ETF Portfolio - Pros & Cons

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Hi all,

I'm new to this forum and I arrived here looking for, well.. a forum to discuss the following:

I'm trying to figure out if it is worth creating an 80%-90% bond and equity ETF portfolio, and leave only say a 10% for Stock Picking.

My thinking goes as follows:

PROS:
Actively managed portfolios (either by my self or a professional), usually fail to beat their benchmarks, so why not buy the benchmark..
Regional and Sector diversification can be easily achieved using ETFs.
There will probably be less fees involved, especially when it comes to rebalancing the portfolio.
ETFs are less volatile.

CONS:
Picking certain stocks from within an index can yield better results from buying the whole index.

I was hoping you could add/modify the list and/or post your own comments.

Many Thanks!

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DCtalks said:   My thinking goes as follows:

PROS:
Actively managed portfolios (either by my self or a professional), usually fail to beat their benchmarks, so why not buy the benchmark..
!


Why not fully commit to the idea that you aren't likely to beat the index and just settle for a 100% Bond & ETF portfolio? Aside from the performance question, there's also the account maintenance question. Keeping track of cost basis of individual stocks over the long-run can be a tedious task. Custodians are more helpful in dealing with this now, but historically, that alone has been a con for me.

Raringvt - I agree with you 100% ! I just wanted to leave some room for debate. I'm pretty much settled that I'll go with a !00% bond & ETF portfolio, but really what I am looking for is whether there are some convinving arguments for the opposite.. Thank you for your comment

I do 95% bond/stock indexes.
5% for what i think will be the 'hot' sector for this year.
ie: REITs for 2013

If you have the funds to meet the minimum investment requirements, you may want to look into low-cost mutual funds rather than ETFs to achieve the same thing. For example, many of the Vanguard and Fidelity index fund expense ratios are comparable or better than similar index-tracking ETFs, especially if you can buy Admiral/Advantage shares. Trading ETFs subjects you to bid/ask spreads from trading on the open market, NAV premiums/discounts and stock trading fees (although many brokerage houses let you trade a selection of ETFs for free). Those additional costs may add up to more or less than any difference in expense ratio depending on the circumstances.

DCtalks said:   
CONS:
Picking certain stocks from within an index can yield better results from buying the whole index.

It "can yield better results"; it can also lose bigger. All depends on stock picking skills and some luck. In short, not much of a Con.

There is one reason to have a small/dedicated portion for "stock picking". If you like to have some "fun investing" on the latest IPO or some beaten down stock that you are certain will come back up, hot tip from your uncle Bob, etc., you can do that with this small portion. You may hit a few big ones, lose on some etc. but not affect the overall portfolio performance much. Investing in passive index funds can otherwise be quite dull/boring. Without a dedicated portion, there might be a tendency to plunk a large portion of your portfolio into stock picking that may not pan out.

mespin said:   If you have the funds to meet the minimum investment requirements, you may want to look into low-cost mutual funds rather than ETFs to achieve the same thing.

Thank you mespin for pointing this out. To be honest I hadn't really thought about using mutual funds but now I'll look into this


uutxs said:    There is one reason to have a small/dedicated portion for "stock picking". If you like to have some "fun investing" on the latest IPO or some beaten down stock that you are certain will come back up, hot tip from your uncle Bob, etc.,

Yes, that's the way I thought about it as well, and that's why I'm thinking of keeping a 10% of my portfolio for stock picking. However, now that I'm thinking about it, perhaps I would like to keep a bit of cash to overweight/underweight certain portions of the portfolio, depending on the market trends.. I think that this also has its "fun" since, as you correctly pointed out: "investing in passive index funds can be quite boring". Thanks!

I'd suggest coming with an asset allocation based on your risk tolerance, and then deciding on the bond/stock etf/MF portfolio. And if its mostly index funds/etfs (which is a great idea), then you could also head on over to bogleheads.org and get some advice on a proposed portfolio. the wiki on that site has a ton of great info, especially stuff like investing in taxable/tax-advantaged accounts.

But yes, do set aside that that 5-10% 'play' money that you're thinking of, but maybe keep it outside your desired AA (mental accounting, if you will) - so you can do with it as you please without worrying about your AA/rebalancing.

If you're not good enough at picking stocks to get a day-job doing it, why would you subject your own retirement account to your "learning curve"? The cost of trading stocks is very high - larger than is made clear to you upfront by the brokerage industry.

sesat said:   If you're not good enough at picking stocks to get a day-job doing it, why would you subject your own retirement account to your "learning curve"? The cost of trading stocks is very high - larger than is made clear to you upfront by the brokerage industry.

The people for whom it is a day job usually can't beat indexing over any reasonable period of time.

Since inception, the S&P500 has returned on average of 10-11%. Of course, that doesn't factor in inflation, but the truth is, most fund managers can't beat it consistently. ETF & Index Funds are a good way to move with the market while being tailored somewhat to your needs. Of course, you should be in the stock market for the long haul and having direct investment in companies such as Coca-Cola or McDonalds are almost always never a bad decision.



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