The Value of Mutual Funds/ETFs In a Portfolio

Warren Buffett has said that the person who does not want to worry about the stock market should be 90% in Index ETFs to the United States Stock Market (Dow Jones, S&P 500, and Russell) and 10% in short dated T-bills (Treasuries).

This advice has value in that because of inflation, technology, productivity and population growth, the stock market goes up from 15 year to 15 year cycles. This means if you buy at the top (ie 2000) you would still make money by 2015.

Not only do Index ETFs have value but ETFs around a certain sector like Technology, Industrials, Real Estate, Emerging Markets, or Country specific ETF. In some senses these are sector specific index ETFs. Buying into these requires a bit more skill in picking waves or trends. Furthermore these types of ETFs have greater value in higher dividends or capital appreciation than broad Index ETFs that Warren Buffett talks about.

Lastly Mutual Funds can be good if you know how to value them. This basically means looking at long term backdated trends and seeing how the managers of the Mutual Funds stack up compared to their benchmarks or averages. In reality though most managers of Mutual Funds only mimic the return of the similar ETF even though their fees are usually 5x – 10x higher. However, if you pick the magic man, you can see some higher return in a specific mutual fund.

In a portfolio never forget to buy bond like Mutual Funds/ETFs because they will give the ying to the yang of equities in the portfolio. Balance is important.

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