ETF Investing

[J8127]

I know this is not a hot topic on this board, but I figure with so many intelligent people (and FOGs) on it there must be others who are interested in this sort of thing.

Earlier this year I became interested in managing my savings, investing, etc... I have been contributing to the TSP since I enlisted and plan to do so until I get out and roll it over from there. However, I took a chunk of deployment money and invested it into an all ETF portfolio and at the end of the year I am going to do some shuffling, maybe a complete overhaul, and was wondering if any other money guru's had some thoughts on it.

I invested with a USAA brokerage account, but one of the major changes I am considering is switching to a company that doesn't charge commissions on ETFs so I can rebalance whenever I want or invest small amounts monthly rather than waiting until the end of the year.

Anyway, here is what I picked out thus far. I pretty much went with the funds that had the lowest expense ratio at the time from what I felt were legitimate firms.

U.S. Corporations - 50%
Large Caps - IVV (iShares) - 20%
Mid Caps - IJH (iShares) - 15%
Small Caps - IWM (iShares) - 15%

International Corporations - 20%
Large Caps - VEU (Vanguard) - 10%
Emerging Markets - VWO (Vanguard) - 10%

Commodities (And Real Estate) - 20%
REIT - VNQ (Vanguard) - 10%
Gold - IAU (iShares) - 10%

Bonds - 10%
Corporate Bonds - LQD (iShares) - 5%
Midterm 3-7 Year Bonds - IEI (iShares) - 5%

I'm pretty happy with all of corporate stock funds and my REIT, I've actually made back my commissions and a small profit in just a few months with those, where I'm pretty sure I screwed up is with the Gold ETF and the Bond ETF's. To be honest, with the bonds I just got lazy. I'm 21, so I have plenty of time to be "risky" with this. I don't have a limitless tolerance for risk, but if I didn't want to make money I would just put this all away in a savings account and just lose real dollars every year. I do not have a savings account, I keep the rainy day money yes, but I am investing all of my savings one way or another, and I don't see any other way to beat inflation. My goals for this and the TSP are long term retirement savings. I want to save up a big chunk of cash and then turn it into inflation protected annuities when I retire and not worry about money again. Anyway, for some specific questions,

- Should I switch to a firm that does not charge commissions for ETF trading, even if it meant going with an ETF firm? (I.E. Invest with Vanguard which would mean I would have to own all Vanguard funds) Currently I save the money and at the end of the year I invest a large chunk...and pay commissions. If it were free, I could get the cash into the market sooner, probably not every single month but multiple times a year.

- Does anyone see any flaws in my apportionment plan? I could handle just not having any bonds at all right now, they are all losing money anyway (short term, I know)

- Should I ditch the two bond funds and invest in an all-encompassing bond ETF, and if not, is there a better combination of funds to cover the bond market? I am not interested in buying actual bonds.

- IRT the Gold Fund...I feel now that having 10% of my portfolio in gold is probably pretty stupid. I don't have enough to buy bullion, although I could save the money that would go towards this fund and maybe every other year I could buy another ounce. Would any of you recommend this? What about a general commodities fund or precious metals fund? Combinations? Any advice here, I'm pretty lost.

Thanks in advance, I hope it wasn't too long winded.

[jatx]

You are very, very overweight on equities, regardless of your age - unless you are 100% certain that you will never need liquidity.

Too many questions to answer all at once, but there are some good articles online at Money and Kiplingers about portfolio allocations using ETFs.

FWIW, most private client groups whom I know are recommending something like the following right now for "moderate risk" investors. Because you are not experienced, I would caution you about being any more aggressive than this.

Equities 52%
- US Large Cap Value 13%
- US Large Cap Growth 13%
- US Mid Cap 6%
- US Small Cap 3%
- US REITs 2%
- Non-US Developed 13%
- Non-US Emerging 2%

Fixed Income 46%
- US 36%
- Non-US 10%

Cash 2%

Two notes: Most firms are deviating from their own allocation models right now with regard to real estate. This is not because yield is unavailable in RE, it is because their clients are telling them to pound sand and investing their REIT dollars themselves. So, at the client level, REIT allocations are closer to 6-10%. This has caused what appears to be a rebalancing towards corporate bonds, but which is not actually the case.

If you do not know much about the various classes of real estate, the safest place for you to be is in REITs that invest in single tenant assets backed by investment grade corporate credits. E.g., NNN and its peer group. These can substitute for some of your US corporate bonds.

IMHO, you should keep at least 10% in cash until you gain experience and build your knowledge base.

[JJ_BPK]

I'm a FOG and my track record is a tad above normal. I retired at 47 and I'm still GtG 15 yrs later. So I'll give you some cheap suggestions.

If you don't have the time to learn how in invest, use Mutual Funds. The majority are free to trade. There are gazillions of them.

You can spread you money as suggested to have a balanced portfolio.

Use dividend re-investment on all you funds until you're old enough to think about spending some of the funds.

Making adjustments 1 or 2 times a year is all you need until you get to educated.

ETF's & Spiders are almost the same as mutal funds but can be traded real time. If you aren't educated,, this does not buy you anything.

The best part of Mutual Funds and/or ETF's is they get you a bucket of stock that buffers you from the dips. Some of the stock will be up while others are down.

The worst part of Mutual Funds and/or ETF's is they get you a bucket of stock that buffers you from the highs. Some of the stock will be up while others are down.

Safety in obscurity & mediocrity. This is to your advantage.


Daily trading of stocks or ETF's only make money for the brokerage firm you use. There may be 500-1000 people in the world that THINK they can beat the market. Day traders are a special bread, usually boned up on caffeine and cigarettes.

