So you have a Roth IRA, you are saving $333 per month or thereabouts, you understand the principles of dollar cost averaging, and you have have a target asset allocation.  Now it is time to choose a group of investments that will make up your retirement portfolio.

You have a wide variety of investments available to you, including stocks, bonds, mutual funds, money market funds, and exchange-traded funds (ETFs).  I would stay away from bonds and money market funds in your retirement portfolio.  Bonds are not a very liquid investment with relatively low rates of return.  They may become more appropriate as you reach retirement age and beyond, but not now.  Chances are your brokerage account features a money market account that collects interest, non-reinvested dividends, and any deposits you make into the brokerage.  I feel that carrying a very small balance in the money market is wise, as it gives you liquidity to take advantage of investment opportunities and also serves as a back-up to your emergency savings.  However, beyond that, money markets have no place in a retirement portfolio.

That leaves stocks, mutual funds, and ETFs. 

Stocks can be risky, but give you a greater measure of control over your portfolio than mutual funds or ETFs.  I tend to shy away from all but a few stocks, those that allow me to invest in a specific area that is unavailable with mutual funds and/or ETFs. (For example, Real-Estate Investment Trusts, or REITS.)

Mutual funds can be worthwhile investments, but are often saddled with high expense ratios that eat away your returns. (For more information, read my post on where to hold a Roth IRA.)

ETFs are by and large my investment of choice for a retirement portfolio.  They are transparent, meaning you know exactly what you are investing in.  They have low expense ratios, meaning you get to keep more of your earnings than with a similar mutual fund.  They offer relatively easy diversification, as they track established indices like the Dow Jones Industrials or S&P 500.  And ETFs also exist in a wide variety of niche markets, allowing you to customize your portfolio to a greater degree than with mutual funds but without the risk of individual stocks.

Accordingly, I recommend investing mostly in ETFs, with mutual funds and stocks filling in any gaps in your portfolio.  Below, I have listed a few ETFs and stocks that I find particularly interesting.  As you can perhaps tell, I am bullish on emerging markets, China, commodities, and real estate, in addition to the backbone Large, Mid, and Small cap indices.  

Please do your own research on these investments before making any financial decisions. 

Large Cap:

• DIA Diamonds Trust - Reflects the performance of the Dow Jones Industrials
• QQQQ NASDAQ 100 - Reflects the performance of the NASDAQ 100
• SPY S&P Deposit Receipts - Reflects the performance of the S&P 500
• RSP Rydex S&P Equal Weight ETF - Reflects the performance of S&P 500, but is not weighted by market capitalization

Mid Cap:

• VOE Vanguard Midcap Value ETF - Seeks to track the performance of MSCI US Mid Cap Value index
• RFV Rydex S&P Midcap 400 Pure Value - Seeks to replicate the performance of the S&P MidCap 400.

Small Cap:

• IWO iShares Russell 2000 Growth Index - Seeks to replicate the performance of the S&P SmallCap 600/Citigroup Pure Growth index.

Overseas:

• VWO Vanguard Emerging Markets VIPERs - Invests in approximately 500 companies located in emerging markets around the world.
• EFA iShares MSCI EAFE Index  - A blend of stocks from Europe, Australia, and the Far East
• PGJ Powershares Golden Dragon ETF - Invests in companies that derive the majority of their revenue from the People’s Republic of China.
• FXI iShares FTSE Xinhua 25 Index - Generally reflects to the performance of the FTSE/Xinhua China 25.
• CUBA Herzfeld Caribbean - Invests in companies that stand to benefit greatly from business and trade with Cuba.

Commodities & Real Estate:

• HCP Health Care Properties - Invests in nursing homes and assisted living projects.
• DBC DeutschBank Commodity Index - Invests in light, sweet crude oil, heating oil, aluminum, gold, corn and wheat.
• GLD Streettracks Gold Index - Invests in and reflects the price of gold.
• SLV iShares Silver Trust - Invests in and reflects the price of silver.

Finally, I am interested to hear about your investment preferences.  Is there an ETF or a sector that you are particularly interested in? 

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This entry was posted on Thursday, October 26th, 2006 at 4:53 pm and is filed under "The Plan", 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.