Tag Archives: investing

Millennials: Here’s Your Best 2016 Investment Portfolio

Congratulations! Here you are. A successful millennial. For the sake of argument, we are going to put you in the middle of this group, generally described as being born roughly between 1980 and 2000. We’ll stipulate that you are born in 1990, so graduated college in 2012 and are now four years into your working career. At 26 years of age, you have a long and bright working future ahead of you. You are clever enough to know that you should start investing now. At the same time, you are not all about money. You don’t want to be a slave to your investments, you want your investments to be a slave to you, and give you both the time and freedom to devote to the things that are important to you. Click to enlarge I’ll cut right to the chase. There are a ton of investment strategies from which you can choose. Here is the one I would suggest. First, open a brokerage account at Fidelity Investments. Second, buy these six ETFs, in the weightings shown: 45% – iShares Core S&P Total U.S. Stock Market ETF (NYSEARCA: ITOT ) 10% – iShares Core High Dividend ETF (NYSEARCA: HDV ) 30% – iShares Core MSCI EAFE ETF (NYSEARCA: IEFA ) 5% – iShares Core MSCI Emerging Markets ETF (NYSEARCA: IEMG ) 5% – iShares Core U.S. Aggregate Bond ETF (NYSEARCA: AGG ) 5% – iShares TIPS Bond ETF (NYSEARCA: TIP ) Third, set up a schedule to rebalance regularly back to these weightings. That’s it. We’re done. I told you I would keep this brief. You can simply stop right here and implement the plan that I suggest. I’m guessing, though, that you won’t. You’d like to know a little more. OK, then. Feel free to read as little or much of what comes next as you wish. I’ll share a few basic thoughts, and then provide some links to yet further reading if you so desire. What’s So Great About This Portfolio? Simplicity: Containing only six ETFs, this portfolio will be extremely simple to both maintain and track. However, simple does not mean simplistic. I’ll talk about this a little more in the “diversification” section below. Low Costs: The cost, or overhead, is extremely small. Simply put, the greater the expenses your portfolio incurs, the less that makes it into your pocket. If you follow the links to the ETFs I provided above, you will notice that they sport expense ratios of between .03% and .20%. At the allocations I suggest, I calculate that your overall weighted expense ratio comes out to .0835%. That’s right. About eight hundredths of one percent. The rest? Into your pockets, to compound and grow. Zero Commissions: This is an important one. Likely, you will want to set up a regular investment plan, investing small incremental amounts on a regular basis. While ETFs are a great investment vehicle, if you have to pay $8-10 for every transaction, you lose the benefits very quickly. The ETFs I suggest are included in the 70 iShares ETFs that Fidelity allows you to trade commission-free. Diversification: Within the portfolio, you will gain exposure to both domestic and foreign stocks (including a modest allocation to emerging markets), bonds, and TIPS (Treasury Inflation Protected Securities). The weightings I suggest are relatively aggressive; appropriate for someone in their mid-20s to approximately 30. At the same time, I am including an element of defensiveness in the portfolio by including a small weighting directed at quality, dividend-paying stocks, as well as bonds and TIPS. These selections will both generate a little income that you can reinvest over time as well as offer a measure of protection should the market experience a steep decline; allowing you to rebalance the portfolio. Background and Further Reading Finally, let me share a little background information regarding how I came to this specific recommendation, as well as links to some further reading. Late last year, as part of my work as a contributor for Seeking Alpha, I researched the 2016 investment outlooks of several respected investment houses. Using that research as a guide, I created The ETF Monkey 2016 Model Portfolio . Next, I set up and tracked three iterations of the portfolio: Vanguard , Fidelity , and Charles Schwab . While, as I will explain below, I chose to feature Fidelity, you could follow the basic principles set out in this article and set up your portfolio at either Vanguard or Charles Schwab. The key, of course, would be to select ETFs that you could trade commission-free in each case. When I set up the portfolio, I must admit that my initial bias was in favor of Vanguard. Vanguard is a legendary provider, and offers a large selection of ETFs with some of the most competitive expense ratios in the marketplace. However, as I reported in my Q1 update , the Fidelity implementation was actually the top performer of the three. This slight outperformance has continued as of the date I sat down to write this article. Therefore, I decided to use Fidelity as my provider of choice. Finally, here is a little more detail on some recent changes to the iShares Core S&P Total U.S. Stock Market ETF , the largest component of my recommended portfolio, as well as some thoughts on portfolio rebalancing . I hope this brief article has offered a helpful starting point. Feel free to drop your questions and comments below, and I will do my best to answer them. Disclosure: I am not a registered investment advisor or broker/dealer. Readers are cautioned that the material contained herein should be used solely for informational purposes, and are encouraged to consult with their financial and/or tax advisor respecting the applicability of this information to their personal circumstances. Investing involves risk, including the loss of principal. Readers are solely responsible for their own investment decisions.

