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DO IT YOURSELF:

Invest in Index Funds!

 

EXCHANGE TRADED FUNDS (ETF's)

also known as "index funds"

also known as "passively managed" mutual funds

(NOT to be confused with "actively managed" mutual funds!)

 

"In study after study, year after year, it has been shown that the vast majority of actively managed mutual funds underperformed their [benchmark index funds]" -- Jim Cramer

 

etfBUY EXCHANGE TRADED FUNDS (ETF's): Overshadowing all of the many pitfalls of investing is a lesser known fact that no non-fiduciary will ever tell you, and that is that over time the average unmanaged broad stock index (example: the S&P 500 index) has been OUTPERFORMING the average actively managed mutual fund for quite some time. So you don't need to pay perhaps 1% to 2% per year to some "asset manager" to be judge and jury with your money and hold your hand, nor do you need to lock your money up in "prison" in long-term investments that have front-end or back-end "loads", high management fees and high turnover ratio costs. Whether you're young or old there's super low cost ETF's for any strategy. Through ETF's you can invest in bonds, various indexes, industries, sectors, commodities, metals, countries, and currencies. You can even bet against the market with ETF's or buy "leveraged" ETF's that rise or fall at multiples of 2 or 3 times certain indexes such as the Dow Industrial Averages. Do you need to invest in all of these ETF's? No. Some investors invest in as little as 2 ETF's VT and BND and do just fine.

 

Investing in index ETF's is as easy as tying your shoelaces. Just open an account with a deep discount brokerage firm and place a "buy" order at a cost of only about $10 per trade, just as you would buy a stock. And you can can sell an ETF at any time for any reason for about ten bucks, and without the early withdrawal penalties or just plain high fees that are often associated with annuities, limited partnerships, "actively managed" mutual funds, non-traded REIT's, etc.

 

Unlike actively managed mutual funds, which may only traded at the close of the trading day, ETF's are traded at all hours of trading. So if you place a trade at 10:23 AM it will be executed seconds later. With actively managed mutual funds, that same trade won't occur until 4:30 in the afternoon at the closing price. Place a market order to trade an ETF at 3 AM and it will be executed at 9:30 AM at the open of the stock market. With actively managed mutual funds, that same trade once again won't occur until 4:30 in the afternoon at the closing price.

 

Most ETF gains are taxed at the lower, more reasonable "capital gains" rate -- unlike some other investments such as annuities which are taxed as "ordinary income". For someone who doesn't have the time to manage their own money, ETF's are the smart choice. You'll have the peace of mind in knowing that nobody can take advantage of you. Even Jim Cramer (MSNBC's Mad Money), who devotes about 99% of his show to discussions about individual stocks, has recommended ETF's to those who don't have the time to study stocks. Although evidence suggests that we can take it a step further by saying that most investors who do study stocks and market trends would fare better by investing in ETF's than if they were to try to pick and trade stocks. You certainly take on more risk as well as trading expenses by picking and trading individual stocks.

 

And finally, ETF's pay dividends that are representational of the securities that the fund holds. For example the S&P 500 ETF VOO currently pays 1.95%. Payments usually occur quarterly.

 

"In study after study, year after year, it has been shown that the vast majority of actively managed mutual funds underperformed their benchmarks." -- Jim Cramer, MSNBC's Mad Money

 

"It is near impossible to work out who is going to outperform the rest on a consistent basis. And therefore for virtually all investors making a decision as to which active fund to invest in is a pure lottery." -- Documentary video 17:12

 

"All the time and effort that people devote to picking the right fund, the hot hand, the great manager, have in most cases led to NO advantage.” -- Peter Lynch, legendary manager of the highly successful Fidelity Magellan mutual fund

 

"By periodically investing in an index fund the know-nothing investor can actually outperform most investment professionals." -- Warren Buffett

(note that Warren said "an" index fund, as in just one ETF to represent your entire stock asset class market exposure!)

 

"The statistical evidence proving that stock index funds OUTperform between 80% and 90% of actively managed equity funds is so overwhelming that it takes enormously expensive advertising campaigns to obscure the truth from investors.” -- Peter Lynch

 

"We discovered that with 111 managers, our performance in the aggregate was NO better than the S&P 500's, minus fees and commissions." -- John English, Ford Foundation

 

According to John Bogle (of the Vanguard fund group) it is a mathematical certainty that over a lifetime you cannot beat the indexes with active management (ex- actively managed mutual funds). Source: PBS

 

STUDY FINDS: After fees, LESS than 3 out of every 100 funds outperformed the Standard & Poor’s 500-stock index!!!

