Archive for the ‘Build Portfolio’ Category

Buy And Holding ETF’s?

By: Pete | Date posted: 05.01.2012 (1:39 am)

I always find it a bit frustrating but also interesting to see so many analysts and the media always trying to group all ETF’s together in one group. I don’t see the point of doing so. ETF’s have certainly been stealing market share from mutual funds but while all mutual funds seem to fit the “buy and hold” model, that is far from being the case for most ETF’s.

Differences Between ETF’s

ETF’s should be looked at by category. If you take a look at inverse or leveraged ETF’s for example, I think you’ll see that while these products are very much used and very useful to some investors, many others should never even consider buying them. A 3X leveraged ETF is something that should be held for a few minutes, a few hours or perhaps at the most a few days. That is likely not what you are you looking for and neither am I. That being said, those products provide great value for investors looking to profit from short term bets so they certainly have their place in the marketplace.

Long Only ETF’s

That being said, I think the vast majority of other ETF’s fit very well in a long term buy and hold strategy. Sure, I personally believe in a very simple type of ETF portfolio that would hold broad asset classes (such as US equities) but depending on each investor’s context, they might want to get involved with some more specialised ETF’s that cover a specific industry, a specific bond maturity, etc.

Through their smaller fees, enhanced liquidity and the diversification that they provide, I think ETF’s have finally made it possible for individuals to invest in as efficient of a way as pros with millions of dollars and full time teams managing their funds…!

How Many ETF’s Does One Need To Retire? Less And Less

By: Pete | Date posted: 04.13.2012 (5:00 am)

It’s fascinating how quickly the investment world is changing thanks to ETF’s. Even a decade ago, someone trying to manage his own retirement would be stuck trying to buy stocks that would be as diversified as possible. Buying bonds was certainly possible but turned out to be extremely expensive and difficult to trade. There was always the possibility of using mutual funds which is the road most chose but that was an expensive solution.

ETF’s To The Rescue

A decade later, an American investor is now able to get a fully diversified portfolio with just a few different ETF’s. Some choose the even easier road of buying Target Date funds but I generally think it’s more efficient to build your own target date fund. Why? You really only need a few ETF’s to get it done. I’ve already written about a few sample ETF portfolios but a few new ETF’s have made our lives even easier.

A New WisdomTree ETF

A few months ago, I was thrilled to see that WisdomTree had launched an ETF that tracks Emerging Markets Local Debt (ELD), which buys Sovereign debt from emerging markets. That was clearly a great sign. Then, earlier this year, WisdomTree launched EMCB, an emerging markets corporate bond fund. Clearly, it is becoming easier to own an extremely well diversified fund. In reality, one could probably build an ETF portfolio that would own:

Stocks:

-US Equity ETF (VTI for example)
-EAFE Equities (EFA for example)
-Emerging Markets Stocks (VWO for example)

Bonds:

-Total US Investment Grade market (Pimco total return ETF BOND for example)
-International corporate bond fund (IBND)
-Emerging market corporate bond fund (EMCB)
-Emerging market sovereign debt (ELD)

Anything Missing?

Honestly, there isn’t much missing at this point. I think that eventually we will be able to get a solid Global Bond fund or at least an international one that will include exposure to both corporate and government bonds. It is a challenge for ETF issuers to build such a fund as they continue to open new ETF’s, they are getting closer to that day in my opinion. Clearly, I think DIY (do it yourself) investors that want a passive strategy will be better served by ETF’s that any other product at any point in the past, that is great news and it should be celebrated!

Target Portfolio: How Many Asset Classes To Own

By: Pete | Date posted: 12.06.2011 (11:06 am)

The time has arrived. After taking the time to read about ETF’s, about the different types of asset classes that can be used, about the different factors that influence what you should own in your accounts, I consider that you are ready to start preparing your first trades. The first question that you should ask yourself is how many asset classes that you will be investing in. Opinions will vary quite a bit but I think it’s difficult to go wrong by trying to build a simple portfolio instead of a complex one.

What influences the number that you will choose? The desire for complexity does have an impact. However, the major factor remains how much money you own. There are no fix rules but I would personally decide based on the following table:

$5000 or less: 3-4 asset classes
$5000-$1000: 4-5 asset classes
$10,000-$20,000: 5-6 asset classes
$20,000-$50,000: 6-7 asset classes
$50,000 and more: 7-10 asset classes

You could certainly add or take away a few more,but those are my personal preferences.

Why Adding Too Many ETF’s Can Hurt Your Portfolio: It will increase your trading costs both initially and in rebalancings and increase the time required to analyze your portfolio.

Why not having enough ETF’s will hurt your portfolio: In the end, you do need exposure to several types of risks in order to maximize your profits. Being only in bonds or in US equities for example gives you a lot of risk if specific events occur, risks that you could avoid if you added a few more asset classes to your portfolio.

Your Initial Setup Step by Step

By: Pete | Date posted: 11.23.2011 (11:12 am)

You might get the impression that building an ETF portfolio from scratch would end up being an incredibly complex task that could go on for months, require help from financial advisers, your bank and a ton of other people. I have to tell you to start that the process is much easier and smoother than you probably imagine. There are a few different steps that are required but once that happens, you will be ready to move on. Just a warning, this post is all about getting things ready, not trading. Again, we offer a complete step by step in our free mailing list.

Step #1-Open Trading Accounts With A Broker

We will get more detailed about these steps in the future but in terms of brokers, you can simply visit a broker such as:

TD Ameritrade
Schwabb
Quest Trade
Etc

Once you arrive on their website, you can follow a fairly simple step-by-step that will walk you through the account opening process. I prefer to prepare you, there will be a lot of different questions being asked, mostly about your finances and your trading experience but also the types of accounts that you want to open. I’d say that you will want to start with a retirement account (401K or RRSP for example) as well as a cash or margin account.You do not need more, you do not need access to derivatives (options or futures), etc.

This process can be done almost entirely online but you might have some forms to print out and send by mail because of the required signatures, etc. If that is the case, it is likely that you will also be asked banking information. The idea is to be able to do electronic transfers between your banking account and your brokerage account. Why?

Transfer Funds

There are no amounts too small or too large when you start trading but if possible, I would say that starting off with at least $5000 (a bit more if possible) is a great way to ensure that commission fees have a limited impact on your performance but also that you can diversify your holdings somewhat. Transferring the funds can usually be done through your brokerage account once the link between the two is done but obviously you might have more to do for the first one. Once that is done however, you will see how future transfers will be much smoother and easier… speaking of future transfers…

Setup An Automatic Transfer

No matter how you think you cannot afford it, I can tell you right now. The number 1 factor that will determine how much you end up with in a decade or two will not be your pick performance or even your asset allocation, it will be how much you are transferring every month. Start off small, with an amount that you know that you can afford to invest. The idea is to start small but increase that amount over time. How? Every time you get an increase in your cash flows, put a part of that increase into your automatic transfers. How do you setup the transfer? Simply talk to your broker and they will be more than happy to assist you in doing so.