One it comes to an exchange traded fund (ETF) buy-and-hold portfolio, it’s not a one-size-fits-all venture.
Studies have shown that the performance of investors who are in it for the long haul mostly rides on how they’ve done their asset allocation, says John Spence for MarketWatch. With ETFs, it’s extremely easy to do, thanks to their transparency and the fact that they follow indexes, so there’s no keeping up with manager changes or "style drift."
When coming up with an asset-allocation plan, investors need to figure out their risk tolerance, time horizon and their ultimate goals. Want more risk? Have a bigger position in stocks. If you want lower risk, income-producing bonds are relatively safer.
The power that ETF investors can now have over their portfolios is great to watch and have made building a portfolio easier than ever.
There have been some drastic changes in the markets over the last 50 years that should inform any asset allocation decisions:
1) Small-caps, over time, have outperformed the large-caps, and investors can get excellent exposure to them through ETFs.
2) The United States makes up one-third of the global market capitalization. So, why are domestic investors underallocated globally? ETFs give a variety of ways to get exposure to the booming global economy through regional funds, single-country, emerging markets and more recently, frontier markets.
3) Currency and commodities are asset classes that were once difficult to get exposure to. Now with ETFs and exchange traded notes (ETNs), coupled with the surge in commodity prices and the falling dollar, these types of funds deserve a portion of the buy-and-hold portfolio.