Read more about Archie Richard's Book Understanding Exchange Traded Funds

Suggested Portfolio

Exchange-traded funds (ETFs) are excellent vehicles for a successful, long-term investment program. ETFs are mutual funds that can be traded during the day. Over the long term, they're less costly than mutual funds.

But do not trade the ETFs I recommend. Just buy them when you get the money, rebalance every year and a day (to avoid short-term capital gains), and otherwise hold for life.

Use double diversity. At the first level, each ETF represents many individual securities. At the second level, the inclusion of different asset classes cuts the risk further. To some extent, the price movements of the various classes do not correlate. As the value of one asset class moves down, the value of another may move up, reducing the volatility of the whole. Surprisingly enough, the total return over the years will be almost as good as that of the best-performing classes, these usually being the stocks.

Cutting the volatility reduces the inclination to sell when stock prices fall. Nothing hurts long-term results more than moving to cash during bad times. Bad times don't remain bad.

Here are the asset classes and ETFs I recommend:

	Big Stocks	SPY	12%
	Small Stocks	VB	8%
	Europe	VGK	10%
	Far East	VPL	10%
	Emerging Mkts	VWO	20%
	REITs	VNQ	10%
	Commodities	GSG	10%
	Long Corporates	VCLT	10%
	Long Treasuries	TLT	10%

In April 2009, I changed the percentages to reduce the U.S. share. (Unless the socialization of America is stopped, the nation is heading downhill.) I also beef up Emerging Markets, which, at least half-heartedly, have adopted free-market capitalism. I also reduce REITs and Long-Term Treasuries and add commodities and long-term corporate bonds. To find the other reasons for these choices, go to the Column section of this website. Under "Selected Columns," read the columns listed in the "Investment Strategy" box. Also visit the "Credit Crunch" section of this website. Finally, my McGraw-Hill book, "Understanding Exchange-Traded Funds" should prove helpful. You can acquire it here from Amazon. The book received five wonderful endorsements. Unfortunately, the book had room for only one of them. The Amazon website shows all five.

The brokerage firm Foliofn, whose costs are low, is well suited for buying and selling exchange-traded funds. Use the company's "Window Trading," meaning that instead of entering purchases and sales in terms of the number of shares, you enter them in terms of the amount of money. Foliofn handles fractional shares, making the orders come out to the penny. Window Trading is explained in the firm's website www.foliofn.com.

Regular Additions

If you're investing earned income as you go along, arrange for Foliofn to pull money automatically out of your bank account monthly or quarterly. Deposit the additions in Foliofn's money market fund and use the spreadsheet linked to below to allocate the money to the various investments. To keep the commissions low, accumulate money in the money fund until the investments to each ETF exceed $500.

Using my spreadsheet to allocate your additions will automatically rebalance the portfolio. Additional annual rebalancing (see below) would be unnecessary .

If you're just beginning and investing every month from regular additions, the commission costs may be too high. To reduce them, you might start with only two ETFs, as follows:

• Total Stock Market Fund (VTI) - 40%
• FTSE All-World Ex-U.S. Fund (VEU) - 60%

Later, as your portfolio grows, broaden your investment list.

Regular Withdrawals

Exchange-traded funds distribute all of their dividends and capital gains to shareholders. Foliofn automatically credits them to its money market fund.

If you need income from your portfolio, obtain it from the money market fund, say, quarterly. If you need more income than the dividends and capital gains supply, obtain the balance annually when you rebalance. To avoid depleting the portfolio, do not remove more than 6 percent of the portfolio's then-current value each year.

Rebalancing

If you hold the investments in your own name (not in an IRA) and you're not arranging regular additions or withdrawals, rebalancing is necessary. But rebalance no more often than every year and a day. Unless you're subject to the Alternate Minimum Tax, this avoids paying short-term capital gains taxes. If you set up the account on March 8, for example, rebalance on March 9 of the following year.

Rebalancing means to bring the allocations back to the desired percentages. But unless the percentage of the current value of a sector has changed by more than 20 percent from the desired percentage, leave it alone. Excessive trading increases costs and taxes but does not improve long-term results.

For example, say the desired percentage for a fund is 10 percent. A year later, if the fund represents 12 percent of the portfolio, leave it be. If it constitutes 12.1 percent, sell 2.1 percent to bring the fund back to 10 percent. Reinvest the proceeds in funds that have been weak. Rebalancing is an automatic method for selling high and buying low.

Real estate investment trusts (REITs) and bonds pay more income than the others. Rebalancing often includes bringing those two funds back to the desired percentages.

Spreadsheets

Clicking on the link below brings up a spreadsheet that enables you to allocate your cash to the investments I recommend in the right proportions. It also enables you to rebalance, incorporating the 20-percent limitation. Using my spreadsheet costs you nothing.

Many thanks to my friend John Howard for designing improvements to the spreadsheet. To the extent it's not perfect, it's not his fault.

I generally recommend that the less often people pay attention to their portfolios (except for the annual rebalancing), the better the results. But if you enjoy working with your portfolio and the investments are held in a traditional or Roth IRA, you can gain an advantage by rebalancing more often, say, every two months. You might catch a sector that has moved significantly in the short term, before it slinks back into the pack.

But remember, rebalancing doesn't always mean to trade. Unless you're withdrawing or allocating additions, trade only when the percentage of a security has changed by more than 20 percent from the target percentage.

To use the spreadsheet, click on the Foliofn link below. Excel, or a program that can read an Excel file, should open it. You can then save the file to wherever you want.

If clicking on a link below doesn't work, try right-clicking the link. Then choose "Save Link As." This might be worded as "Save Target As," "Save Target Link As," or some such. But do not choose "Save Image As." That one won't work.

You may change the formulas if you like; they're unprotected. I recommend that you not change them. If your spreadsheet becomes corrupted, return to this website to copy part or all of it again.

If you have difficulty with the rebalancing, hire a bookkeeper to assist.

Foliofn's website, as mentioned, is www.foliofn.com. Its phone number is 888-973-7890. The ETF spreadsheet follows here. Since Foliofn lists the assets in its statements alphabetically by symbol, the assets are listed the same way in the spreadsheet. This enables you to update the values easily.

Here's the ETF link: (MS Excel 2003 format)

To start:

• Enter the cash available in the top line of Column D and buy the amounts shown in Column H.
• When adding money to the portfolio later, record the additional funds in Column D and buy accordingly.

For periodic withdrawals from a regular (non-IRA) account:

• Withdraw only the amounts available in the money market fund. (These would be mostly from dividends.)
• If you require more income, wait until your rebalancing to withdraw the excess. (Unless you're subject to the AMT, this saves taxes.)

When to rebalance:

• In a regular account, rebalance only every year and a day.
• In an IRA or other qualified account, you can rebalance more often, say, every 2 months.
• But no trading is necessary unless red appears in Column G or blue in Column H.
• The colors mean that the percentage has changed by more than 20% from the desired percentage.

To rebalance:

• If you're adding or withdrawing money, include or exclude the amount from Column D. To withdraw more than is available in the money market fund, entire a negative amount in Column D. (The spreadsheet doesn't act quite right in this circumstance, but it's close enough that you can figure out what to do.)
• If no number is red in Column G and no number is blue in Column H, do not trade at all.
• If a number is red in Column G, sell that amount of the security and allocate the resulting funds according to Column H.
• If number is blue in Column H, buy that amount of the security, raising the funds, if necessary, from the sales shown in Column G.