ETF Strategies

We often get questions regarding how to invest in ETF’s. The best answer to that question is to see a good financial planner and have the planner map out your best asset allocation. (Be aware that many financial planners will try to sell you commission products. ETF's don't pay commissions to planners. Pay your planner a fee to get the best advice.) It amuses me that many people just say, "Oh, I don’t want to pay for advice". Meanwhile they may have $100,000 sitting in a fund paying 3% and they could be making anywhere from 10% up to 80% depending on their risk tolerance. In other words they are making $3000 on their investment but they could be making $10,000 to $80,000 per year – and they don’t want to pay a few hundred dollars for the advice. This is a classic case of the old British saying "penny wise and pound foolish".
However if you are a die-hard penny-pincher even to the point of damaging your own future earning potential I will give you the following examples that you may be able to learn something from. I cannot, in a general article, say for you to do this or that because it all depends on your particular situation and risk tolerance. So here are a few educational examples.
Jack and Jill are in their 40’s and have no children. Three years ago they had saved $100,000 and put it in a balanced mutual fund that has earned them –4% (a loss) in the first year, 5% in the second year and 10% in the last year. They used these earnings to increase their mutual fund account so it is now sitting at a value of $110,880. They think they can do better so they approach their favorite financial advisor who is fully aware of the power of ETF’s. He looks at their situation and shows them what the following portfolio would have done for them.
40% in a high yield bond ETF
20% in select international ETFs
20% in Financial ETF’s
20% in Energy ETF’s
Over the past 3 years this portfolio would have done much better. In fact it would have grown to $142,747. Almost $32,000 better than they did themselves. Please remember that past performance is no guarantee of future results.
Another example is Dawn and Juan who are both in their 60’s, retired and have a $500,000 nest egg that they don’t want to risk. But they also are not able to get much income from the guaranteed certificates that they currently have it invested in. In fact they are earning less than 3%, or $15,000 per year. They think they can do better so they approach their favorite financial advisor who is fully aware of the power of ETF’s. He looks at their situation and shows them what the following investment would have done for them.
100% in a high yield bond ETF
Over the past year it would have earned them 10.4% or $52,000 with very little risk because it is based on a broad spectrum of corporate and government bonds. This is a far cry from their paltry $15,000 and when combined with their other pension income gives them a very nice income without diminishing their nest egg.
One final example is Reginald. Reggie is a young and single tax lawyer with money to burn. But at 29 years old he is getting concerned that he should be investing for maximum growth while he is still single and can take the risk. He approaches his favorite financial advisor who is fully aware of the power of ETF’s. The advisor looks at his situation and shows him what the following portfolio would have done for him:
10% Australia
10% Austria
10% Brasil
10% Mexico
10% S. Korea
10% Global Energy
10% Global Financials
10% Cdn Real Estate Trusts
10% Cdn Energy
10% Cdn. Financials
Over the past 3 years and starting with $100,000 this portfolio would have grown to $151,791. That’s an average of 15% per year. If he can keep up this growth he will be able to retire with more than $1 million by the time he is 46. But since he has lots of income he plans to contribute another $18,000 per year to these investments. Now he will have over $3 million by the time he is 46. Then he plans to live on the earnings, which will give him $300,000 per annum at current ETF bond rates. Ah, to be young and financially clever! (By the way, his financial advice cost less than $1000.)
But again please remember this was all for educational purposes and past performance is no guarantee of future results.
Scrooge