Sometimes we assume around here that everyone comes to ETF.com trying to answer one simple question: “What’s the best _________ ETF? “ And we’ve gotten pretty good at answering that question.
Wanna know what the best all-around U.S. small-cap ETF is? You head to our segment report on small-caps and look for the blue ribbon, which signals our “analyst pick” in almost any market segment.
While there are lots of good funds in the list, if you’re just looking for cheap, tradable exposure, you’ll be hard pressed to do better than the Vanguard Small Cap (VB | A-99).
But what if you’re approaching ETF investing—or investing at all—for the first time? You’re middle aged, have a little money to get to work and don’t even know how to get started?
Traditionally, this would be where I write 1,500 words on asset allocation. I’d tell you to assess your risk tolerance and time horizon and educate you about different asset classes. But in a stroke of what I can only imagine is bureaucratic oversight, the SEC actually maintains one of the clearest guides to all of that in its investor education website.
And once you’ve read the basics, there are quite literally thousands of places on the Internet that will offer up presliced portfolios for you.
You could follow one of the portfolios at Bogleheads (a long running Vanguard-centric community). You could buy one of Rick Ferri’s books (or just hire him as your manager), or you could just head over to Wealthfront, go through its questionnaire and steal the resulting portfolio. You could even just use Matt Hougan’s Cheapskate Portfolio from ETF.com.
But let’s imagine you’ve already got a brokerage account and $100,000 to invest, and you’ve already decided you’re a pretty average investor, who’s looking for something like 60 percent risky assets (generally equities) and 40 percent less risky assets (generally bonds). How do you approach the process of building a portfolio of ETFs to match that allocation?
Question No. 1: Where Is Your Money?
If you’re like most people (or like me at least), you made a choice a long time ago about where you were going to park your money. Maybe you got a rollover from a 401(k) in the ’90s and stuck it in Fidelity. Maybe you scraped together $10,000 in college and opened a Charles Schwab account. Maybe you’ve been a longtime Vanguard investor because that’s what your father did.
Most financial writers ignore this, but I’d argue it’s one of the more critical contributors to answering the question “which ETFs?” With the rise of commission-free trading, for a smaller account like $100,000, oftentimes the lack of commissions will be more important than a decent amount of expense ratio on the funds you choose.
If you’re making six trades a year in your account (not unreasonable with perhaps two rebalancing trades in three funds), and you’re paying $10 a trade, you’re automatically out 0.06 percent a year just in trading costs.