ETF Portfolio - Pros & Cons

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!

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.

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

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.

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.

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.