 

Forbes Magazine article exposes the lies told by non-fiduciary "advisers" about index funds.

 

An ETF is a "passively managed" fund which usually seeks to merely copy a particular index (such as a stock or bond index) as closely as possible. Passive management means that there are no high paid Wall Street mangers conducting research of individual investments (like stocks) and attempting to use their expertise to pick the best stocks or "time the market" by attempting to buy low and sell high. And that's a good thing because not having active managers means drastically lower management fees and lower trading costs (known as turnover ratio).

 

In a nutshell an ETF seeks to be the market rather than beat the market. You might say "Wait a minute. That's not good enough for me. I want to do better than just average". Well if you've read on page one you know that studies have shown that "actively managed" funds consistently fail to beat the indexes. Statistical evidence has shown that the deck is stacked against you if you attempt to beat the market by having your money "actively managed".

 

An ETF can be bought and sold at any time on a stock exchange like the NYSE for dirt cheap -- usually about $10 per trade and regardless of the size of the investment. That's right! An order for $1,000 worth of an ETF like SPY costs $10 and an order for $100,000 worth of SPY also costs just $10! Compare that with the expensive (and inferior) products that brokers sell! The best way to invest in ETF's is to simply set up an account with a deep discount brokerage such as E Trade, Scottrade, or TD Ameritrade. Then place a buy order online. It's that simple. You can track your investment by the minute on everyday sites like Yahoo Finance.

It should also be noted that brokers don't like to sell ETF's because ETF's don't pay the lavish commissions that they earn when they sell other investments like "actively managed" mutual funds, annuities, limited partnerships, life settlement investments, non-traded REIT's, bonds, etc. Just because non-fiduciaries like brokers don't push ETF's certainly doesn't mean that ETF's should be avoided. Instead it's brokers, non-fiduciary investment advisers, insurance salesmen and bank employees who should be avoided!

 

Heavily traded ETF's such as S & P 500 ETF's have the least problems and risk, beyond the ordinary risk of owning the individual stocks represented by the fund. There are however certain ETF's that seek to replicate narrower markets (or niche funds), leveraged ETF's, inverse ETF's, and synthetic exchange traded funds. These ETF's have many hidden risks. For example leveraged and inverse ETF's are not suitable as long-term buy and hold investments. Some niche ETF's may be thinly traded, less illiquid, volatile, and subject to price manipulation. More scarecely traded ETF's may not always sell at net asset value (the bid / ask spread). This can work to your advantage or disadvantage. You may buy or sell at a premium or at a discount. Again just stick with widely traded ETF's and generally these issues should not be of concern.

 

Call me paranoid, but even when investing in heavily traded ETF's I suggest diversifying amongst companies that offer the funds. Why? Alarmists will cite MF Global as cause to diversify paper assets no matter how remote the possibility of problems. For example even if you were to decide to only invest in the S & P 500 index (as Warren Buffet has recommended to the average investor) you might consider more than one S & P 500 index fund (iShares, Vanguard, etc).

 

With ETF's you can say goodbye to tax confusion! Come tax time, one nice advantage to ETF's is that there's no confusing spin-offs or mergers to consider when calculating cost basis. ETF's may simply split or reverse split, but that's child's play compared to, for example, determining the tax basis of a stock like LSI Logic, which has been spun-off, split, and merged every which way to sunset from 3 other companies (Agere A shares, Agere B shares, ALU, LU) since the AT&T days.

 

NEWS: In 2012 ETF's surged in popularity, with ETF investments increasing 26 percent to $1.34 trillion.

 

FACT: Since 2003, investors have increased their exposure to index funds by $1 trillion, while pulling out $287 billion from actively managed funds.  

 

FACT: 47% of ultra high net worth investors own ETF's.

 

NEWS: The California Public Employees' Retirement System is considering putting ALL of their investment portfolio into passively managed funds (AKA index funds, ETF's).

