Investors are shifting their allegiance from mutual funds to ETFs. ETFs offer more transparency and, almost always, lower fees than mutual funds.
The question for the thinking investor is how to combine ETFs to create a portfolio that makes sense – meaning, one that has the best chance of achieving the returns you want, with a level of risk you can stand. Wealthfront recently created a slide show presentation, which we’ve been showing at companies in Silicon Valley, offering a primer in how to use Modern Portfolio Theory to combine ETFs. We hope that watching it helps you put your own portfolio together, or enables you to ask an investment advisor better questions about what your portfolio should look like:
The slide show complements our whitepaper (pdf) on our investing strategy.
A couple of notes on Modern Portfolio Theory – which most individual investors have heard of, but few have taken the time to understand. Many institutional investors – the Yale Endowments of the world -- base their investing strategies on Modern Portfolio Theory. Harry Markowitz introduced the theory in 1952, and in 1990 shared the Nobel Prize in Economics for its development with Merton Miller and William Sharpe.
There has been a lot of work around Modern Portfolio Theory, but basically put, the theory prescribes combining asset classes that have different return, risk and correlation characteristics rather than choosing particular stocks or securities to maximize returns for any level of risk.