A few months ago I posted about whether or not to move my previous employer 401K to an individual IRA. I opted to move it all, roll-over, to an individual IRA.
For me, the advantages definitely outweighed the disadvantages. Here are the biggest advantages as I see it.
- A one stop shop to view and manage all my investments.
- Greater selection of investments. I now have over 2,000 ETFs, 12,000 mutual funds to choose from and that is not including individual stocks.
BTW, did you know there are more mutual funds and ETF’s than there are stocks? True.
I now had much more power over how to invest my retirement funds. But with such great power, comes even greater responsibility.
The first question I had to answer was; how to go about choosing my investments? To do this I started with my first rule of investing; protect capital. I translated that into keeping costs to a minimum. When trading ETFs and Mutual Funds there are basically two costs involved;
- The commission
- The expense ratio
The commission is what you pay your broker for the transaction.
The expense ratio is how much the fund or ETF charges as a service fee to investors.
Obviously the lower these two are the more money you have available to work with.
Looking over the screens my online broker offers, the first thing that jumped out at me was commission free ETF’s. So that was my first selection criteria.
- That narrowed my choices down to 296 from 2105.
My next criteria was funds with below average expense ratios, as compared to the industry .70% average.
- That narrowed my choices even further, down to 130.
That was the easy part. Now what do I do?
Ultimately I am looking for a wide diversity throughout my retirement investment funds. For this I turned to a framework or investment model which helps categorize investment strategies.
The Morningstar Style Box is a nine-square grid that provides a graphical representation of the “investment style” of stocks, ETFs’ and mutual funds.
The grid classifies securities according to market capitalization (the vertical axis) and growth and value factors (the horizontal axis).
Understanding how different types of stocks behave is crucial for building a diversified, style-controlled portfolio of stocks, ETF’s or mutual funds. The Morningstar Style Box helps investors construct portfolios based on the characteristics and style factors of all the stocks and funds a portfolio includes.
Since my first two search criteria limited my choices to ETF’s, I am going to limit my description of the style box to how it relates to ETF’s. The Morningstar style box classification of an ETF is based on the asset-weighted market caps (for the vertical axis) and value-growth scores (for the horizontal axis) of all the stocks in the portfolio. This is important to remember because I want to keep my overall investments as diversified as possible. It could be possible to select different ETF’s, in different style boxes and have quite a bit of overlap not only in sectors but also in individual stocks. This is because each ETF is comprised of many stocks. It is possible to have duplication between ETF’s. Fortunately many online trading platforms and fund prospectus make it fairly easy to track concentrations and overlap.
Here is a perfect example of one such ETF.
Even though the ETF is firmly classified as a Large Cap Growth ETF, it does have a small amount stocks classified as Mid Cap Growth. One can also see the sector concentrations and even the top 10 stocks. (partially hidden in this screen shot).
On a very simplistic level, I was shooting for at least one ETF in each box. I did have some personal investing ideas that I wanted to incorporate into my over-all portfolio. Namely at least one of the following,
- Growth and or Momentum trends
- International and Emerging Markets
- And some sector specific ETF’s such as Financial, Health (pharmacological, Biotech) and Energy.
In the end, I do have at least one ETF in each style box and since I already knew I was going to have overlap in sectors, I concentrated on eliminating, as much as possible, duplicate stocks based on each ETF’s top ten holdings.
13 no commission ETF’s with an average .326% expense ratio.
Out of 130 “top 10” holdings, I have 8 duplicate stocks.
Now that is Investing with Style.