Investor With $40K IRA and $40K Roth IRA Eyes 40-Year DRIP Strategy – 'Is One ETF With 101 Securities Insufficient Diversification?'

For many investors, the goal of achieving financial independence or building wealth in the long run focuses around strategies like dividend reinvestment plans and ETFs.

DRIPs make it possible for investors to automatically reinvest dividends into additional shares, compounding returns in time. ETFs, on the other hand, offer an accessible way to diversify across securities, reducing risk while riding on the market growth.

But how much diversification is enough, and can a single ETF provide the growth and security needed for a 40-year investment time frame? That is a question one Reddit user struggles with.

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The user, a 31-year-old sewer builder with $40,000 in an IRA and $40,000 in a Roth IRA, is considering a long-term DRIP approach using just one ETF, Schwab U.S. Dividend Equity ETF SCHD, which holds 101 securities. His target is to maximize returns over the next 30 to 40 years, but he's skeptical about this approach providing enough diversification.

“I’d DRIP for 30-40 years (retirement ages are likely going to increase, unfortunately!) And add max out the Roth for as long as I can. Is this a bad decision? Is one ETF with 101 securities insufficient diversification?” he asked Reddit.

Reddit has offered the investor plenty of advice in the comments; let’s analyze them below.

$80,000 All In SCHD? Reddit Investors Offer Their Suggestions

Go for Growth Instead of Dividends in the First Few Years

Commenters emphasized that, at 31 years old, the investor should focus solely on growth-oriented investments rather than dividend-focused ones like SCHD.

“Dividends have their place, for sure. I personally would not do that! That amount of money I would put into growth only like the S&P 500! Why? You will make more money in the long run through growth. You can then at retirement either sell the growth and buy dividends, which will make you a lot more money. Just have to maneuver how much to sell at a time for tax purposes. Or… just take a 4% payout, and it will be even more money payout,” a Redditor said.

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Replying to the poster’s question, “Is this a bad decision?” a commenter said, “Yes. It would likely reduce your gains over 30 or 40 years by hundreds of thousands of dollars vs. investing in the S&P 500. I ran the numbers with someone who had the same bad idea yesterday here.”

A Redditor suggested a hybrid approach, with most of the portfolio allocated to growth ETFs and a smaller portion to dividend assets.

“With 30 or 40 years, I’d go all in on growth. [Invesco QQQ Trust QQQ] or similar, or 80/20 with the 20% being SCHD or similar. Dividends are nice when you need them. You don’t need them because of your time horizon.”

“Nah, as good as SCHD is, the fact is, you would be missing out on some very good growth by not owning tech and growth funds,” another comment reads.

A user recommended the poster split the portfolio between three different ETFs to mix in both growth and dividends.

“It’s not the number of securities that makes it somewhat insufficient, it’s the type of securities. You’re too young to be all in SCHD. Split it evenly three ways with [SPDR S&P 500 ETF Trust SPY], QQQ, and SCHD,” he said.

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Never Go All In Into One Asset

Many Redditors disagreed with the idea of going all in into an asset, and instead, suggested diversification as a solution.

“Not everyone needs to beat the market. Wealth preservation is good and SCHD will give you a nice retirement from dividends. Don't put all your eggs in one basket,” a Redditor wrote.

“Never go all in on one thing; go a little of this, a little of that, diversity your portfolio!” one comment says.

Besides advising the poster to avoid investing all his money in only one asset, this commenter suggested a different ETF and came up with a strategy.

“Putting all your eggs in one basket is very risky, I don't care how stable the fund is. Also, if you want to constantly be paying the taxes on the income being paid every year then great, have at it. But if you ask me, you'd be better off with your time horizon and you insist on going hands-off and putting it all into one ETF, put it all into [Vanguard Total Stock Market ETF VTI] and let it ride, DRIP, and keep adding to the position with any extra income. Let that nest egg grow 20 plus years, then move that much larger nest egg into SCHD later. That'll give you more income in your retirement,” he wrote.

“I wouldn't go all in. But make it a part of the portfolio that you consistently add to,” another commenter said.

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