How ETF Investing Has Changed in the Last Three Years

by: David Jackson

A reader asked the following question, which I'll try to answer:

I just found your website and began to read the Radical Guide to Investing.

I got the impression that many of the articles were written in 2003. I did not see any dates posted with the articles, so I do not know if they are still relevant today. Like anything else, markets change in three years and so do investment ideas.

I took early retirement at 55 because the new corporate technique for avoiding age discrimination law suits is to have managers do negative performance reviews, despite evidence to the contrary. I have spent most of the year trying to make money in an options trading account. Now, I am scrambling to figure out what to do with my 401K. It has been in a fixed fund since February and has done very little this year. Last year, I put 70 percent into a diversified stock fund and did real well (15% for the year).

My conversations with Fidelity and Securities America gave me the impression that I would be steered in the direction of managed funds, so I am doing nothing until I figure out where best to put my money.

Should I continue to read the Radical Guide or go elsewhere for information?

Here's my answer: You're right - The Radical Guide to Investing was written in early 2003. Here's what's changed since then:

  1. More ETFs. There are now far more ETFs than were in early 2003. That means that more asset classes are covered by ETFs (such as gold, ticker: GLD and IAU) and microcap stocks (ticker: IWC, PZI). That's good news for investors, because it means that you can build a low-cost, diversified portfolio more easily using only ETFs.
  2. ETF costs have fallen. Increasing competition in the ETF marketplace has continued to drive down costs. Specifically, Vanguard offer some really cheap ETFs. (But be aware of the drawbacks of Vanguard funds).
  3. It's easier to buy ETFs. There's now a lot more readily available information about ETFs. Most online brokerages have information about ETFs and ways to search for ETFs.
  4. Options for ETF managed accounts are growing. Ameritrade was first to market with a managed account that contained only ETFs. Now other companies are joining, such as XTF Advisors. (You can find some articles by XTF Advisors on this site.

On the other hand, there's an ongoing price war in the traditional index mutual fund market, driven by Fidelity's attempt to undercut Vanguard (with E*Trade playing along). For many people (particularly those wanting to add small amounts each month to their tax-deferred investment accounts) that means that traditional index funds may be cheaper than ETFs. Given that you're looking to invest a lump sum, ETF may make most sense.

What hasn't changed is this. Focusing on asset allocation, building a diversified portfolio from entire asset classes, avoiding stock picking, and thinking carefully about rebalancing make more sense than ever. Take a look at your portfolio's performance over the last 5 years, and compare it to a diversified basket of ETFs rebalanced once per year. My guess is that you'll find that The Radical Guide to Investing is as relevant and compelling now as it was 3 years ago. In fact, Internet traffic to The Radical Guide to Investing hit an all-time high this year!

One final point. One of the keys to long term performance is keeping management fees to a minimum. If you can effectively manage a portfolio of ETFs yourself and avoid paying asset-based fees to a manager, you should definitely do that.

Hope that helps. Maybe other readers also have reactions to your questions.
David Jackson

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