How to Achieve a Target Asset Allocation in Five Minutes or Less

Asset Allocation Graph

Once you have chosen an asset allocation for your portfolio, it is easy to find ETFs that provide one-stop buy-it-and-forget-it exposures to each of the asset classes that you want to own. A list of ETFs by asset class can be found at http://etfdb.com/etfdb-categories or in the table below.

When you must choose between multiple funds that offer exposure to the same asset class, consider these two important factors:

  1. Expenses for ETFs should be well under 0.5% of assets (often referred to as 50 “basis points,” where 1 basis point = 0.01%). The lower the fee, the better.
  2. Liquidity is a measure of how active the market is for a stock or ETF. If the market for an ETF is not very active, there might be a large gap between the buying and selling price. This gap, called a “spread” is an implicit transaction cost that you must pay every time you buy or sell an ETF. Look for larger ETFs (in terms of assets under management) to avoid a high spread.

 A Starting Point: Good ETFs for Each Asset Class

The following is a list of well-run ETFs that have relatively low management fees and good liquidity. The ticker is the three or four letter “code” given to all stocks and ETFs. You will need the ticker when it comes time to enter your orders at your discount brokerage. Vanguard offers excellent index mutual-fund equivalents for those that prefer investing in that structure.

Table 6 – ETFs to use for a one-stop portfolio (all figures as of February 2013)

a VT can replace VTI, VEA, VEO to get an entire stock allocation with one ETF if you desire a simpler approach.

b BND can replace TLT. Some gurus like David Swensen believe that it is not worth adding corporate bonds if you already own stocks – others disagree.

c Gold can be used in place of some or all commodities exposure, or pulled from TIPs (e.g., 12% TIPs, 6% gold, 6% commodities would work).