A Distinctly Canadian View Of Emerging Markets

Figuring out whether developed equity markets will outperform emerging market stocks has been no easy task, even if the choices couldn’t be any starker. By now, we are all familiar with the potential benefits of emerging markets: They have grown at a faster pace than developed economies, their population is younger , and they will soon be expected to aspire to consume many of the things people in the developed world take for granted. Sounds pretty good, right? Not so fast. These seeming positives have been in place for many years, and yet emerging markets have pretty consistently underperformed most developed markets since 2011. A combination of falling commodity prices, heightened political risk, slower (but still relatively brisk) economic growth, rampant corruption, a stalled reform agenda and limited earnings growth have all weighed on performance to one degree or another across the emerging world over this time period. So while emerging markets appear inexpensive, they are not unambiguously cheap. For Canadian investors, it’s even less clear if emerging markets will prove to be a winning destination for investment capital. As I’ll show, the loonie has tended to move with EM currencies, correlations between EM and Canadian equities have been high, and the sector composition was reasonably similar for a long time. That said, some of these factors are changing and even boosting the allure of holding EM equities in a portfolio. Currency Since the January lows, emerging market stocks have posted sizeable returns in US dollars, but the results are much less impressive in Canadian dollar terms, thanks to strength in the loonie. Some of the same factors lifting emerging market stocks, bonds and currencies also support the Canadian dollar and Canadian stocks: a rebound in commodity prices, a more patient Federal Reserve and less dire news about the global economy, especially out of China. This result shouldn’t seem all that surprising; the Canadian dollar has closely tracked emerging market currencies since 2010 (see the chart below). Consequently, Canadian investors don’t get as much of a boost to performance from appreciating EM currencies when risk appetites are growing and the global economy is accelerating, because the Canadian dollar is typically rising too. That said, EM currencies could potentially appreciate against the loonie given how far they’ve fallen. Click to enlarge Correlation Assets that exhibit a high positive correlation have more muted diversification benefits. If emerging market currencies and the Canadian dollar tend to appreciate together, then what about the correlation between EM and Canadian stocks? Here again, there’s another tight fit and another reason for Canadians to be apprehensive about the diversification benefits of owning emerging market equities. Looking at the chart below, Canadian equities have been much more positively correlated to EM equities since 2005 than to US or other international developed stock markets (represented by MSCI EAFE). That said, we should note that the high positive correlation of EM and Canadian equities have declined in recent years, boosting the diversification benefit. Click to enlarge Composition One reason correlations were this high – and the diversification benefits for Canadian investors this low – may have something to do with the similarity of industry exposures: the energy, materials and financials sectors made up more than half of the market cap of both Canadian and emerging market stocks. In the past five years, however, something interesting has happened. Thanks to the initial public offerings of many high-tech companies, the information technology sector has grown to more than a fifth of the emerging market equity index (see the chart below), whereas it’s less than 3% of the MSCI Canada index. As a result, EM may begin to deviate more from Canadian equities because of shifting sector exposures. The expansion of the tech sector is both a sign of, and offers investors exposure to, the convergence of emerging markets to developed economies. Click to enlarge Although not without risks, we’re warming up to emerging market equities and continue to believe in the possibility of improved investment returns based on better demography, faster growth and pent-up consumer demand. For Canadian investors, we see room for EM currency appreciation versus the loonie and better portfolio diversification benefits over time than has historically been the case. Source: BlackRock Investment Institute and Bloomberg. This post originally appeared on the BlackRock Blog.

