model portfolio refinement 2

In a further effort to decrease correlation with the S&P 500, I've decided to allocate 1/3 of the model portfolio to foreign stocks with low betas. The new holdings will be 'acquired' tommorow via commission free trades and are shown in the chart above (32 stocks and 2 ETFs). Note: click the charts twice to enlarge them further for easier viewing.

The first ETF (ticker: DFJ) provides exposure to small cap stocks in Japan and its holdings are shown here. The beauty of a small cap focus is that it tends to exclude banks while still providing exposure to foreign stocks that don't trade in the U.S.

The second ETF (ticker EWM) provides exposure to Malaysia and its holdings are shown here. If you follow the link, you'll notice the Malaysia ETF is 31% financials, but I decided to let that slide because (i) it works out to only 1% of the model portfolio, (ii) it provides exposure to foreign stocks that don't trade in the U.S., and (iii) the ETF has a low beta (.74).

Separately, let me say a few more words about Exchange Traded Funds (ETFs). First, I think ETFs are superior to your typical mutual fund primarily because they tend to have lower annual fees. This is because ETFs are typically managed passively with low overhead (simply trying to mimic an index), whereas mutual funds are typically managed actively. Active management requires more overhead associated with hiring folks to research and trade securities. Since 90% of mutual funds don't keep up with stock indexes after accounting for overhead every year, I don't think the cost differential is worth it. So by default I think ETFs are better investment vehicles.

However, ETFs are still blunt instruments. For example, if you're like me and want exposure to foreign stocks but are averse to banks, oil companies, gold miners, and high beta, then there are hardly any ETFs out there for you. If your savings are in a brokerage account that charges a commission for every trade, then you can't finely tune your account because it would be cost prohibitive to buy and sell a large number of securities (unless your account is very large). However, if your brokerage account is at folioinvesting.com where there are no trading commissions, then you can afford to finely tune your investments as I've shown above.

Quote of the Week: "Always to seek to conquer myself rather than fortune, to change my desires rather than the established order, and generally to believe that nothing except our thoughts is wholly under our control, so that after we have done our best in external matters, what remains to be done is absolutely impossible, at least as far as we are concerned." - René Descartes (1596 - 1650)