Tuesday, January 03, 2006

Investing $20,000 in 2006.

Do you have the problem of investing $10,000 or $20,000 in 2006? Are you looking for the best ways to allocate capital to maximize future returns? If yes, then you are in the same boat as I am. Read on...

Ben Stein wrote an article in October on a model portfolio that can weather retirement. http://finance.yahoo.com/columnist/article/yourlife/1218. I liked Ben's article and let us analyze his suggested portfolio.

30% - Spider
10% - Diamonds
15% - Small cap stocks
15% - Foreign Large Caps
10% - Emerging market funds
5% - Goldman Sachs Commodities Fund
5% - Canadian Stock Market
10% - U.S REIT funds.

While this is a great portfolio for a 100,000 or 200,000 dollar portfolio, the cost of buying the funds in a 10,000 or 20,000 dollar portfolio is rather high. If one has $2000 or less to buy an ETF or stock, the cost of trading can be quite high. ( >= .2% when trading cost is $10/trade ) In this case, one should consider low cost mutual funds through Vanguard and Fidelity.

A longer term asset allocation strategy is something one should consider in these circumstances. I like the Spiders, I would invest 5,000 or 10,000 dollars into the spiders. I like IVV ( details in http://www.amex.com ) which has the lowest expense ratio of all the spiders at 0.09%. If you go the mutual fund route, Fidelity's FSMKX has a low expense ratio of 0.1 and Vanguard's VFINIX has an expense ratio of 0.18% respectively. The difference between Fidelity and Vanguard for 10,000 dollar invested is eight dollars for every ten thousand dollars invested. I would pass on the diamonds for now as the basket is not diversified with only thirty large caps in the index.

If one bought IVV for 5000 dollars, I would buy one share of BRKB. Currently BRKB is selling for 2933 dollars. This is a stock that is selling very close to liquidation value and doesnt have any expenses associated with it. Look for another blog analyzing BRKA/BRKB soon in this forum.

I would also invest about 5,000 dollars in the emerging markets index fund - EEM. EEM has a higher expense ratio of 0.75% but so far the returns have been pretty good which more than compensates for the expense ratio. Vanguard has a VIPER in this sector with a lower expense ratio but whose returns have been lackluster compared to EEM. If you go the mutual fund route, there is a one time fee when buying and selling ( 0.5% ) that gets charged that goes into the fund. This fund goes by the ticker VEIEX. This fund sells with the ticker VWO and one can bypass the one time fees when buying the fund through the VIPERS. EEM has one year return of 33% where as VWO has an annual return of 30%.

I would then split the remaining 7,000 dollars equally between Foreign Large Caps and Canadian Stock Market Funds. EFA has an expense ratio of 0.31% and has risen by 13.4% in the past year. Given that growth is likely be stronger in the rest of the world compared to U.S, this is a fund to buy.

The canadian stock market fund was up 27.84% last year and as Ben Stein points out, 25% of Canadian companies are engaged in trading commodities. The Canadian dollar has been strengthening against the U.S dollar and continues to have the largest trade surplus with the U.S. If the U.S dollar weakens against the basket of world currencies, one would expect the loony to remain or get stronger.

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