 

NOTE: The ETF's listed below are certainly not personalized investment recommendations. This list is provided to create general awareness about the diversity of ETF's that are available. If you need help it is advisable to hire a fee-only fiduciary for a one time consultation to build a portfolio based on your individual situation.

 

Also be sure to place LIMIT ORDERS and DURING trading hours! When placing a trade you are given the option to trade at market or to make a "limit order" at or above or below a specific price. Do not buy or sell index funds or stocks "at market" (also known as a "market order"). During periods of erratic trading (such as during the open of trading when investors are panicing), securities may trade briefly at erratice prices, well below true market value. Instead place a limit order at a specific price that protects your trade from being executed too far below true market value (if selling) or too far above true market value (if buying). The only way to pick a fair price is to place your trade during trading.

 

"If you don't have the time then don't over think it. Just one cheap S&P index fund is the best way to go [to represent the stock portion of your portfolio]." -- Jim Cramer

 

Broad market US stock indexes (ETF's)...

 

VT - This ETF essentially seeks to replicate the total world stock market in developed and emerging markets. Some investors hold just this one single ETF to represent their entire stock asset class. By owning this ETF you effectively own 7,240 stocks of companies located in 50 countries. You can't get any more stock diversified than this!

VITPX - This ETF essentially seeks to replicate the total US stock market. By owning this index fund alone you are stock diversified amongst about 3,300 companies and you are only paying 0.02% in annual management fees! Since 2007 the performance of the total stock market index has been almost identical to the S & P 500 index.

SPY - This ETF essentially seeks to replicate the S & P 500 index, a blend of Large Cap value and growth stocks. The S & P 500 index is also stock diversified because 46.1% of S&P 500 index company revenue came from outside of the United States as of 2011. When you look at the list of the 500 stocks that make up the S & P 500 index you realize that these are the stocks that make up just about any everyday handpicked portfolio designed by "stock pickers". Since 2007 the performance of the S & P 500 index has been almost identical to the total stock market index.

VOO - This ETF is run by Vanguard, and like SPY, this one also seeks to replicate the S & P 500 index.

WFVK - This ETF essentially seeks to replicate the Wilshire 5000 Total Market Index (a blend of Large Cap value and growth stocks).

MDY - This ETF essentially seeks to replicate the S&P Mid Cap 400 Index.

IJR - This ETF essentially seeks to replicate the Standard & Poor's Small Cap 600 Index. Small cap stocks are generally more volatile than large cap stocks.

SLY - This ETF invests in small cap exchange traded U.S. equity securities.

FEU - This ETF essentially seeks to replicate the Dow Jones STOXX 50 Index.

PRF - This ETF invests in S & P 500 index stocks but seeks to avoid overvalued stocks by using a proprietary weighting formula based on five-year averages of sales, cash flow, and dividends, as well as current book value. Surprisingly it performed worse than the S & P 500 index during the 2007 - 2008 crash, but better than the S & P from that point on.

 

Conservative, slow growth stock ETF's....

 

SPLV - This ETF seeks investment results that generally correspond (before fees and expenses) to the price and yield of the S&P 500Â Low Volatility Index.

USMV - This ETF seeks to replicate the MSCI USA Minimum Volatility Index.

LVOL - This ETF seeks to replicate the total return of the Russell-Axioma U.S. Large Cap Low Volatility Index.

XLP - This ETF seeks to replicate the Consumer Staples Select Sector Index. Held up better than most during the 2008 - 2009 market crash.

IDU - This ETF seeks to replicate the Dow Jones U.S. Utilities index

 

Bond ETF's...

BND - Vanguard Total Bond Market ETF - The investment seeks to track the performance of a broad, market-weighted bond index. The fund employs an indexing investment approach designed to track the performance of the Barclays Capital U.S. Aggregate Float Adjusted Index. It has an expense ratio of only .08%. Some couch potato investors hold this security alone to represent their entire bond asset class holdings.

Keep in mind that as of 4/29/2014 BND's holdings by maturing were as follows:

Over 30 years = 2.6%

20 - 30 years = 26.78%

10 - 20 years =9.01%

5 - 10 years = 20.85%

3 - 5 years = 17.5%

1 - 3 years = 23.27%

Currently many fiduciary advisers recommend only 5% in long-term bonds.

