 years old: 70% Stocks / 30% Bonds

You could build this

asset allocation with just
2 low-cost Fidelity index
funds, FUAMX for bonds
& FSKAX for stocks.

So if you had $1,000

total in your Roth IRA to
invest, you would buy
$700 of FSKAX and $300
of FUAMX. And you're
done!

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What's brilliant about Jack Bogle's recommended asset allocation is that it's so simple!
With just 2 index funds, it's easy to manage. The cons? There isn't any exposure to foreign
stocks, and no exposure to inflation-protected assets like real estate and TIPs (inflation-
protected bonds).

For something a little fancier and robust...

Recommended by David Swensen, legendary manager of Yale’s $30B endowment fund

30% in Domestic Stocks (FSKAX)
15% in International Stocks (FSPSX)
10% in Emerging Market Stocks (FPADX)
15% in Real Estate Stocks (FSRNX)
15% in U.S. Treasuries (FUAMX)

You could build this

asset allocation with
these 6 low-cost Fidelity
index funds. See page 8
for a cheat sheet of
index funds.

So if you had $1,000

total in your Roth IRA to
invest, you would buy
$300 of FSKAX, $150 of
FSPSX, $100 of FPADX,
$150 of FIPDX, $150
FUAMX, $150 of FSRNX.
And voila!

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I personally invest according to David Swensen’s asset allocation, because I like that it
doesn’t have too many eggs in one basket.

Throughout ANY economic cycle or season, at least a portion of this portfolio is positioned
to benefit. At the same time, it’s still very growth-oriented.
In times of peace & prosperity, stocks and real estate will do well
In times of high inflation, TIPs and real estate will do well
In times of recession or crisis, bonds will do well

Step 2: Find low-cost index funds for each asset class.

Once you decide on an asset allocation, the next step

is to find low-cost index funds that fit those
FINANCIAL JARGON
allocations. The key is to make sure that the expense
ratio is under 0.20%. What is an expense ratio?
The expense ratio is what the fund skims off the top to pay for its
operating expenses. So if you invest $100 in a fund with an expense
ratio of 1% (which is high!), the fund "skims" off $1 to cover its
overheard and management pay.

To make it easy for you, on the next page is a cheat

sheet of index funds for you to choose from,
organized by asset class. They are all Fidelity funds,
which are known for being low-cost and having $0
investment minimums.

Step 3: Build desired asset allocation with the index funds.

So if your desired asset allocation is 70% stocks and 30% bonds, and you have $1,000 total
to invest in your Roth IRA, then you’d buy $700 of the stock index fund, and $300 of the
bond index fund.

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Fidelity Total Market Index Fund (U.S. Equity)

Ticker Symbol: FSKAX
Expense Ratio: 0.015%

Fidelity International Index Fund (International Equity)

Ticker Symbol: FSPSX
Expense Ratio: 0.035%

Fidelity Emerging Markets Index Fund (Emerging Markets Equity)

Ticker Symbol: FPADX
Expense Ratio: 0.075%

Fidelity Inflation-Protected Bond Index Fund (TIPS)

Ticker Symbol: FIPDX
Expense Ratio: 0.050%

Fidelity Intermediate Treasury Bond Index Fund (U.S. Treasuries)

Ticker Symbol: FUAMX
Expense Ratio: 0.030%

Fidelity Real Estate Index Fund (Real Estate)

Ticker Symbol: FSRNX
Expense Ratio: 0.070%

This list of Fidelity funds is just a guideline. If you opened your Roth IRA at Fidelity, you should buy Fidelity funds to avoid transaction fees. If you opened your
Roth IRA at Vanguard, you should buy Vanguard funds to avoid transaction fees.

Before investing in any mutual fund, please carefully consider the investment objectives, risks, charges, and expenses. Refer to the prospectus and read it
carefully before you invest. Past performance is no guarantee of future results. This checklist may not be relied on as investment advice, and any references to
specific funds should not be construed as recommendations or investment advice. Diversification does not ensure a profit or guarantee against a loss.

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Strategy #3: Invest in individual stocks

This is the most advanced way to invest your Roth IRA. Here's how to do it:

Step 1: Think of a company that you'd consider investing in.

It should be a company that you know, like, and understand. For example, the first stock I
ever bought as McDonald’s, because at 14 years old - I knew, liked, and understood
McDonald’s (lol!).

Step 2: Then, do a financial "health checkup" on the company.

The scariest thing to you as an investor of a company, is too much debt. Although
economic downturns happen, companies with too much debt rarely survive and there's no
margin for error. Here are 3 debt metrics that say a lot about a company's overall financial
health: 

Interest Coverage Ratio This metric tells you how much operating income a company
generates relative to its interest expense. The higher the better.

Interest Coverage Ratio = Operating Income

________________________
Interest Expense

To get these metrics, use a website like Morningstar where you can quickly see a
company’s historical financials all in one page. Let's use Apple (AAPL) as an example.
Here's the link for AAPL on Morningstar.

