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Friday, October 22, 2010

This Makes Sense to Me

from the NYT

A Basket of Assets in One Investment

AS investment vehicles, exchange-traded funds seem like a perfect fit for retirement portfolios.
The funds, known as E.T.F.’s, are generally relatively low cost and easy to understand. Listed and traded openly on exchanges, E.T.F.’s are baskets that invest in assets as various as global stocks and gold.
Yet picking the right E.T.F. is crucial. Far too many E.T.F.’s are overmarketed and some of the complex funds are loaded with nuances that most investors do not understand. E.T.F.’s can pose an almost irresistible, but risky, temptation to limit your bets to a single industry sector, country or commodity.
This is a particularly good time to invest in E.T.F.’s because major fund managers and vendors are battling one another to win customers by lowering costs. Brokerage commissions and internal fund management “expense ratios” are the major costs of owning E.T.F.’s. By taking advantage of this commission war, investors can increase the net returns on retirement funds....
With more than 1,000 funds to choose from in a $1 trillion industry, which E.T.F.’s do you add to your portfolio? You can start with the simple principle of diversification. Do you have funds that cover the entire United States stock and bond markets? How about international stocks and bonds?
It is also prudent to consider which risks you want to insulate your retirement portfolio from: market downturns, inflation, currency fluctuation and losing out on opportunities abroad, for example.....
Beware, too, of advisers who say they can beat the market with portfolios of E.T.F.’s.
Here I think the writer is oversimplifying a bit  or is at least unclear . No adviser should say he can beat the indices that are tied to the underlying etfs. Of course it is possible that a diversified portfolio  composed of etfs  tied to indices other than the s+p 500  such as the one recommended  in the article (see above in bold ). Could outperform (or underperform) the s=p 500 . And such a portfolio certainly offers more diversification and could  have a different risk/return profile. The  the s+p 500 which is a large cap US stock index in fact it doesnt represent  'the market" in fact it is not a very good proxy for the entire US stock market (unlike a total stock market index represented by an etf such as vanguard's VTI)
While you can always construct a portfolio on your own, it makes sense to consult a certified financial planner or registered investment adviser to see what your portfolio needs — and does not need — before you buy these vehicles. An investment policy statement outlining your objectives is essential. Duplicating what you already have makes no sense. (of course i agree with that one)

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