Your Chance To Pay It Forward
By Roger Nusbaum, AdvisorShares ETF Strategist
Over the last few weeks I’ve fielded several financial related questions (more personal finance than actual investing) from some younger people in my life (mostly nephews). This is a great reminder of a point I have made quite a few times over the years which is that even if you’re not an advisor, the fact that you care enough about investing to spend time reading blog content very likely makes you the go to person for investing and planning advice in your various circles. You know how most people know a guy or have an uncle, well that is you. You may think you know a lot, or you may think you only know a little, but you know more than the person asking you.
This is a great opportunity to help someone and possibly have a meaningful impact on someone’s life. We have all had people in our pasts impart wisdom to us, even if they didn’t know it was wisdom, that then had a meaningful impact on our lives. I personally have been on the receiving end of one these for life choices; how to do my job firefighting including how to be a better fire chief, as well as diet and exercise ideas, and of course personal finance.
One of the questions aimed at me lately was at what point is a brokerage account big enough to diversify beyond two or three broad based ETFs. The issue here is commissions. An account with $20,000-$30,000 is a great start for a younger person but buying 20 holdings, paying $8 per trade is not necessarily the most economical way to go compared to 20 trades at $8 each in a $200,000 account.
It became obvious about 12 years ago that the investment world was getting flatter by virtue of the access that ETFs were starting to provide as well as how much cheaper ETFs were than traditional mutual funds. As time has gone on, ETFs have listed that offer access to ever more market segments and strategies, the associated fees have continued to trend lower and just about every online brokerage now offers a huge swath of ETFs commission free.
This means a potentially more robust form of diversification is available, economically speaking, to accounts of all sizes (we can address the idea of diminishing returns or deworsification in a subsequent post).
While there is of course an element of subjectivity in terms of what is ideal, I think it is okay in this context to have a couple of holdings that cost a commission which allows for a little fine tuning. I have always been a believer of having a small allocation to gold for its low correlation to equities. In a similar vein, I believe in a small allocation to alternatives also for reasons of correlation but in some instances as a fixed income proxy that won’t be sensitive to interest rates. Not every commission-free ETF platform will have this types of funds, so someone having similar views about gold and alternatives could make a couple of trades and pay the commission while filling out the rest of the portfolio with broad or not so broad, commission-free funds.
While all of this might seem basic, that is the tone of the questions you, as the go-to person, are likely to encounter. Whatever you’ve learned, pass it on to those trying to learn.