Leave it open on another browser tab to reference.

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Scroll all the way to the bottom and find "Interest Coverage".

You want to see an Interest Coverage ratio of 6 or higher, and the higher the better. As you
can see, AAPL's interest coverage is well beyond that!

Debt-to-Assets Ratio This tells you how much the company OWES (debt) relative to
how much it OWNS (assets). The lower the better.

Debt-to-Assets Ratio = Total Liabilities

____________________
Total Assets

To get the inputs for this calculation, toggle over to the Financials tab on the Morningstar
page.

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Then click Balance Sheet.

Find the most recent reported numbers for "Total liabilities" and "Total assets". Divide.

_______________

You want to see a Debt-to Assets ratio under 0.75, ideally. AAPL's is 0.70 as of Sep 2018.

Debt Payback Time This metric tells you how long it would take for the company to pay
off all its debt. The formula is as follows:

Debt Payback Time = Long-Term Debt

____________________
Free Cash Flow

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To get the inputs for this calculation, you'll have to go to a two different places on the
Morningstar page. First, find where it says Free Cash Flow. You want to take the most
recent reported number. This will be the denominator.

Then, toggle over to the Financials tab and find the Balance Sheet again. Scroll down to
find the line item "Long-term debt".

Grab the most recent reported number. This will be your numerator. So for AAPL:

Debt Payback Time = $93.735 billion

____________________ = 1.567
$59.830 billion

This means it would take Apple 1.567 years to pay off ALL of its debt (these numbers may
have changed as of today). A good rule of thumb is 3 years of less. You don't want to
invest in a company that has so much debt that it will take forever to get out of debt.

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Step 3: Look at the company's profitability and earnings

If the company passes the debt tests, it's time to look at how profitable the company is. If
you invest in profitable companies, the value of your investment in the company will grow.
Period. Here's 2 quick ways to assess profitability:

EPS The first thing you want to look for is strong, consistently positive and upward-
trending EPS numbers. EPS, or Earnings Per Share, is the total net income of the
company divided by the # of shares outstanding. Looking at earnings on a per share
basis makes it much easier to read and compare with other companies.

ROIC Return on Invested Capital, or ROIC, is the most important measure of profitability.
It's expressed as a percentage, and it shows how well the company is utilizing its
resources to generate returns.

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Scroll all the way down to find ROIC for AAPL.

ROIC is calculated by dividing the total net income of the company by the total capital
invested in the company. It's good to know how it's calculated, but you rarely have to do it
yourself since you can just refer to websites like Morningstar :)

You're looking for companies with ROIC of 10% or higher. The higher the better!

Step 4: See if the stock is trading at a reasonable price

If the company passes all the above tests, now it's time to determine whether the stock is
a bargain right now. One quick and easy way to determine this is with the PE Ratio, or
Price-to-Earnings ratio. The PE Ratio compares the stock's current trading price to its
most recently reported earnings per share. The formula is as follows:

PE Ratio = Stock Price

____________________
Earnings Per Share

This metric shows you how "cheap" or "expensive" the stock is. The lower the PE Ratio, the
cheaper the stock relative to the earnings its generates.

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You can either calculate it yourself, or just toggle over to the Valuation tab and find AAPL's
PE Ratio.

A good rule of thumb is to find

stocks with PE ratios of 15 or
less. It helps to compare a
stock's PE ratio with its historical
average, as well as with industry
averages.
The lower the PE Ratio, the more
of a bargain you are getting!

As you can see, it’s quite a bit of work to look for individual stocks. It’s not for everyone,
but it's worth it!

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Picking a Strategy
So which Roth IRA investment strategy do you think is best for YOU?

If you’re a “lazy” investor and you want to invest the money in your Roth IRA with as
little effort as possible, go with Target Date Funds. Lots of people retire millionaires
doing just Target Date Funds, so I strongly recommend them for the lazy, hands-off
investor.
For the slightly more DIY investor, I recommend index funds. It can be very rewarding to
learn about different asset allocations, learn the pros and cons of each, and then decide
for yourself what you want to do. It gives you a sense of empowerment and control
over your finances. 
And for the very DIY investor, I suggest learning how to invest in individual stocks. Just
be prepared to roll up your sleeves and do a bit of research and number crunching.

So that pretty much sums up 3 really awesome ways to invest your Roth IRA!

I hope this Roth IRA Investing Starter Kit serves you. If you just max out your Roth IRA
every year, invest according to the principles in this PDF, and you do nothing else... you
can be a tax-free millionaire when you retire.

I'd love to hear from you with any questions/comments, so feel free to email me at
[email protected]. Be sure to also check out my YouTube channel, where I post videos
every week about how to invest in stocks. Happy investing!

To your wealth,
Rose

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