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).

Asset allocation is perhaps the most important consideration when designing an investment portfolio.  Selecting an appropriate mix of stocks, bonds, and cash and maintaining the proportions through regular rebalancing, is about as sure-fire a winning strategy as it gets.

And the online financial service firms are there to help, right?  If I just follow the directions on the website, it’ll be easy as pie, right?  Wait a minute, hombre, not so fast.  Let’s compare the offerings of three large online services:  Schwab, Fidelity and Morningstar.

What exactly is “aggressive”?

The first step in selecting an appropriate asset mix is to determine what “investing” style matches your investment time horizon and your tolerance to risk.

If you’re nearing retirement, you want to have a more conservative portfolio than if you’re just starting out.  Workforce newbies have the most to gain from a high-risk-high-gain allocation, and more time to recoup, should the markets sour.  Likewise, if you’re the type who loses sleep when the markets see-saw, you might be more comfortable with a lower volatility portfolio, and accept that you might have to work an extra year — that may be a good trade-off for you.  Each website offers a walk-through questionnaire to help you evaluate where you fit on the spectrum of risk tolerance. Continue Reading »