Monday, March 22, 2010

ETF's and lazy portfolios

Frequently Asked Questions & Answers About ETFs and Index FundsI wrote a lot about my decision to invest in some ETF's and I am sure some of you may be wondering why ETF's and not index funds and what is the difference anyways. Honestly, the biggest reason for investing in ETF's for me was availability. Well, that was easy. So what is the difference?

I finally found a really great answer to the question about ETF's and Index Funds and their differences. For example, what is the difference between Vanguard ETF VNQ and Vanguard Index Fund VGSIX? The key differences being that index funds are offered by a fund management company and may require a minimum purchase and they do not trade on the open market throughout the day. ETF's are just the opposite. If you have a brokerage house, you can buy and sell them anytime you want. 

Ooohh, buying and selling anytime you want. Couple that with no commissions means you could have almost as much fun as a day trader, right? That is the concern expressed in this Morningstar article. The author writes that the incentive to gain new accounts may have unintended consequences. While it is generally accepted that ETF's are a smart investing choice, providing commission free trades may entice traders to try and time the market, or trade more often than necessary, thereby reducing the good qualities of the ETF through the traders own bad behavior. 

investors might be inclined to trade simply because they can, even though academic studies have proven that the lazy investor is invariably better off than the one who trades with great frequency.

What? You mean hard work does not pay off in the investing realm? Nope. The lazy investor and the lazy portfolio have been celebrated at providing what we need most when it comes to building our nest egg. Slow and simple wins the race. A lazy investor is one who sets his investments on auto pilot and forgets them, mostly. Kind of the advertising you might see from ShareBuilder.

The Lazy Person's Guide to Investing: A Book for Procrastinators, the Financially Challenged, and Everyone Who Worries About Dealing with Their MoneyWhat is a lazy portfolio? It is a collection of funds that match an asset allocation and your aversion to risk. No active trading, no picking individual stocks, no market timing, just lazy, boring, automatic investing. The Mad Money Machine actively compares professional lazy portfolios here. But an easier introduction to sample lazy portfolios is illustrated with five great examples by GetRichSlowly. JD explores portfolios named The Couch Potato, The Three Fund, The No-Brainer, The CoffeeHouse, and The Perfect Portfolio. While my personal portfolio, current or target, does not match these five exactly, I have learned much from examining them.

And finally, here is a link that you can use to test out your current, or target, portfolio to see how it stacks up.
From their website,
Icarra is a powerful web-based portfolio management system that:
  • Accurately tracks your portfolio
  • Calculates portfolio returns (including IRR)
  • Generates flexible charts
  • Allows you to find new investing ideas from other users's shared portfolios
Icarra is a free service.
What is your opinion of lazy investing? Is it just too boring for you? Share below in the comments.

You may also be interested in reading:
You Can Lose Money Selling Your Investments
Selling Your Investments Means You Get to Buy New Ones
ETF's and Lazy Portfolios
Dollar Cost Averaging: An In Depth Investigation Using EEM
Alternatives to My Investing Decisions

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