Long time reader WH made an interesting comment Friday in response to the idea in Friday's post about the extent to which low savings rates and overspending are obstacles to financial plan success. He noted from the Felix Salmon article I linked to that Felix said that 'whatever the market does in your investing career you will probably do a little worse'. WH noted the extent to which various fees and expenses associated with investing could be the biggest impediment to success.
This sort of inefficient investing is certainly a huge obstacle but I don't think it is the biggest thing getting in the way of success. Intuitively, living a $100,000 lifestyle on a $50,000 portfolio and repeated panic selling would seem to be more harmful.
Disirregardless (hat tip to my buddy Mikey who just became a father for the fourth time) of whether inefficiency is the biggest impediment or not, we all can benefit from a little more efficiency. One way to do this is the various free ETF trading programs that now exist. TD Ameritrade has about 100 ETFs, Fidelity has now 30 iShares funds that can be traded for free, Vanguard ETFs can be traded for free at Vanguard and Schwab ETFs can be traded for free at Schwab.
Below is the list of Schwab ETFs, there will probably be more than you think;
Schwab US TIPS ETF (SCHP)
Schwab Short Term US Treasury ETF (SCHO)
Schwab Intermediate US Treasury ETF (SCHR)
Schwab US Broad Market ETF (SCHB)
Schwab US Large Cap ETF (SCHX)
Schwab US Large Cap Growth ETF (SCHG)
Schwab US Large Cap Value ETF (SCHV)
Schwab US Mid Cap ETF (SCHM)
Schwab US Small Cap ETF (SCHA)
Schwab US REIT ETF (SCHH)
Schwab International Equity ETF (SCHF)
Schwab International Small Cap Equity ETF (SCHC)
Schwab Emerging Markets ETF (SCHE)
Clients below a certain size own SCHB and SCHA and that is the point. Below a certain size it becomes even more important to minimize the number of $8-$10 commissions. The Schwab (SCHW) roster of ETFs covers a lot of asset class ground. Someone with less than $50,000 could build the majority of their portfolio from that list and then add three or four things for narrower exposure and only have a commission drag of $36. Obviously, this would be mostly a broad based portfolio but that is just fine for someone who would rather not spend a ton of time on this. The investor I have in mind might want to layer on one country fund, something like gold and maybe one stock they feel comfortable with. This seems pretty realistic to me, especially if they can be diligent savers, they can DCA [dollar cost average] in to these funds.
While the Schwab program is a more overt asset grab, the TD Ameritrade (AMTD) program goes farther in terms of actually helping people (make no mistake, it is in asset grab too). It does so by including quite a few iShares single country funds in its list of 101 ETFs. I would note that the expense ratio in the Schwab funds is lower than most of the funds in the Ameritrade program. Again, the program helps increase efficiency with regard to fees, which becomes more important the smaller the accounts get. People just starting out will usually have smaller accounts, but now can get pretty good asset class diversification.
I should clarify one thing from the above paragraph: Spending $300 to implement a $1 million portfolio is not really an issue IMO, but that would be a colossal drag on a $55,000 portfolio.
True to Friday's post, maybe today's post can count toward spreading the gospel to people who come to you for this sort of advice.