Rick Ferri thinks many advisors are making investing too difficult and expensive. And that's why he sees a simple, low-cost ETF investing portfolio as all you need.
The former broker and asset manager with three decades of experience now runs Georgetown, Texas-based Ferri Investment Solutions. Rather than taking a cut of assets, Ferri charges hourly for his unvarnished opinion on what he thinks clients should do with their money. Ferri holds a Chartered Financial Analyst (CFA) designation.
What should you do with your money? Most likely? Simplify and pay lower fees, Ferri says.
Simplify Investing By Easing Your Worries
But you're worried about market volatility and think you need to prepare your portfolio for it. Calm down, he says. "There has always been volatility and always will be volatility. No one can accurately and consistently predict the level of volatility in the short-term," Ferri told Investor's Business Daily.
What about recession? "Recession is never off the table," he said. But given the unpredictable nature of them, battening the hatches prematurely is a waste of time. "There have always been recessions and always will be recessions, the timing of which are also not predictable," he said.
What To Expect In 2020 From ETF Investing
Surely, though, 2020 will be different, right? Coming off a 29% gain in the S&P 500, or 31.5% return including dividends, new market forces will influence returns. No, he says.
"The same factors that have driven markets in the past 500 years; earnings growth, inflation, real interest rates, taxes, monetary and fiscal policy, political uncertainty, global unrest, and the unknown unknowns" will drive markets in 2020. "No one can predict these factors (in the short term) with any consistency."
But what Ferri is more confident about is a low-cost, diversified portfolio will win for most investors over the long term. And such portfolios are the best way to capture his long-term returns expectations. "My 10-year forecast is a 2.5% annualized return from U.S. investment-grade bonds and 6% from global stocks," he said.
Ferri thinks ETF investing is an excellent choice for most investors looking to build such a portfolio. He takes the simplification of ETF investing even a step further.
Ferri differs with some other index-fund recommending advisors who build portfolios with seven or more ETFs. Some advisors, for instance, add ETFs that own cheaper stocks to tilt portfolios toward value or small-company stocks. Ferri says in his experience doing this only adds complexity with little benefit. He says you only need three types of ETFs.
ETF Investing Choice #1: A Low Cost Total U.S. Market ETF
The core of any prudent low-cost portfolio is the total U.S. market. This is your biggest exposure to the U.S. economy's stellar long-term growth. Investors in U.S. markets enjoyed a powerful run in the 2010s, with an annualized 13.6% total return during the period.
It's a competitive space for ETFs, and choices abound. One of Ferri's top picks is the Vanguard Total Stock Market ETF. The ETF, with nearly $140 billion in assets, owns more than 3,500 U.S. stocks from the small to the very largest.
Technology is the top holding in the ETF at 26%, followed by financials at 17% and health care at 14%. The top 10 holdings reflect what you'd find in most total market ETFs, including Microsoft, Apple and Amazon.com.
But VTI stands out with its rock-bottom expense ratio of 0.03%. That keeps more return in your pocket, not the asset manager's.
To this end, Ferri also likes the comparable $25 billion iShares Core S&P Total U.S. Stock Market ETF, which also charges 0.03%. It tracks the S&P Total Market Index and holds more than 3,500 stocks. And then there's $16 billion Schwab U.S. Broad Market ETF, which owns 2,500 stock and charges 0.03%.
ETF Investing Choice #2: A Low Cost Total International index ETF
International stocks have lagged the U.S. for years. But Ferri still thinks owning overseas stocks is worthwhile for diversification.
The $19 billion Vanguard Total International Stock ETF stands out. It owns more than 7,000 stocks spanning the globe, outside the U.S., including 17% of its assets in stocks based in Japan, 11% in the U.K. and 9% in Hong Kong. Financial stocks dominate at 24% of assets, followed by industrials at 14%. And you own the world at an expense ratio of just 0.09%.
Another option is iShares Core MSCI Total International Stock ETF, with $18 billion in assets. The country and sector weightings are nearly identical with that of VXUS as is the fee of 0.09%.
Third Investment You Need: A Total Bond Market ETF
The final investment you need exposes you to the income and stability of the bond market.
Vanguard's $48 billion Total Bond Market ETF tops Ferri's list. The ETF owns mostly U.S. bonds, 92%, and mostly Treasuries at 43% of the portfolio. It adds in a dose of mortgage-backed securities at 22% and industrial-company bonds at 15%. The ETF yields 2.27% and charges just 0.035%.
Another option is the largest bond ETF, $69 billion iShares Core U.S. Aggregate Bond ETF. It holds 93% of assets in the U.S. bond market and 40% in Treasuries. It yields 2.25% and charges slightly more, 0.05%, a year.
Similarly, there's Schwab U.S. Aggregate Bond ETF, with $7.4 billion in assets. The holdings are like AGG's, but the fee is slightly lower at 0.04%.
And that's it for your ETF investing plan. "A stable allocation to these three ETFs based on your need is all it will take to achieve financial success during your lifetime," Ferri said.
Oh and Ferri's fees? They start at $450 an hour.
Follow Matt Krantz on Twitter @mattkrantz
