Several days ago a friend wrote and asked about setting up a portfolio where $500 would be deposited every month. What advice would I pass on to such an investor? The first bit of advice is to read all the Beginning Investor posts on this blog and then set up a Strategic Asset Allocation (SAA) plan not all that different than one finds within this blog post. I also would read the Critical Information posts. These can be found under Categories in the right-hand sidebar.
What to do with that first $500 investment? After opening up an account with a discount broker such as TDAmeritrade, I would purchase as many shares of VTI as the $500 will buy. This is the first move to populate the Large-Cap Blend asset class and gives one broad exposure to the U.S. Equities market. Soon after making that initial purchase, I would make an effort to learn how to use the TLH Spreadsheet in order to have a clue how the portfolio is diversified and how well the portfolio is performing with respect to a benchmark such as the VTSMX index fund. If working with TDA, be sure to request $7.00 trades and set the account up for commission free ETFs. That does not happen automatically so be sure the commission free option is in place before purchasing ETFs. Every penny saved on commissions works right to the bottom line of returns.
ETF Rankings: Here we have a list of popular ETFs. Not all are commission free. This list will rotate from time to time, but I post such a list at least once a month, so look for this ranking of ETFs on this blog. We want to invest in the best of the best while maintaining adequate diversification. This model will not beat the market significantly. Nor will it fall behind the market all that much. We are holding risk to a minimum without going into complicated portfolio management. Again, this is a simple approach for a beginning investor.
Buy-Hold-Sell Recommendations: When the second month rolls around and another $500 is available for investing, I would look down over the follow list and seek a high ranking ETF with a positive absolute momentum value. Domestic real estate (VNQ) is such an ETF. It is ranked number 5 and it shows many green cells. DBA, an agriculture commodity, is another possibility. DBA does not throw off a dividend so one may want to wait until the third or fourth month before expanding into Commodities. Again, it depends on how the SAA is set up. Gold (IAU) falls under Precious Metals and one may want to wait a few months before investing in this asset class.
In the third through ten months I would pick up shares of VOE, VBR, VOT, VBK, VEA, VWO, RWX, BND, and PCY. All are commission free ETFs with TDAmeritrade. Even if it means only buying 5 shares of each, begin to build a diversified portfolio. If you use the TLH Spreadsheet you will see how your portfolio is diversified. TLH SS help sessions are available to Platinum members and questions are welcomed. Please post questions in the Comments section so other readers will pick up replies to questions.
These few basic instructions will help a beginner launch a portfolio. Once a few investments are in place, the Dashboard will show the user how the portfolio is diversified and how many shares are needed to bring a particular asset class into balance according to the target percentages.
One last suggestion. Check out investment books on this site or search books. I highly recommend reading William J. Bernstein. It is important to get started on the right track and the Top Ten Investment Books is a great starting place.
Lowell,
I assumed the free ETFs happened automatically. What do I need to do to make sure I have that option. They’ve been charging me $9.99 for trades how do I lock in the $7 trades?
Bob W.
Bob W.,
There is a place on the TDA website where you can set up the commission free ETFs. I forget exactly where that is located, but your broker can inform you if you are unable to locate that setting.
As for the $7.00 trades, I heard someone else negotiated the $7.00 trades for the non-commission free ETFs or stocks, so I asked the broker at TDA to set it up for me. It is not uncommon.
Lowell
In conjunction with learning about portfolio construction, I’ve started to read the Feynman Study. It seems Part 1 skips to Part 3. Am I missing something or is this an oversight?
John K
John,
I’ll need to check on that. Part 2 should be there.
Lowell
John,
Here is the link to Part 2. It is there if you click on the Feynman Study under Categories, it shows up.
https://itawealth.com/2013/09/06/feynman-study-part-2/
Lowell
thanks Lowell!
Lowell, all,
Terrific article in weekend Barron’s on ETFs and crazy stuff now and to come.
http://online.barrons.com/article/SB50001424053111904628504579423162646381646.html?mod=BOL_hp_highlight_2#articleTabs_article%3D3
Importance of diversification and sure tools such the CWM spreadsheet. But main message is know what it is you are buying, why and keep expenses low. Diversify . . .but how far down do we drill before we are at UNG or NASH level? : >)
Robert
Robert,
It appears as if one needs to be a subscriber to see this article. Try this link.
http://online.barrons.com/article/SB50001424053111904628504579423162646381646.html#articleTabs_article%3D1
Lowell