Creating a portfolio with exchange-traded funds can work really well for the fix-it-and-forget-it investor like myself.I want to invest wisely, but after the decision is made, please don't bother me about it again. I have to be at my son's baseball game and then figure out how to make purple icing for my daughter's birthday cupcakes. As a refresher, an ETF is a single security that represents a basket of stocks that track an index. So that means while they look like index funds, these things actually trade like stocks. That also means you'll pay your broker a commission fee every time you buy or sell. So, if you're planning on making monthly contributions to your portfolio, ETFs might not be your best option. The upside, though, is that ETF shares can easily be converted back to cash and don't have short-term redemption fees like many mutual funds do. That means you won't have to pay an early withdrawal charge because you withdrew the money before a specified time. And since ETFs basically mirror an index, you don't have to worry about excessive portfolio turnovers translating into capital gains hits come tax time. So, if you have some money to park and forget, these things could be the way to go. We'll offer some very basic sample portfolios for the different stages of life. Of course, there's no cookie-cutter answer -- your investment choices depend on your own situation -- so don't take these portfolios to the grave.
The Swinging SingleThe upside to being young (aside from lack of responsibility and the ability to stay up past 10 p.m.) is that you can take on more risk. So, if your stomach can handle it, go ahead and be aggressive. Throw it all in the stock market. To view Tracy Byrnes' video take of this article,
Most pros would recommend that you put anywhere from 60% to 70% of your money in domestic stocks, with the remainder invested overseas. So, on the domestic side, consider using a broad total-market index fund. There are many out there, but since they all closely correlate to the broad market indices, the expense ratios become the biggest differential, says Dan Culloton, a senior fund analyst at Morningstar. So, why not go with the cheapest? The Vanguard Total Stock Market VIPERs ( VTI) is the clear winner, with an expense ratio of 0.07%. It follows the MSCI US Broad Market index, which consists of all the U.S. stocks traded regularly on the New York Stock Exchange, American Stock Exchange or over-the-counter markets. Your other option is the iShares S&P 500 Index ( IVV), with an expense ratio of 0.09%. It invests at least 90% of its assets in S&P 500 securities. On the international front, consider the iShares MSCI EAFE Index Fund ( EFA), suggests Culloton. This ETF mirrors the Morgan Stanley Capital International Europe, Australia and Far East (MSCI EAFE) index and is composed of about 1,000 companies that trade on 20 stock exchanges around the world (not including the U.S., Canada and Latin America). Can't get much more international than that. If you're truly feeling aggressive, you could put a piece of your international portion in emerging markets. No more than 5% of your international piece, though, should be in these risky areas. But if you're willing to take the chance, the Vanguard Emerging Markets Stock VIPERs ( VWO) will do the job at a low cost and will get you some exposure to those so-called untapped markets. Going with an overall emerging-market fund is a much better way to take a risk than throwing your money in, say, a China fund. While China may be the flavor of the month, flavors come and go. And, remember, you don't want to flip ETFs too often, because the commissions on your buys and sells will start to add up. So you're better off putting your money in a fund with a longer-term outlook.