Archives for March 2006

While continuing my reading, it seems like Dimensional Fund Advisors (DFA) mutual funds are the Porsche of index funds. They are sexy in that they index everything under the sun (including stuff Vanguard does not) such as having a SmallCap Emerging Markets fund. They are well-engineered, being based on the best academic research available and having famous professors Fama & French on their boards. DFA tries to take indexing to the next level. Finally, they are exclusive as their funds are only available through approved financial advisors. Of course, this also means you’ll also have to have at least $100,000 to play with and pay annual advisor fees. I believe this is to avoid the performance hit on their funds from any active trading by untrained investors.

I don’t know if the fees are worth it, but, just like a Porsche, I still have this mysterious instinctual urge to own some!
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Most people who have done some reading on investing have heard of the concept of Dollar Cost Averaging (DCA), which involves spending the same amount of money regularly buying their chosen investment, regardless of how the investment fluctuates. For example, I could commit to buying $100 of VFINX every month, no matter what the share price is. If it drops, I buy more shares at the lower price.

Near the end of reading The Intelligent Asset Allocator, I ran across the concept of Value Averaging (VA), which is supposedly gives you a bit better returns than DCA. A simplified version of this method involves trying to increase the total value of your investment by the same amount every month. For instance, instead of my DCA plan above, I could decide to increase my total value of VFINX by $100 each month.
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An alternative to using mutual funds to split up my asset allocations is using ETFs. One of the perks of ETFs is that they often have lower expense ratios than similar mutual funds. An example is the Vanguard Total Stock Market Index Fund (VTSMX) vs. Vanguard Total Stock Market VIPERs (VTI). Both track the MSCI US Broad Market Index, but VTSMX has an expense ratio of 0.19% vs. VTI’s 0.07%. But, since I plan on dollar-cost-averaging, I must also consider transaction costs. If you meet the minimums, it costs nothing to buy VTSMX in a Vanguard account. But every time you buy VTI, you have to pay stock commissions.

The Motley Fool recommends that you keep your commission cost below 2% of your invested principle. I personally like to keep it under 1%. This means if you are paying $5 a trade, you should be buying at least $500 of shares at a time. Otherwise the stock will have to gain more than 1% just for you to break even.
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