Tuesday, July 17, 2007

As Dirty a Beard as Ever

London was fab; now in beautiful Birmingham.

The London Eye

For those attending lovely GUADEC, an apposite reminder: My keynote is Thursday morning, 09:30.

And do not miss Joey's torrid meta-metadata chat, which is under way as we speak.

Friday, July 6, 2007

Ditch the Broker, Get the Girl

The high availability and quality of ETFs provides a strong foundation for a cost-effective retirement strategy. Of course, Wall Street (at least one half of it) hates ETFs, which are cheap and don't allow brokers to extract generous commissions. Worse, a good ETF-based strategy can outperform a more managed approach. Cheaper and better, just like Linux!

Given the decision to setup a lazy portfolio, you need to decide on an allocation strategy. There are many long-term trends that I believe are likely to continue; ETFs allow their monetization and integration into your investment portfolio. For example, I've never been a fan of individual stocks as an investment asset (I am making a distinction here between trading and longer-term investing). Over time, the individual investor will not—cannot— generate the same level of return that a mutual fund will garner. Moreover, in the long run, mutual funds have a hard time beating their benchmark indexes—even they cannot beat the street. So I would not want a long-term investment strategy built around my own stock selection, or even mutual funds. But I would want an ETF or two that tracks a broad swath of the US market. Such a move might sound pedestrian, but it beats having a dog like Magellan stink up your retirement.

Another trend that I suspect is only going to accelerate is the decline of the dollar and the growth of emerging markets. The easiest way to realize the former is a fund that invests in mid- and large-cap offerings in Europe, Asia, and Australia. Such a fund bets on continued growth in those markets, but what they also back is the health of those currencies versus the dollar. To bet on emerging markets—veritable money trees, like investing in pre-Industrial Revolution America—there are plenty of focused ETFs. Due to information asymmetry, illiquidity, and corruption, there is actually a good argument for going with a managed fund for your emerging market allocation, but there are some smart yet low-fee ETFs, too.

Robert in NYC
Just the sort of moron from which you want to take investment advice

Thus, for the aggressive and long-term investor, consider my "bet the farm on overseas" portfolio allocation:

  • 45% Vanguard Total Stock Market (VTI) or iShares S&P 500 Index ETF (IVV)
  • 25% iShares MSCI EAFE Index ETF (EFA)
  • 20% iShares MSCI Emerging Markets Index ETF (EEM)
  • 10% iShares Russell 2000 Value Index ETF (IWN)

This portfolio allocation is bound to shower you in gold. Or it might result in a complete loss of value. And your wife will leave you. Alone and a diet of cat food: You have been warned.

Reinvest all dividends and rebalance annually.

Oh, and the smart investor—unless immortal—eschews annuities as if they were a Michael Bay film.