Selecting the Right Funds

My favorite ETF is.... 10 of them?

Andrew Sternaman
June 19, 2023

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Happy Monday readers, and welcome to Part 2 in a 3 part series on getting started with investing in ETFs. Missed Part 1? Head over to stayfrostyfinance.beehiiv.com to catch up!

On today’s newsletter:

Determining Your Goals and Risk Tolerance
What does the data suggest?
Staying steady with a strategy

Let’s get to it!

Alright, after last week, you should have an idea of what to expect with ETFs. Maybe you did some additional research. Awesome. But if you’re still unsure about where to begin, fear not, I have you covered today. I’m going to go over three different main points that should spearhead your personal investment strategy.

What are your Goals? Risk Tolerance?

Regardless of whatever you decide to invest in, whether financially or not, it’s important to consider these two items first. You probably have some goals, but don’t worry about being too specific. Maybe you want to buy a house someday, have a kid, move a new city, get a new car, go back to school, etc, the list goes on. Now combine your goals with a time frame.

So, let’s say you want to buy a house in 10 years. Great. Now let’s determine your risk tolerance. This is a measure of what you are willing to gain/lose. Remember, no investments are guaranteed, however it’s likely that the S&P 500 is not going to go to zero but losing 30% of your investment is not out of the question, for example.

Ideally, the closer the goal is, the more risk averse you should be. The longer away it is, the more risk you could take, if you wanted. That’s how I think anyways. Time is your friend in investing. As you browse ETFs, let’s look at a quick glossary that may help distinguish better investments for you

Beta: A measurement showing how volatile an investment is to the overall market. Beta of 1 - Performs with market. Beta of -1 - Performs inverse to the market. Beta of 2 - Has twice the volatility of the market.
Transaction Fees: Your brokerage may charge you a fee when buying or selling investments. Many brokerages today offer zero transaction fees for buying or selling ETFs.
Expense Ratio: A number detailing the cost to operate the specific fund.(this cost is subtracted from the fund’s gross returned and paid to the fund manager). Vanguard has the lowest expense ratios on their funds.
Market Capitalization: Total market value of a specific company. Can be Small, Medium, Large. The smaller the market cap, the more volatile the stock, and the larger the market cap, the more stable it is generally speaking.
Growth: Fund/company that looks to increase overall market cap as the main goal - Capital Appreciation.
Value: Fund/company that has a current lower value than what certain performance indicators indicate. Over time the expectation is that these companies will trade at a higher price. Don’t worry about the exact math to figure that out. Just understand the definition.
Blend: A combination of Value and Growth stocks.

What does the data suggest?

Your armed with your goals, your newfound knowledge, and your new brokerage account. Where to dump that pile of cash you got? Well, let’s look at some past data. Keep in mind, past data is not a guarantee of future performance, but it can help us get an idea of where these funds/sectors are going.

Disclosure: I didn’t source this data myself.

From here, you can see that the S&P 500 alone was not the best returning asset class of the past 90 years. In fact, small cap value funds outperformed. The website lays out even more sector combinations that have outperformed in the past and potentially will be in the future. Keep in mind that outperformance may come with an increase in risk and standard deviation in yearly returns. If you can stomach volatility, then maybe these investments may suit you.

Benefits of staying steady.

I think it goes without saying you don’t want to change your investment strategy every 5 minutes. Ideally, this is something you’d want to stick with for the long term. 5 years is not that long in the investing world, and if you were to change a strategy every 5 years, maybe even 10 years, you might not even reap any benefit because it takes a long time for these strategies to execute.

What do you do Andrew?

Right now, I subscribe to the ultimate buy and hold 10 fund/sector philosophy by Paul Merriman with 10 ETFs across 10 sectors with 50% being international and 50% being domestic. You can find the same ETFs on his website below.

What about Target Date Funds? - Well, I think you can do better, that’s why. The data says you can too. And if you are reading this, I’m assuming you have an interest in doing so as well. There is more involvement required, but it’s worth it.