Making Amends: The Penny-Pincher's Portfolio

February 03, 2009

Market timing is risky. One short-term move that's a sure bet is to cut fees. Why pay more than 0.12% a year for a diversified fund portfolio?


A lot of pundits are telling you to start bottom-fishing for stocks. That might be true since many blue-chip companies are trading at ridiculously low valuations.

But such short-term moves can be difficult to turn into long-term gains. Instead of focusing on trying to time markets, another strategy might be to put your portfolio's fee schedule under the same microscope as its returns.

The average mutual fund's expense ratio now is 1.24%, according to Morningstar. That means for every $100,000 you've set aside, you're forking over $1,240 a year in administrative-related fees.

So let's do some penny-pinching. You can easily set up a portfolio of exchange-traded funds that would come with a total expense ratio of 0.12% to own. Such a miserly basket of 60% stocks and 40% bonds would set you back $120 per every $100,000 invested. And it'd be widely diversified with plenty of room to grow through nine different funds.


The Penny-Pincher's All-ETF Portfolio

ETF Symbol ER % Category Weight % YTD Return %
Vanguard Total Stock Market VTI 0.07 U.S. Large-Cap 10 -6.91
Vanguard Value VTV 0.10 U.S. Large Value 10 -10.79
Vanguard Small Cap Value VBR 0.11 U.S. SC Value 10 -11.75
iShares EAFE Small Cap SCZ 0.40 Int'l Dev. SC 5 -10.07
Vanguard European Stock VGK 0.11 Int'l Dev. LC 10 -11.89
Vanguard Pacific Stock VPL 0.11 Int'l Dev. LC 10 -10.93
Vanguard Emerging Markets VWO 0.25 Int'l Emerging 5 -6.92
Vanguard Total Bond Market BND 0.11 U.S. Bonds 30 -3.13
Vanguard Short-Term Bond BSV 0.11 U.S. Bonds 10 -1.58



But it's important to realize what such a portfolio doesn't include. As a confirmed penny-pincher, you've got to just say no to high-priced funds.

For example, it certainly might be advantageous in the long term to include an international small-cap value ETF. And since the iShares EAFE Small Cap Index (NYSE: SCZ) provides only developed markets exposure, it might be nice to have a bit of emerging markets coverage to juice returns down the road.

But you're going to start really paying up for those types of features. (In an earlier Long Road column, we studied low-cost foreign small-cap alternatives. See the story here.)

It's like buying a car—you've got to walk into the showroom knowing how much is enough. Stick with the basic features needed and stick to a set allocation plan, which is what will drive a majority of your returns over time.

(A side note: Vanguard has a new FTSE All-World ex-US Small-Cap Index ETF set to launch soon. It will provide exposure for both emerging and developed markets and come slightly cheaper than SCZ. See related story here.)

With pure small-cap value ETFs starting at around 0.60%, a more cost-conscious strategy might be to get most of your exposure to that style of stock in the U.S. The price differences are startling. The Vanguard Small Cap Value ETF (NYSE: VBR) comes with a much easier-to-swallow 0.11% expense ratio—a fifth the cost of its closest foreign rivals. In order to remain diversified, a true penny-pincher would dabble in small-cap stocks overseas without going overboard.

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