Buy 5 Best Dividend Mutual Funds For Enticing Returns

A Fed rate hike seems off the table in June as companies scaled back hiring in April. Not only was the increase in hiring the slowest since September, the labor force participation rate also declined, which could mean that people found it a bit more difficult to get jobs. The Fed is already cautious about raising rates in the near term as the U.S. inflation rate in the first quarter came in way below its desired target. Possibility of a rate hike receding in the near term makes investment in dividend-paying mutual funds more alluring. As economic growth stalled in the first three months of the year, with a slew of data from consumer spending to manufacturing in April neither painting a solid picture, it will be prudent to stay invested in such funds. Dividend-paying funds generally remain unperturbed by the vagaries of the economy. Rate Hike Improbable in June The latest report on weak job creations in April made the Fed cautious about raising rates sooner. The U.S. economy created a total of 160,000 jobs in April, significantly lower than the consensus estimate of 203,000. The tally was also considerably lower than March’s downwardly revised job number of 208,000. The unemployment rate in April was in line with March’s rate of 5%. However, more people dropped out of the labor force. The participation rate fell to 62.8%, declining for the first time in 7 months as 300,000 individuals quit jobs or gave up job searches. An impending threat with regard to job additions continues to haunt the economy. Companies’ profits are getting squeezed, so they could look to stabilize their labor costs by reducing hiring further. Fed officials were already harboring mixed feelings about raising rates in June. The core personal consumption expenditures (PCE) price index, the Fed’s preferred inflation measure, increased 0.1% in the first quarter, below the consensus estimate of a 0.2% gain. This is also way below the Fed’s desired target level of 2%. Economic Data Disappointing As businesses and consumers turned cautious with their spending, the U.S. economy posted its weakest quarterly growth in two years between January and March. The U.S. economy expanded at an annualized rate of 0.5% in the first quarter, way below last quarter’s growth rate of 1.4%, according to the Commerce Department. Into the second quarter, things aren’t looking bright either. Consumer spending that weakened in the first quarter may have further experienced a slowdown in April. The Reuters/University of Michigan consumer sentiment index declined to 89.0 in April from 91.0 in March. Compared with year-ago levels, the index plummeted 7.2%. The battered U.S. manufacturing sector did stabilize a bit in April, but is yet to regain full health. The ISM manufacturing index dropped to 50.8 in April from 51.8 in March. Top 5 Dividend Mutual Funds to Invest In Diminishing chances of a rate hike soon, calls for investing in dividend-paying mutual funds. Dividend payers suffer when rates are rising as investors focus on safe bonds. Add to this a flurry of weak economic reports and we all know why investing in such top-notch dividend funds won’t be a bad proposition. Companies that pay dividends persistently put a ceiling on economic uncertainty. These companies have steady cash flows and are mostly financially stable and mature companies, which help their stock prices to increase gradually over a period of time. Moreover, dividends are less taxed as compared to interest income, help your portfolio to grow at a compounded rate and offer protection from earnings manipulation. We have selected five such mutual funds that offer a promising year-to-date dividend yield, have given impressive 3-year and 5-year annualized returns, boast a Zacks Mutual Fund Rank #1 (Strong Buy) or #2 (Buy), offer a minimum initial investment within $2,500 and carry a low expense ratio. Funds have been selected over stocks, since funds reduce transaction costs for investors and also diversify their portfolio without the numerous commission charges that stocks need to bear. Vanguard Dividend Growth Fund Investor (MUTF: VDIGX ) invests primarily in stocks that tend to offer current dividends. VDIGX’s year-to-date dividend yield is 1.88%. VDIGX’s 3-year and 5-year annualized returns are 10.5% and 11.9%, respectively. The annual expense ratio of 0.33% is lower than the category average of 1.01%. VDIGX has a Zacks Mutual Fund Rank #2. Fidelity Strategic Dividend & Income Fund (MUTF: FSDIX ) invests the fund’s assets with a focus on equity securities that pay current dividends. FSDIX’s year-to-date dividend yield is 2.71%. FSDIX’s 3-year and 5-year annualized returns are 7.1% and 9.3%, respectively. The annual expense ratio of 0.75% is lower than the category average of 0.82%. FSDIX has a Zacks Mutual Fund Rank #1. Vanguard Dividend Appreciation Index Fund Investor (MUTF: VDAIX ) seeks to track the performance of a benchmark index that measures the investment return of common stocks of companies that have a record of increasing dividends over time. VDAIX’s year-to-date dividend yield is 1.95%. VDAIX’s 3-year and 5-year annualized returns are 8.7% and 9.9%, respectively. The annual expense ratio of 0.19% is lower than the category average of 1.01%. VDAIX has a Zacks Mutual Fund Rank #2. Fidelity Dividend Growth Fund (MUTF: FDGFX ) invests primarily in companies that pay dividends or that Fidelity Management & Research Company believes that these companies have the potential to pay dividends in the future. FDGFX’s year-to-date dividend yield is 1.38%. FDGFX’s 3-year and 5-year annualized returns are 8.9% and 8.3%, respectively. The annual expense ratio of 0.68% is lower than the category average of 1.01%. FDGFX has a Zacks Mutual Fund Rank #2. Vanguard High Dividend Yield Index Fund Investor (MUTF: VHDYX ) employs an indexing investment approach designed to track the performance of the FTSE High Dividend Yield Index. VHDYX’s year-to-date dividend yield is 2.9%. VHDYX’s 3-year and 5-year annualized returns are 10.2% and 12.1%, respectively. The annual expense ratio of 0.16% is lower than the category average of 1.1%. VHDYX has a Zacks Mutual Fund Rank #1. Original Post