Help Your Portfolio Recover with ETFs09 Jul
Six years ago, I worked with iShares to launch their Portfolio Construction Tool, an online application that helped financial advisers build client portfolios using iShares (Barclays Global Investor’s branded ETFs). A few years later, we did the same for State Street Global Investors and two other large money managers, covering over 80% of the ETF market. Tens of thousands of advisers have used the tool since then.
In January, 79% of advisers named ETFs their top investment option for the next six months, according to a Charles Schwab survey. It is clear that professionals loves ETFs, and you should too.
What ETFs have going for them:
- They are cheap: As I emphasize over and over again, it is hard to predict returns, but expenses are totally predictable. The fact is that fees and expenses take a huge bite out of your portfolio returns over the long run, so stick with the cheap stuff. The average expense ratio for ETFs is 0.56% vs. 1.44% for the typical actively managed mutual fund.
- They are simple: The index ETFs track well known indices and can be traded on the exchanges like stocks, so with just a couple of ETFs you can have enjoy wide diversification in the U.S. and abroad at rock-bottom prices. (You pay commissions every time you trade so you should do it in big lump sums rather than monthly).
- Everyone is doing it: Investors poured nearly $150 billion into ETFs in the second half of last year, even as they drained more than $250 billion out of regular stock and bond mutual funds. Perhaps individual investors are finally wising up and realizing that they do not have the skill sets to pick individual stocks.
Rescuing your Portfolio:
If your portfolio took a beating last winter, this might be the right time to rebuild it if you haven’t already. If you do not have a lot of time then just keep it simple. For example, here is what I did with my 529 College Savings Account: A diversified mixed of 60% stocks, 40% bonds using 5 low-cost ETFs. (You can get much fancier with more niche ETFs, but that just makes rebalancing more complicated later.) By the way most of these have expense ratios less than 0.1% per year.
- Stock: US Stock (35%) – Vanguard Total Stock Market (VTI) or something similar
- Stock: Foreign Stock (20%) – Vanguard FTSE All-World ex-US (VEU) or something similar
- Stock: US Real Estate (5%)- Vanguard REIT (VNQ) for that inflation hedge
- Bonds: Intermediate Bond (30%) – Vanguard Total Bond Market (BND)
- Inflation Protected Bond (10%) – iShared Barclays TIPS Bond (TIP), with all that deficit spending, inflation will come sooner or later
Post was inspired by an article by Penelope Wang in the Professional user’s Guide to Money Speical Report
