I’m excited about Schwab’s announcement of commission-free exchange traded funds. They’re currently offering four ETF’s:
U.S. Broad Market
U.S. Large Cap
U.S. Small Cap
International Equity (Developed Nations)
In December, they’ll add four more:
U.S. Large Cap Growth
U.S. Large Cap Value
International Small Cap
Emerging Markets
To keep the rhythm going, I suppose I should list four things I like about the Schwab funds. Here goes:
Each fund tracks a Dow Jones or FTSE index, so you can look up exactly what positions it holds.
Insanely low expense ratios. The chart below is from the Schwab site comparing its expense ratios to other popular ETF’s. I’ll point out that Schwab’s expenses are even lower than the Vanguard S&P 500 (VFINX). Schwab’s expenses are 0.08% (!) for their Large Cap ETF, while Vanguard charges 0.18%
Commission-free when bought online from a Schwab account. Schwab’s accounts have low minimums to open, making them accessible to almost everyone.
Now I can buy ETF’s through dollar-cost averaging.
As I’ve said before, the primary benefit of investing through dollar-cost averaging is that it puts the “when” and “how much” questions on autopilot, letting you focus on “what” to invest in. Up to now I’ve avoided ETF’s because my brokerage charges about $12 for an online trade. To invest in a portfolio of four ETF’s once a month, I would spend $576/year on transaction fees. Why would I do that when I could instead invest in four no-load low-expense-ratio mutual funds? (See, for example, my Three-Minute Portfolio and Gold Star Portfolio.) With commissions set aside, now I can consider Schwab’s index offerings, and they do look interesting, indeed.
Best of all, maybe, just maybe, others will follow suit. (Are you listening, Vanguard?) A little competition could be a nice plus to the average investor.
Full disclosure: Long in VFINX.
Disclaimers: This information is provided for educational purposes only. It may not be an appropriate investment for you. See a financial professional if you have questions about your particular situation. Investments in mutual funds are not FDIC insured and can cause loss of principal (you can lose money).
Back in August, I created the Gold Star Portfolio — a selection of mutual funds that have low expense ratios and are rated highly by Morningstar. It’s been almost three months — time for a quarterly check up.
The graph below shows the Gold Star Performance in pink. The blue line is a weighted average of the indexes. The good news is that the overall markets went up 5.1%. The better news is that, in the same time period, the Gold Star Portfolio is up 6.9%.
Dollar cost averaging is the practice of investing the same amount of money at regular periodic intervals. For example, a person might invest $300 every month. It’s generally thought to be a good practice, but some call it a marketing gimmick, and others call it a losing proposition. Which is true? As with most debates, each viewpoint has some truth to it. Let’s look at each.
Why it’s a Useful Tool
The benefit of dollar cost averaging is this: by investing periodically, you’re more likely to buy shares when prices are low. The low-priced shares give you the greatest return.
As an example, let’s look at investing in a stock for which the price was $10 in month #1, rose to $15 in month #2, fell to $5 in month #3, and returned to $10 in month #4. A graph of the stock prices is shown below.
I was reading an article enticingly entitled “Boost Your Returns” in the latest issue of SmartMoney magazine. My eyes skimmed down to a section on certificates of deposit. I like CD’s. They’re FDIC insured and provide a small but certain return.
CD’s as derivatives
But, whoa, not these CD’s. The SmartMoney article is about CD’s that are indexed to various assets. One highlighted CD is pegged to the value of BRIC currencies. If the value of the foreign currencies rise, I receive an interest rate that is a portion of this growth. If the currencies fall, relative to the dollar, then I receive no interest, but I do get the principal back at the end of the term. Huh? Why would I want to do this? What does the average person know about the Brazilian real, Russian ruble, Indian rupee, or Chinese renminbi? And by average, of course, I mean me. Continue Reading »
In investing, ‘risk’ can have many meanings: the risk of inflation, the risk of interest rates changes, the risk of currency exchange rate fluctuations, just to name a few.
One important measure of the riskiness of a stock (or mutual fund) is: How much does its value change relative to other stocks?
Which would you rather own?
Below is a graph of the S&P 500 index and the total return on a bond fund (PTTDX: Pimco Total Return). Each line was normalized to 1 at the beginning. If you made either investment in June 2002 and held it for six years, you would have had about a 35% total return on your investment. Both investments end up at the same point.