IEI - iShares Barclays 3-7 Year Treasury Bond

BIV - US intermediate-term bonds (5 - 10 years)

VCSH - This ETF essentially seeks to track the Barclays Capital U.S. 1-5 Year Corporate Bond Index.

VCIT - Intermediate-term corporate bonds.

GVI - This ETF essentially seeks to replicate the Barclays U.S. Intermediate Government/Credit Bond Index

JNK - This ETF essentially seeks to replicate the U.S. high yield corporate bond market.

VTIBX - Total International bond index

 

NOTE: As discussed earlier, even as a bond investor you do NOT necessarily need to lock your money in prison. With bond ETF's you can sell at any time without penalty.

 

Broad market international stock indexes (ETF's)...

 

ILF - This ETF essentially seeks to replicate the S&P Latin America 40 index.

IEV - This ETF essentially seeks to replicate the S&P Europe 350 index.

DEM - This ETF essentially seeks to replicate the Wisdom Tree Emerging Markets Equity Income Index.

 

Balanced index fund options

VBINX - 60% total US Stock Market and 40% total US Barclay's bond index. One fund and done!

Vanguard also offers passively managed mutual funds that automatically rebalance index fund holdings to maintain 20/80, 40/60, 60/40 and 80/20. With a combination of two funds you can reach any allocation ratio.

 

International country specific stock indexes (ETF's)...

 

ITF - This ETF essentially seeks to replicate the S&P/TOPIX 150 index (Japan).

EWC - This ETF essentially seeks to replicate the MSCI Canada Index.

EWZ - This ETF essentially seeks to replicate the MSCI Brazil Index. The oldest as well as the largest Brazil ETF.

CHIQ - This ETF essentially seeks to replicate the Solactive China Consumer Index.

 

High dividend stock ETF's....

FDL - This ETF essentially seeks to replicate the Morningstar Dividend Leaders Index.

DON - This ETF essentially seeks to replicate the Wisdom Tree Mid Cap Dividend Index.

 

Precious metal ETF's...

GLD - This ETF essentially seeks to replicate the price of gold bullion. This provides an option to holding physical gold. Beware of the higher 28% tax rate (not 15% capital gains tax).

SLV - This ETF essentially seeks to replicate the price of silver. This provides an option to holding physical silver. Beware of the higher 28% tax rate (not 15% capital gains tax).

 

Sector specific ETF's...

IYK (U.S. Consumer Goods index)

IYE (Dow Jones U.S. Oil & Gas index)

IDU (Dow Jones U.S. Utilities index)

IYH (Dow Jones U.S. Health Care)

IYG (U.S. Financial Services Index)

IYZ (U.S. Select Telecommunications index)

IYF (Dow Jones U.S. Financials index)

IYT (Dow Jones Transportation Average index)

IYC (U.S. Consumer Goods index)

IYR (Dow Jones U.S. Real Estate index)

IYJ (Dow Jones U.S. Industrials index)

IYM (Dow Jones US Basic Materials index)

 

Value stock ETF's...

SPYV - This ETF essentially seeks to replicate the S&P 500 Value Index.

 

Are you a day trading gambler? There are also "leveraged" ETF's:

UPRO - This ETF essentially seeks to correspond to three times (3x) the daily performance of the S & P 500 index. So for every 1% in S & P 500 decline, this ETF goes down about 3%, and for every 1% increase of the S & P 500, this ETF goes up about 3%. Due to daily rebalancing, leveraged ETF's are generally used for day trading -- not long-term holding.

UKW - This ETF seeks daily investment results, before fees and expenses, that correspond to twice (2x) the daily performance of the Russell Mid Cap Growth index. Due to daily rebalancing, leveraged ETF's are generally used for day trading -- not long-term holding.

 

You can even bet against the market with these ETF's...

TWM - 2 times the inverse of the Russell 2000 small cap index. Due to daily rebalancing, leveraged ETF's are generally used for day trading -- not long-term holding.

SOXS - 3 times the inverse of semiconductor stocks. Due to daily rebalancing, leveraged ETF's are generally used for day trading -- not long-term holding.

FAZ - 3 times the inverse of financial stocks. Due to daily rebalancing, leveraged ETF's are generally used for day trading -- not long-term holding.

