In a perfect world, we could have someone (or something, like a robo-advisor) manage our money flawlessly at no cost. But that’s not the real world.
Robo-advisors charge fees, and you might be able to get the same level of performance without bothering with them by investing in ETFs and mutual funds. And that’s precisely what I’m going to break down in this article.
Which robo-advisors charge fees?
Some companies charge additional fees on top of robo-management to the collective groan of you and millions of investors worldwide. These fees cover a wide range of expenses, from account maintenance to trades and transactions.
You can expect a couple of extra fees from leading robo-advisor firms, like these:
- AssetBuilder – $20 to $49.95 trading fee.
- FutureAdvisor – $7.95 to $24 trading fee.
- Rebalance IRA – $50 to $70 for a portfolio rebalance; $250 fee to open an account.
You can get around these fees if you’re willing to manage your own investment portfolio, though. This process requires time, effort, research, and commitment, but offers financial independence and potentially handsome profits.
Here’s how you can build your own portfolio of ETFs and mutual funds if you decide to go solo.
Where to build your portfolio
If Vanguard is the gold-standard, then E*TRADE should be the runner up. The company’s mutual funds and ETFs excel across the board with $0 commissions and $0 account minimums.
The intuitive website design and tools make investing accessible, whether you’re a first-time investor or a veteran.
E*TRADE has three trading platforms that are free for customers: E-Trade Web, Power E-Trade, and E-Trade Pro. You can also trade via phone with one of the two apps for iOS and Android. Get started today with one of the company’s 4,400 mutual funds.
Ellevest differentiates itself from competitors with goal-oriented investing for women – though men can be clients too.
The platform comes with three tiers that cost between $1 and $9 a month, and personalized investment advice, though you can take advantage of Ellevest’s promotion for one month of free investing.
Ellevest takes care of all the details, so you don’t have to. It rebalances your account for free and lets you control how aggressively you invest your money.
The company also recently changed its offering, which included eliminating a fee for the percentage of assets under management.
TD Ameritrade is an excellent place to build a portfolio of ETFs and mutual funds. ETFs, for example, have $0 commissions with TD Ameritrade and they have over 2,300 ETFs available to invest in.
Also, TD Ameritrade has a really nice screener for ETFs within their platform so you can focus on a specific sector, you can match a certain style of investing. If you want to invest in global and emerging markets, you can do that. You can gain exposure to commodity markets, or you can even look for ETFs that hold a specific stock.
So for example, if you want to invest in an ETF that has Apple and Facebook, you can find one quickly through their filter screen. TD Ameritrade also has a laundry list of mutual funds to pick from, and you can filter in similar ways as you can with ETFs.
Robinhood is another excellent option for building a portfolio of ETFs. Robinhood offers $0 commissions just like TD Ameritrade, so it will cost you nothing to build a unique portfolio of ETFs. Note that Robinhood currently does not have mutual funds.
Robinhood only has around 500 ETFs that you could buy and sell, however, they more than make up for it with the way that their platform works. If you’re someone who likes to make stock trades right from your phone, then Robinhood is going to be for you.
They’ve specifically designed their platform to work best on a mobile device so you can quickly find an ETF and invest in it right away. Robinhood also has something called Robinhood Snacks, so you can check out the latest market news in bite-sized information, which is really helpful.
Public is unique in that they focus on being able to buy any stock or any fund without having to pay the full price for the stock. What they mean by this is that you could buy slices of stock or you could buy the entire thing. So if you want to invest just $25 in a Vanguard Total Market ETF, you can do that.
Public doesn’t have mutual funds as of right now, but they do have a very broad selection of popular ETFs from places like Vanguard, BlackRock, and others. And again, you can invest in these ETFs by the slice, so if an ETF costs $200 and you only want to invest $20 in it, you can do that very quickly.
Public also has a really nice aspect to it so you can connect with friends or see what other people are investing in and either follow their patterns or even set new patterns for people that follow you.
How to choose the right ETF
Half the battle to build your portfolio of ETFs is picking the right one. You can start by looking at each fund’s composition and how they relate to your risk tolerance and investment preferences.
For instance, there are several dozen ETFs tracking the energy sector. Once you examine the top holdings, you’ll see that each one takes a different investment approach.
The same applies whether you’re interested in common stock ETFs commodities (like gold and silver). ETFs attract investors, in part, because of the diversity. You can even invest in single sectors like oil (OIH), biotechnology (BBH), or REITs (IYR).
Don’t forget to look at the assets under management (AUM) when choosing your ETF. The AUM represents the total market value of the stocks, bonds, or commodities in the fund. Beware of small AUM levels, which often reflect low liquidity.
ETFs with insufficient liquidity can make it challenging for you to get your money in and out of the fund. The last thing you want is to accumulate grey hairs when moving your money.
How to build your own ETF portfolio
1. Find the best allocation
Your goal isn’t necessarily to find the best ETF. It’s to find the best ETF for your needs. That means considering your current investment portfolio, risk tolerance, timeline, and tax situation.
For example, saving for your kid’s college tuition should go hand-in-hand with low-risk options. A 529 plan lets you grow and withdraw your money tax-free when you use it to pay for higher education. It doesn’t offer as much flexibility as other ETFs, as you can only make investment changes twice per year.
You should look into an ETF’s historical returns, too. While past performance doesn’t mean future success, it can be a reliable indicator of investment worthiness.
If you’ve never looked at market returns, use the three-factor model, founded by the University of Chicago Booth School Business professors Eugene Fama and Kenneth French.
