Just 5 ETFs and You're Set? Buy-n-Hold Silliness Still Carries On

by: Gary Gordon

You'd have thought that the 2000-2002 bear that ravaged portfolios in the first half of the decade would have stifled buy-n-hold, asset allocation advocates. Alas... "simpleton" journalists and "commission-based, keep-your-assets" advisers continued to push the ridiculous notion that you refrain from selling.

Certainly, the 2008-2009 bear that dehumanized investors must have put an end to the silliness, right? After all, assets from stocks to bonds to commodities to real estate demonstrated that buying-n-holding any investment type is far too risky; plainly speaking (writing), there isn't a magical asset allocation percentage that diversifies a portfolio away from life-changing losses.

It's pretty surprising, then, that:

(1) Bogle of Vanguard fame,
(2) "defrocked-a-decade-ago" Motley Fool and,
(3) Money Magazine

have each thrown their respective fishing lines directly into the winds of change. It's surprising because more successful marketing machines began changing their tunes a long time ago. Think Suze Orman, a reformed buy-n-holder.

Bogle, founder of Vanguard, has raged against the ETF machine for nearly 10 years because ETFs seemed to be challenging Vanguard's indexing dominance. Of course, Vanguard was smart enough to develop 40+ ETFs of their own, ignoring the founder's disdain and cementing their place as one of the top financial institutions.

Keep in mind, just because ETFs are tradeable like individual securities, an indexer can still choose to be a passive buy-n-hold, asset allocator. ETFs just make it easier for an investor to buy or sell at a price point that one desires, something Bogle thinks leads investors to make poor "timing" decisions.

(Note: Ask any Vanguard 401k investor how happy they were to have restrictions and penalties for leaving or entering mutual funds. The disincentive, as well as the public pressure to "hang in there," caused millions of people to lose half of their retirement savings! Say "No" to ETFs, Mr. Bogle- really?

The idea that a financial institution knows what's better for the "average" investor such that it restricts trading activity, something that Bogle thinks is a good thing, is intrusive, oppressive and insulting. What happened to freedom of choice? If an ETF investor wishes to hold on, he/she can. If an exchange-traded index fund investor wishes to sell, he/she should have that ability!)

Not everyone is against ETFs anymore. Yet I find it ironic that the kings of foolish buy-n-holding of individual stocks, the Motley Fool, who softened their tone after the 2000-2002 bear market ruined their reputation, are now talking up ETFs.

Here in 2009, they've put forth the "only" ETFs you will ever need:

Vanguard Small Cap (NYSEARCA:VB)
Vanguard Emerging Markets (NYSEARCA:VWO)

iShares Barclays Aggregate Bond (NYSEARCA:AGG)

Click to enlarge

So this covers the investment universe, does it? Any asset allocation for any risk level, the folks at Motley Fool claim.

An "all-in-one" aggregate bond fund that is effectively dependent on intermediate U.S. treasuries flies in the face of scores of important bond and income possibilities. Where to begin? Short, medium, corporate bonds diversify in the way that small cap stocks diversify from large-cap stocks alone. Munis, inflation-protected, foreign bonds, emerging market bonds, and yes... high quality mortgage backed. How can the world of bond investing be minimized to AGG... albeit, an excellent core holding?

Do I even need to go further with the income that's not presented above? I guess there's no need for domestic REITs or foreign REITs. Perhaps we can forget about the buy-write option income approach. Preferreds? Convertibles? Why... they must be a waste, according to Motley Fool "journalist/investors."

As for stocks, I am a big fan of Vanguard Emerging Markets (VWO). Yet to minimize the importance of China and Brazil is ludicrous. And to minimize the criticality of small-cap funds like China Small Cap (NYSEARCA:HAO) and Brazil Small Cap (NYSEARCA:BRF) is near-sighted at best. At the very least, you think these folks might have at least served up SPDR International Developed Small Cap (NYSEARCA:GWX) as having relevance like U.S. small caps do. And do I even need to mention the failure to include commodities?

Money Magazine is equally shameful, if for no other reason that the advice changes issue by issue. In "ETF Investing Done Right," the writer(s) of this July 2009 piece claim that you need just 5 ETFs to get your diversified mix of 60% stocks, 40% bonds.

Ironic, since late 2007 mixes typically showed 70%-75% stock appropriate for most. By April 2008, it shifted to 50% stock and 50% income. Now it's 60%/40%?

Keep in mind, there's no systematic rebalancing or recommended asset allocation changes taking place in the magazine. Each presentation is offered as a buy-n-hold, leave-it-alone solution for moderate risk tolerance. Pick up the magazine one month, get a "cure-all." Pick it up another month, find something entirely different.

Below is Money's "ETF Investing Done Right" for July 2009:

1. Vanguard Total Stock Market (NYSEARCA:VTI) 35%
2.Vanguard FTSE All-World excl U.S. (NYSEARCA:VEU) 20%
3. Vanguard Total Bond Market (NYSEARCA:BND) 30%
4. Vanguard Real Estate Inv Trust (NYSEARCA:VNQ) 5%
5. iShares Lehman TIPS Bond Fund (NYSEARCA:TIP) 10%

I could "tee off" on Money Magazine for its failure to identify two of the most powerful forces in diversification: foreign bonds and commodities. For foreign bonds, one could use the SPDR Lehman International Treasury Bond ETF (NYSEARCA:BWX) and for commodities, one could employ the services of the Powershares Total Commodity Index (NYSEARCA:DBC).

Naturally, it doesn't make much sense to get too wound up about weak presentations from has-beens and/or media mainstreamers. As easy as ETFs are to use, an investor needs to take a bit more interest in what he/she does. Buy-n-hold asset allocating is never sensible... and 5 ETFs won't cover your retirement life adequately.

Full Disclosure: Gary Gordon, MS, CFP, is the president of Pacific Park Financial, Inc., a Registered Investment Adviser with the SEC. The company may hold positions in the ETFs, mutual funds and/or index funds mentioned above.