RUSS - 3 times the inverse of Russian stocks. Due to daily rebalancing, leveraged ETF's are generally used for day trading -- not long-term holding.

TBT - 2 times the inverse (-2x) of the daily performance of the Barclays U.S. 20+ Year Treasury Bond Index. Due to daily rebalancing, leveraged ETF's are generally used for day trading -- not long-term holding.

REK - 1 times the inverse of the daily performance of the Dow Jones U.S. Real Estate Index.

 

There's ETF's for just about everything under the sun. Just search Google or Yahoo for what you are looking for. Examples: "Conservative ETF portfolio" or "ETF's for seniors" or "Inflation resistant ETF's" or "Brazil EFT" or "Global Agriculture ETF" or "Reverse ETF's". Remember if it's not sold through your deep discount broker then don't invest in it.

 

Warren Buffet has stated that by investing in one single ETF, the average investor can outperform most Wall Street professionals. It follows that an ETF like SPY would suffice just fine.

 

Random examples of portfolios

 

Jim Cramer style portfolio for retirees (2/3 bonds, focus on high dividend stocks)

66% AGG - Total bond market

10% VOO - S & P 500 index

10% IDU - US Utilities

10% XLY - Consumer Staples index

 

Couch potato portfolio for 50 year old (35% bonds):

65% VOO - S & P 500 index

35% AGG - Total bond market

 

Growth portfolio for 50 year old (30% bonds):

47% VOO - S & P 500 index

17% VGTSX - Total international stock market

15% BIV - US intermediate-term 5 - 10 year bonds

15% AGG - Total bond market

2% VDE - Energy (hedge against inflation)

2% IYM - Basic Materials (hedge against inflation)

2% GLD - Gold (hedge against inflation)

 

Most aggressive portfolio for someone under age 30 (no bonds):

30% VOO - S & P 500 index

24% VGTSX - Total International stock market

20% VO - Mid-cap stocks

20% VBK - Small-cap growth stocks

2% VDE - Energy (hedge against inflation)

2% IYM - Basic Materials (hedge against inflation)

2% GLD - Gold (hedge against inflation)

 

RELATED LINKS:

 

"We discovered that with 111 managers, our performance in the aggregate was NO better than the S&P 500's, minus fees and commissions." -- John English, Ford Foundation

 

Study for 2015- Nothing has changed. Active managers still failing to make more money than the market averages.

 

External article -- "My two least favorite ways to pay for advice" (commission-based advisers and asset managers).

 

STUDY FINDS: After fees, LESS than 3 out of every 100 funds outperformed the Standard & Poor’s 500-stock index!!!

 

Another must read article: Avoid individual stocks. Buy ETF's.

 

Another article: Over a 5-year period from June 2009 through June 2014, only 26% of actively managed funds beat their respective index benchmarks. Only 13% of large-cap stock-fund managers beat the S&P 500 index.

 

Not sure how much risk to take or where to invest? Check out Vanguard's portfolio creation tool as well as Vanguard's nest egg calculator. Of course hiring a fee-only fiduciary adviser for a one-time consultation is a smart thing to do too.

 

Still not convinced that "fee-only" is the superior and only choice? Clark Howard agrees: Pay for investment advice or get it "free"?

 

Index only portfolios are best

 

Not sure how much risk to take? Check out Vanguards portfolio creation tool.

 

The Crash of 1929 took 4 1/2 years to recover -- not 25 years. When adjusted for deflation, a portfolio of 75% bonds / 25% stocks was actually even after 1933 -- Not down close to 90%.

 

Are passively managed index funds safe if the fund company fails? Yes.

"The money you've invested in the mutual fund is safe even if the fund company goes belly-up (like Lehman) or needs a federal bailout (like AIG). There are several lines of safety. For one thing, you're a shareholder in a mutual fund. Your money isn't an asset of the fund company itself. For another, you and all the other shareholders in the fund actually own the securities, not the mutual fund company.

What's more, the securities--stocks, bond, and the like--are held in a segregated custodial account, which is typically managed by a bank or trust. Mutual fund companies carry mandatory insurance. If it has a brokerage business, any accounts there will be covered by the SIPC. Another financial institution would likely swoop in and manage the mutual funds, too."
- Story

 

NEXT ARTICLE: Bonds

 

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