The three-factor model, also known as the Fama and French model, looks at companies’ size, their book-to-market values, and their returns.
Each component lets you find potentially valuable holdings. For example, looking at a firm’s size can show you if a publicly-traded company has a high return despite a small market cap.
2. Start your investment strategy
Once you know where you want to put your money, you can start investing. Don’t worry about timing out the market or picking ETFs while they’re on an upswing.
Research shows that market timing is a fool’s errand. According to Vanguard,
“asset allocation accounts for a whopping 88 percent of volatility and returns.”
Your investment results should even out over an extended period as long as you have enough diversification. That applies strictly within one asset allocation.
You can also think of allocation as carrying much more weight and importance than picking stocks when you want to meet your financial objectives.
The benefit of ETFs is that you can instantly change your exposure levels. Once you figure out the funds that match your investment strategy, you can choose based on your current needs. Note that you do not need to invest all at once. Feel free to make purchases over a few weeks or months.
3. Monitor and assess your portfolio
The beauty of building a personal ETF portfolio is that you can monitor and adapt it at will.
There are no hard rules when assessing performance, though you should look at the market returns at least once per year. Many people opt to evaluate their ETFs at the beginning or end of the year for tax purposes.
Start by comparing the benchmark index with your ETF’s annual performance. For instance, the SPY may have annual returns of 11%, 13%, 4%, 7%, and 15%, while the S&P 500 appreciates 11%, 15%, 5%, 6%, and 18%. The difference in performance is 1%, which is also known as a tracking error.
Like golf, the lower the number, the better. The tracking error suggests that the ETF closely resembles the overall performance of the underlying index. A large discrepancy should make you reevaluate your allocation to reflect actual market returns more closely.
While you should remain mindful of your portfolio, don’t overthink market fluctuations, good or bad. The best way to come out on top is to invest for the long-term. Stay true to your original strategy, but be willing to adapt if the current returns suggest a change.
How to choose the right mutual fund
Now let’s talk about mutual funds. There are various types of mutual funds. Each represents a different asset class and potential returns.
No matter your tastes as an investor, there’s a mutual fund to fit your interests. Three of the most popular choices include index funds, equity funds, and fixed-income funds.
An index fund intentionally replicates a specific market, such as the Dow Jones Industrial Average or the S&P 500. The mutual fund contains a similar distribution of stocks as the index, so your money goes up or down with the market.
There are three variations on the index fund, including the broad market index fund, global or international index fund, and sector-based index fund.
If you want to leverage the stock market’s long-term growth, an index fund should capture your attention. The investment requires less research and management than competing options. The expense ratios are also a fraction of a percent, so you don’t have to pay a small fortune in fees.
As the name suggests, equity funds invest in equity or stocks. You can choose from several subcategories based on everything from company size to investment aggressiveness. You even have the option to invest your money domestically or abroad.
These variations mean you can find an equity fund for your portfolio, regardless of your circumstances. One company may offer aggressive-growth based on small-cap stocks, whose market cap peaks at $2 billion. You can also find value-based investment opportunities among blue-chip businesses.
A fixed-income fund lets you purchase investments that pay you a fixed rate of return. Some of the most common assets include corporate bonds, government bonds, and other debt instruments.
The steady return of interest means you see money flowing into your fund consistently.
How to build your own mutual fund portfolio
1. Calculate your budget
One of the most critical but lesser-discussed parts of investing involves finding how much money you can spend. Harnessing the long-term potential requires patience. You should be willing to set your investment aside for at least five years before withdrawing.
If you’re just getting started investing in mutual funds, I would check out E*TRADE. E*TRADE is a more advanced platform, but for investing in things like individual stocks and mutual funds, it offers a lot of options for you. It also gives you the ability to do a deep amount of research on different funds if you want to.
With E*TRADE, you can invest in funds that have no minimum investment amount also called a no-load mutual fund. Some of the best ones to look at are the Vanguard Total Stock Market Index Fund (VTSAX), the PIMCO StocksPLUS Short Fund (PSTIX), and the Fidelity Contrafund Fund (FCNTX).
Some other investment minimums across the industry include:
- Fidelity Funds – $0.
- Amana Growth Investor – $250.
- Homestead Small Company Stock – $500.
- E*TRADE – $500.
- Fidelity Investments – $2,000.
- T. Rowe Price Real Estate – $2,500.
- Vanguard – $3,000.
2. Review portfolio types
Your mutual fund should be as unique as you are. One of the great divides is determining whether you want active or passive management.
Actively managed funds put the power in your hands as you try to outperform the market. Passively managed ones appeal for their hands-off approach.
Don’t forget to review the fees and fund choices. While the overall quantity and cost of fees vary from one company to another, you will encounter transaction fees from the brokerage account and the mutual fund. You can also select from thousands of different funds, including those offered at your job.
3. Manage your portfolio
Keep an eye on your investments after you make the initial deposit. One savvy strategy involves rebalancing your portfolio once per year. The process lets you buy or sell assets to maintain a well-diversified balance of stocks and bonds.
Remember that your mutual fund should last at least five years, so don’t deviate from your plan, even in the face of an economic downturn. While it’s tempting to pick trendy assets, you should avoid chasing performance. Most of the time, it doesn’t work out.
You should consider the pros and cons of any investment option before you start. ETFs and mutual funds offer affordable ways to grow your wealth through similar, yet distinct paths. Both options enable financial independence with ETFs favoring flexibility and niche investments, while index mutual funds cater to hands-off investors.