by Archie M. Richards, Jr.
May 14, 2007

Josh writes, "I'm 24 years old and can invest only $200 a month to start. The recommendations of exchange-traded-funds in your website appeal to me. But would you please suggest just one or two ETFs, rather than nine?"

Can do, Josh. As it happens, Vanguard recently introduced an ETF that hits the spot.

The following exchange-traded funds cover the world:

• Vanguard's Total Stock Market ETF (VTI) holds 3700 stocks, tracking an index maintained by Morgan Stanley Capital International representing about 99.5 percent of the market values of all publicly-held U.S. equities. The portfolio's annual turnover rate is a tiny 3.8 percent a year, with annual operating costs an even tinier 0.07 percent. These numbers are extremely favorable. In comparison, the turnover rate of the average actively-managed U.S. mutual fund exceeds 90 percent a year, with operating costs of 1.4 percent a year.

• Vanguard's FTSE All-World ex-US ETF (VEU) holds 1500 stocks, tracking an index maintained by the FTSE Group, a London-based company owned by The Financial Times and the London Stock Exchange. The ETF contains stocks of 47 countries other than the United States. The market value proportions are based on the values of stocks in the various regions, namely, 55 percent Europe, 25 percent Pacific, 15 percent Emerging Markets, and 5 percent Canada. The fund's annual operating costs are only 0.25 percent. (Costs of mutual funds and ETFs of foreign stocks are always higher.) Since this fund just started in March 2007, the turnover rate hasn't been determined.

  I usually suggest adding ETFs of REITs and long-term bonds to a portfolio, to serve as offsets to stocks and cut volatility. Limiting volatility helps reduce the inclination to sell stocks when the market falls. But for someone just starting out, a more-volatile portfolio of all stocks, as above, is probably okay. Here's why:

• Declines in value are easier to accept when you have many years to make up losses.

• The best way to measure gains and losses is with percentages. But many people are uncomfortable with percentages. They prefer to take into account actual dollar changes. For a young person with just $1000 invested, a 15 percent decline is only $150, which doesn't seem all that bad. But for an older person with $1 million portfolio, a 15 percent decline of $150,000 is nervewracking, because this amount could support an entire family for several years.

The brokerage firm I recommend for buying exchange-traded funds is Foliofn (www.foliofn.com). Arrange for Foliofn to withdraw money automatically from your bank account.

At $5.00, Foliofn's commissions are low. (They've recently been reduced.) But with small investment amounts, you must still be careful about commission costs.

$5.00 is 2.5 percent of $200, which is too high. I suggest accumulating your investments in Foliofn's money market fund for two months and then invest $400 in VTI. The commission percentage falls to only 1.25 percent, which is more like it.

Two months later, invest $400 in VEU. Alternate between the two ETFs every two months. Increase your monthly investments, of course, as soon as you can.

Congratulations on getting started, Josh. You're on your way to wealth.

In my columns, I may have said that Vanguard's Long-Term Bond Index Fund (VBLTX), recommended in my website, holds only long-term Treasurys.

It doesn't. Part of the fund is in Treasurys, but the rest holds long-term corporate bonds. Nevertheless, I continue to recommend the fund. It has a higher yield and longer maturities than Vanguard's Long-Term Treasury Index Fund (VUSTX).

For exchange-traded funds, I continue to recommend iShares Lehman 20+ Year Treasuries (TLT). That one is the best of the long-term bond ETFs.

Eat Crow Department: In my 3/12/07 column, I predicted the imminent decline of the Chinese stock market. Since then, the Chinese index has risen from 2950 to 4022 - a breathtaking rise of 36 percent in only two months. Yikes!