Growing up, we never discussed the stock market. It just wasn’t part of my household, my neighborhood, or (to my recollection) the national zeitgeist.
My parents probably had some money tucked away in a mutual fund or two that were recommended by my Uncle. The Sunday newspaper had a thick section filled with the weekly summary of stock and mutual fund trading values printed in impossibly small print. The subject was a foreign language, full of arcane symbols.
The only investments ever discussed were savings accounts and certificates of deposits. I would take my birthday money to the bank along with my savings passbook. The clerk would fill out the deposit slip and enter the deposit amount in the passbook, initialing the entry.
Growing up with inflation
The bank paid 5% on deposits. We never shopped around for a better rate, because it would have been too inconvenient to travel elsewhere to transact business. During my high school years, inflation grew to 5%, then 7%, then 10%, finally reaching a peak of 13.5% in 1980. As I recall, the bank continued to pay about 5% on my savings. Even with my measly high school math I knew I was losing ground. Inflation was the story of the day. It dominated the nightly news. President Ford encouraged the nation to “Whip Inflation Now,” with his big red WIN buttons.
I don’t mean to bore you with tales from this old geezer’s childhood. I’m telling you this in case you are too young to have lived through inflationary times. Continue Reading »
Brazil, Russia, India, and China. Together they have 40% of the world’s population and generate 27% of the world’s GDP. The average annual GDP growth of a BRIC nation was greater than 7% (before the recession), as compared to approximately 2% for a G-7 nation. Tremendous growth can create significant profits for successful companies.
How can you capture some of this opportunity in your portfolio? Continue Reading »
I just received a notification from my brokerage about changes to several Janus Funds (JNS). I dutifully clicked on the provided link to see this practically illegible document.
Intrigued by the few words I could actually decipher, I went to the Janus website and searched for a more legible copy of the Supplement, alas, to no avail. Nevermind. The quality of the printing wasn’t my real concern, it was the content of the text.
The Supplement lists the expense ratio limits adopted by some of the Janus funds. In principle, limiting the expense ratio is a great idea, since it provides a target for the fund’s management. But let’s read the fine (if murky) print. (Comments are mine.) Continue Reading »
“The next thing I say to you will be true. The last thing I said was a lie.” — Devo
Last week I wrote about my Three-Minute Portfolio based on low-expense-ratio index funds. That’s a great way to put your investments on autopilot. However, an index fund, by definition, will never beat the market.
If you’re willing to put a little time and attention into your investments you can make a portfolio that will (probably) do a bit better than the market.
Didja’ notice some wishy-washy words in that last sentence?
“Probably”: No one can guarantee you returns that beat the market. Anyone who does is related to Bernie Madoff.
“A bit better”: This is not a get-rich-quick scheme, it is a way to consider other sensible investments.
That being said, it is reasonable to consider what you would choose if you want to reach a bit beyond index funds.
A sensible place to look is to use Morningstar’s rating system. They rate all mutual funds from one to five stars. The worst 10% of all funds rank one star, 22.5% rank two stars, 35% rank three stars, 22.5% four stars, and the best 10% rank five stars. The funds are grouped by category (e.g. US Large Cap) and adjusted for risk. Continue Reading »
“I’m finally ready to begin investing, but I don’t know where to begin. Stocks. Bonds. Mutual funds. ETF’s. It’s all very confusing. I have some cash in a savings account, but I want my money to work harder. What do I do?”
The premise
Getting started with an investment portfolio doesn’t need to be difficult. The following steps will take you to a solid, low-cost, easy-to-maintain portfolio. You might not end up challenging Warren Buffett for the title of World’s Best Investor, but you’ll sleep well, and you won’t spend every waking hour worrying about your investments.
Well-managed index funds have low expense ratios, since you’re not paying anyone to scout out the world’s best companies. All the manager does is maintain a portfolio of stocks or bonds as indicated by the index, whether it’s the S&P 500 or the MSCI EAFE.* Mutual funds (including index funds) give you a little bit of ownership of hundreds of companies. If one company stumbles, you won’t lose too much money; conversely, your returns are not going to “hit it out of the park.” The idea is to move up and down with the market, with the assumption that in the long run, there will be more up than down. Continue Reading »
Affine Tips Feed