You, by your definition are not there.

Find a brokerage firm that has good tools for selecting investments. I have used Schwab for 40 yrs. Not the cheapest, but they have good tools and when I need help, they are there. The tools and help are FREE...

The most important part is not so much what you invest in, but the fact that you never stop investing at your max amount.

Good luck..

[J8127]

Thank you for the feedback.

JJ_BPK - I do have time to learn, thats why I am looking for some advice from some more experienced investors. I read up on the subject quite frequently but it is still like drinking from a fire hose, and it doesn't help that almost everything one "expert" says, contradicts another, "expert."

jatx - I don't know that I could say I am 100% certain, but I am as certain as I can be that I will not need to liquidate any of my investments. I live very well below my means, have a reasonable amount of rainy day cash, and excellent credit to handle anything catastrophic. I also have some of the best job security in the world. Does any of that effect your assessment that I am overweight? My goal is to beat inflation and accumulate wealth to retire with at about 58 (37 years from now). Do you have any recommendations on how to allocate bond exposure? I have either a total-market bond ETF or an Inflation Protected Bond ETF in mind, thoughts?

Your outline also lacks any commodities or gold, do you generally advise against these?

[ZonieDiver]

Find a brokerage firm that has good tools for selecting investments. I have used Schwab for 40 yrs. Not the cheapest, but they have good tools and when I need help, they are there. The tools and help are FREE...

I'll echo that statement. I've used Schwab since '76, while using a couple others for short times - but never been swayed from Schwab.

[nmap]

ETFs are an outstanding choice, IMO. As JJ_BPK points out, they are in some ways similar to mutual funds. They are more easily traded than funds.

Some commodity oriented ETFs require the filing of form K-1 - so tax filing may be a bit more complex than with funds.

There's nothing wrong with your allocation, but I get the impression that you are trying to spread your investments across a wide spectrum. You might wish to consider coming up with a vision of what the economy and its components are going to do, then designing an allocation to match your expectations.

For example - you are long equities and long bonds. So your ideal situation is for interest rates to go down (causing bonds to appreciate) at the same time that stocks are going up. Will interest rates continue down from where we are now? Perhaps - one respected analyst believes they will. But he contends that this will be due to reduced economic activity, implying a declining stock market.

In addition, you have 50% of your portfolio long stocks (not counting REITs). Do you expect stocks to go up from here? Why? (Not agreeing or disagreeing, just saying it may be worthwhile to consider your reasons for taking this particular position). Are stocks great values based on historical numbers (No - they are not.). Are they in an uptrend? (Yes, they seem to be based on both trend analysis and Dow theory). So....if that's your basis....how will you adapt if things change? When will you liquidate a winning position - or, for that matter, a losing one? Will you just hang on indefinitely? If so - why?

Please understand that these are meant as reflective questions, not requests for information. They're just something to think about.

Bullseye Investing by Mauldin is a good discussion of stock values over the past century.

stockcharts.com offers some free charting services - in addition, they have lots of resources that discuss technical analysis

Barron's is an interesting weekly newspaper dedicated to investments. Perhaps it is available at your local library. If so, it's worth a look.

CNBC? OK, granted, one must take much of what they say with a generous application of salt, but it sometimes has some interesting bits of information.

For trading, I use Ameritrade, and I'm happy with them. YMMV!

Best of luck in your endeavor!

[nmap]

BTW - John Mauldin has a free e-mail publication you might enjoy. Here's a link to his latest.

LINK

[abc_123]

Another happy Ameritrade user here. Also second Mauldin's book.

BTW, if you are one of us little people and want to buy physical bullion, there are several sites on-line that permit you to do that with small amounts.

I use bulliondirect.com . Had them recommended to my by someone in my SFA chapter.

They have a catalog that you can buy from or an exchange where members buy and sell physical metal. Members establish an account make deposits, buy product and then can elect to receive a delivery of their physical metal at any time.

I have had no problems with my deposits being credited to my account quickly, or buying on their exchange. None of the users on their forums have had issue with delivery of product. I have not taken delivery of any product yet so I can't speak from firsthand experience on that part yet.

Not saying these guys are the best. Just who i started using and have not had reason to switch yet.

YMMV

[J8127]

Thank you all for the feedback, I will be away for a little bit and unable to respond but I will certainly check back when I return.

[JustinW20]

Originally Posted by nmap

BTW - John Mauldin has a free e-mail publication you might enjoy. Here's a link to his latest.

LINK

John Mauldin is an outstanding source. I've always enjoined his take on the economy.

For clients that have expressed a desire to begin managing a share of their own portfolio, I’ve always recommended Ben Graham’s “The Intelligent Investor” as a good place to start.

[Surf n Turf]

J8127
I am also a FOG who has invested prudently, and has also done a bit above normal. I use Schwab & Vanguard, and trade as little as possible. I especially like CASH.
JJ BPK has outlined some very sound suggestions, none of which I could improve upon.
I would comment on your investment spread, that you look to be trying to cover everything. For that I would recommend an Index Fund. There are several good ones at Vanguard. Diversification is a good thing, if you know what you are buying. and why.

Some things to consider (for the short term – 5 +/- years)
What “state” do you think the American economy is in – Will it get better / worse.
The DOW is pretty high – will it go higher / lower
What emerging Markets / Technology will be available.
Good Luck
SnT

Selected Readings
One Up Street on Wall Street, Peter lynch
Learn to Earn., Peter Lynch
A Random Walk Down Wall Street, Burton Malkiel
An Introduction to Mutual Funds, SEC (Free)
Capitalism and Freedom, Milton Friedman
And finally,
The Wealth of Nations, Adam Smith