How Do You Feel About Spyders (ETFs)

[SmootSmack]

So I had my semi-annual sitdown with my financial advisor to take a look at my investment portfolio and re-evaluate my retirement plan.

I have the basic 401k, Roth IRA, and an individual account. The individual account is more of a "rainy day" fund that I can pull money in case of an emergency. So I go a bit more conservative there, with a fair portion of it being bonds.

For my 401k and Roth I'm a bit more aggressive going heavy on the mutual funds (both domestic and foreign).

Anyhow, it was suggested that I look into ETFs as a more passive aggressive approach. So, for example, my 401k might be heavy on the mutual funds while the Roth is heavy on ETFs.

So my question is what are the pros and cons of ETFs (or exchange traded funds)? Anyhow have experience with these? What are your thoughts?

[FRPLG]

Originally Posted by SmootSmack

So I had my semi-annual sitdown with my financial advisor to take a look at my investment portfolio and re-evaluate my retirement plan.

I have the basic 401k, Roth IRA, and an individual account. The individual account is more of a "rainy day" fund that I can pull money in case of an emergency. So I go a bit more conservative there, with a fair portion of it being bonds.

For my 401k and Roth I'm a bit more aggressive going heavy on the mutual funds (both domestic and foreign).

Anyhow, it was suggested that I look into ETFs as a more passive aggressive approach. So, for example, my 401k might be heavy on the mutual funds while the Roth is heavy on ETFs.

So my question is what are the pros and cons of ETFs (or exchange traded funds)? Anyhow have experience with these? What are your thoughts?

I think my general feeling on investing is that with proper effort and due dilligence anyone can own a diverse set of 6-10 stocks that can out perform the market. Now this requires know how(via experience and learning usually) and some time. Maybe a couple hours a week per stock. That actually works out to a lot of time though. If that time is an issue or there isn't much motivation to actively manage your money then you can look at Index funds, Mutual funds and ETFs. Of those three I'd be least likely to go with an ETF. They are essentially sector based mutual funds so they bring along the cons of the mutal funds plus they add the risk component of not being very diverse. The cons of Mutual funds are that good ones won't out perform the market over the long haul and bad ones will suck you dry. The good ones are good because they have good managers but inevitably they become basically Index funds because as they grow in reputation they grow in money and as they grow in money the more they have to buy and the more stocks they get into. That brings me to Index funds. They have the cons of basically being about half good stocks and half bad stocks. So essentially your money is half bad.

It comes down to a relative relationship. If you have the wherewithall and time to manage a smallish set of diversified stocks you can and probably will out perform the market on a regular basis. It does take time but I like the idea that you can make your own decisions, even when it comes to taxes.

But if you don't want to do this then good Mutual funds are the way to go. They are diversified and somewhat better than Index funds when it comes to bad stocks. I would totally avoid ETFs and only go into Index funds if you simply want very small risk but are OK with average return.

[saden1]

You're better off going with Index Funds over ETFs. ETFs aren't mature yet and unless you're going to do some hands-on work yourself in managing them I would stay away.

Also, I remember reading a while ago in SmartMoney that half of the ETFs are suppose to fold within the next few years due market forces and a lack of initial investment assets...not exactly appealing.

[Schneed10]

I'm echoing FRPLG and Saden. Index funds are highly preferable to ETFs.

ETFs are an investment vehicle designed to accomplish the same thing as index funds, but they were intended for brokers and advisors to have an opportunity to earn more commission and higher fees for the brokerage houses that sell them. Translation: it costs you a lot more in fees to be in SPYDERS / ETFs than it does to be in a comparable index fund.

Index funds and ETFs are intended to take a passive approach to the market. There is tons of academic research out there showing that this is the most efficient approach to investing. It's just that index funds will cost you way less. I highly suggest either Vanguard or Fidelity for mutual funds. Their fees are the cheapest in the business, and all S&P 500 index funds are created equal when it comes to performance, so why pay the higher fees?

For my own personal investments, I put about 50% of my money in two mutual funds (Fidelity ContraFund and Fidelity International Discovery fund) that have outpaced their comparable index every year for the last 10 years; the fund managers have reached near-legendary status on Wall Street. It's hard to argue with the strategy of finding the best stockpickers to pick your stocks for you. Sure enough, ContraFund is up 15% compared to the S&P 500's 5%. And fees on these funds are less than 1%, whereas a broker or financial advisor will never charge less than 2.5%. Then along with those investments, I keep 35% in a passive S&P 500 index fund. And the other 15% is small cap.

That makes me all stocks. In your 20s and 30s, you're best suited by riding the ups and downs of the stock market. Even in recessions when you lose a lot of value, don't fret, because in the inevitable bounce-back year you'll make it all up.

I know that's more than you were asking for, SS. But in short, go for index funds at the big mutual fund houses in lieu of ETFs.

[FRPLG]

Originally Posted by Schneed10

I'm echoing FRPLG and Saden. Index funds are highly preferable to ETFs.

ETFs are an investment vehicle designed to accomplish the same thing as index funds, but they were intended for brokers and advisors to have an opportunity to earn more commission and higher fees for the brokerage houses that sell them. Translation: it costs you a lot more in fees to be in SPYDERS / ETFs than it does to be in a comparable index fund.

Index funds and ETFs are intended to take a passive approach to the market. There is tons of academic research out there showing that this is the most efficient approach to investing. It's just that index funds will cost you way less. I highly suggest either Vanguard or Fidelity for mutual funds. Their fees are the cheapest in the business, and all S&P 500 index funds are created equal when it comes to performance, so why pay the higher fees?

