In a previous post, I detailed my thoughts on investing for retirement in Exchange-Traded Funds (ETFs). I just finished reading Burton Malkiel’s masterpiece A Random Walk Down Wall Street and am more certain than ever that a buy-and-hold strategy using low-cost index funds in a Roth IRA is the wisest retirement strategy for a young investor.

However, the transaction costs (brokerage fees) associated with making frequent contributions to an ETF portfolio could easily cripple a small investor. Earlier I recommended quarterly investments as opposed to monthly, in order to reduce those transaction fees.

I have rethought my strategy somewhat. Earlier this week I moved my entire retirement portfolio from Janus to Vanguard. Vanguard offers a variety of extremely low cost index funds that track everything from the S&P 500 to the MSCI US Real Estate Investment Trust Index. Running the numbers indicates that the lower expense ratios of my new investments may increase my investment returns by nearly $200,000 over the 39 years I have until retirement.

Here is the allocation of Vanguard funds that I am partial to:

40% Vanguard Total Stock Market Index Fund Investor Shares (VTSMX)
20% Vanguard REIT Index Fund Investor Shares (VGSIX)
20% Vanguard Developed Markets Index Fund (VDMIX)
20% Vanguard Emerging Markets Stock Index Fund Investor Shares (VEIEX)

I would like some exposure to commodities, so I may consider investing in DBC on the side. Otherwise, this allocation gives the young investor a healthy exposure to the entire domestic equity market as well as real estate, foreign developed markets, and my favorite sector, foreign emerging markets. All with guaranteed average returns, thanks to low-cost indexing in an efficient market.

Vanguard does have relatively high minimum investments for their IRA accounts, typically around $3,000. The portfolio I am recommending here would require a minimum investment of $12,000. So if you are just getting started with your retirement savings, opening a Roth IRA with Janus (to invest in mutual funds) or Sharebuilder (to invest in ETFs and/or common stocks) may still make sense. A similar portfolio held with Janus would require a minimum investment of just $2,000. You could theoretically start a diversified Sharebuilder portfolio of ETFs with only two or three hundred dollars, though commissions would make a huge impact on such a small investment.

Full Disclosure: While I hold accounts with Vanguard, Janus and Sharebuilder, I have received no compensation from this post. I receive no referral fees from Janus or Vanguard, and receive Sharebuilder referral bonuses when their advertisements are featured on the blog.  I am an Amazon affiliate and will earn a commission if you purchase Malkiel’s tremendous book through the above link.

Did you enjoy this article? If so, please subscribe to the RSS feed, or enter your email address below to subscribe to the daily email digest.
This entry was posted on Thursday, September 13th, 2007 at 10:03 am and is filed under Retirement, Investment, Asset Allocation. You may e-mail this post to a friend. You may print this page. You can leave a response, or trackback from your own site.