For my own personal investments, I put about 50% of my money in two mutual funds (Fidelity ContraFund and Fidelity International Discovery fund) that have outpaced their comparable index every year for the last 10 years; the fund managers have reached near-legendary status on Wall Street. It's hard to argue with the strategy of finding the best stockpickers to pick your stocks for you. Sure enough, ContraFund is up 15% compared to the S&P 500's 5%. And fees on these funds are less than 1%, whereas a broker or financial advisor will never charge less than 2.5%. Then along with those investments, I keep 35% in a passive S&P 500 index fund. And the other 15% is small cap.

That makes me all stocks. In your 20s and 30s, you're best suited by riding the ups and downs of the stock market. Even in recessions when you lose a lot of value, don't fret, because in the inevitable bounce-back year you'll make it all up.

I know that's more than you were asking for, SS. But in short, go for index funds at the big mutual fund houses in lieu of ETFs.

Just to add to this. When picking a mutual fund make sure to look at the manager.. .not the fund. It's great to get into a mutual fund that has outpaced the market for awhile but if it has a new manager then it isn't the same fund. Look for high performing managers.

[RobH4413]

I prefer to just swing/day trade. It's much more exciting.

But seriously, I can't wait until I actually have some money to manage. Until student loans are killed, I'll let dreams be dreams for now.

[Schneed10]

Originally Posted by RobH4413

I prefer to just swing/day trade. It's much more exciting.

But seriously, I can't wait until I actually have some money to manage. Until student loans are killed, I'll let dreams be dreams for now.

Paying off debt counts as managing money, too.

If you have a 401K available to you at work, then it pays to make the minimum payments on the student loan and sock money into the 401K so you get the match from your company.

If you're already doing that, or if no 401K is available, then paying down your debt is the smartest move you can make.

[SmootSmack]

Originally Posted by RobH4413

I prefer to just swing/day trade. It's much more exciting.

But seriously, I can't wait until I actually have some money to manage. Until student loans are killed, I'll let dreams be dreams for now.

One of the most difficult things for me to do when I was your age is to put money I had at the present into a retirement account. It's hard to think about what you'll have in the bank at age 65 when you have so little in your early 20s.

But now I'm really glad I did. I've built up a lot in savings by doing that and I'm ready to retire...in 30 years.

[Schneed10]

Originally Posted by SmootSmack

One of the most difficult things for me to do when I was your age is to put money I had at the present into a retirement account. It's hard to think about what you'll have in the bank at age 65 when you have so little in your early 20s.

But now I'm really glad I did. I've built up a lot in savings by doing that and I'm ready to retire...in 30 years.

Yes for sure.

We're all perfectly cabable of calculating it, but we don't all calculate it, so let's calculate it for Rob and anybody else out there who's curious:

Imagine that you invest in the S&P 500 index funds. The S&P historically returns around 9%. Some years are up, some years are down, but when all is said and done it works out to 9% per year. So you sock the money away and ride the ups and downs:

If you put $1000 away at age 22, and put it into a S&P 500 index fund, and leave it there until you're 65 (43 years), your account will be worth:

$1000*(1.09^43) = $40,676

If you decide to work for a while before you start saving, and wait until you're 29, and then you decide to put away $1000 into the same S&P 500 fund earning the same 9%, and still retire when you're 65 (36 years), your account will be worth:

$1000*(1.09^36) = $22,251

See that? Delaying by only seven years cost you nearly half of the account's value. That's a principle called the time value of money. The longer you let it accrue interest, the faster and faster it grows. It's like a snowball rolling down a hill, at the top, the snowball just gets a little bigger with every rotation. But as the snowball reaches the bottom of the hill, every rotation makes it grow so much.

The absolute best thing you can do is get time working on your side ASAP. Time is even more important than the investments you pick. When you do the math like I just did, the question isn't whether you can afford to sock away the money now, it's whether you can afford not to when you're 65.

And the beauty of it is you're never too old to start. There's no such thing as "ah well I'm 40, I missed the boat." No way, Jose. You end up with a much bigger account if you start when you're 40 instead of 45. Or 45 instead of 50. Financially speaking, it's never too late, and there's never a better time than right now.

[Schneed10]

Originally Posted by FRPLG

Just to add to this. When picking a mutual fund make sure to look at the manager.. .not the fund. It's great to get into a mutual fund that has outpaced the market for awhile but if it has a new manager then it isn't the same fund. Look for high performing managers.

Agreed. Bill Miller and Joel Tillinghast, just to name a couple, are among the greats.

And some guy named Buffett, too.

[Schneed10]

PS On the individual account, smart move keeping that conservative. I meant to say I'm 100% stocks for my retirement accounts. For my rainy day funds, I'm very conservative, 100% money market.

You got your ducks in a row pretty well, SS. Nice planning. I wish more Americans took your approach!

[SmootSmack]

So why does there seem to be a rising popularity for ETFs? Is it because the brokers are pushing it to get a higher commission?

By the way I would be charged a 1% commission

[saden1]

Originally Posted by SmootSmack

So why does there seem to be a rising popularity for ETFs? Is it because the brokers are pushing it to get a higher commission?

By the way I would be charged a 1% commission

Can you elaborate?

[SmootSmack]

Originally Posted by saden1

Can you elaborate?

My financial svengali would get 1% of the value of my account at the end of the year. So if the value of my Roth IRA for example is at $70,000 at the end of the fiscal year he'll get 1% of that as his comission.

[Schneed10]

Originally Posted by SmootSmack

My financial svengali would get 1% of the value of my account at the end of the year. So if the value of my Roth IRA for example is at $70,000 at the end of the fiscal year he'll get 1% of that as his comission.

That's about what I figured, for S&P 500 index funds at Vanguard and Fidelity, you'd pay under 0.2%.