Lifestyle Upgrades

Nowadays, market cap weighted index funds and ETFs (Exchange Traded Funds–these trade just like a stock) are widely available at a very low cost.  While it is always fashionable to try to devise ways to beat the market averages, investors’ collective track record for doing so is quite poor.  So even if these index funds don’t represent some sort of mythical ideal, they surely do allow us an easy, inexpensive way to build a global, diversified equity portfolio. 

If market cap indexing is a good strategy domestically, it would follow that it should be a good investment internationally as well.  Interestingly, I’ve seen a few global indexes such as the one offered by Russell, but I have yet to see a single mutual fund or ETF that provides a market cap weighted portfolio of the entire world.  The products that I see are usually more along the lines of single country funds and “all world except for country X” funds.  That still makes it pretty easy to build the portfolio.  All we need are two funds, and an idea of what percentage of our money to put into each one.

 Let’s start with the funds.  While there are certainly other options, I will use Vanguard ETFs as an illustration, because they are generally recognized as low cost index fund pioneers.  We can build the portfolio with Vanguard’s Total Stock Market ETF (ticker VTI) to cover US Equities and the Vanguard FTSE All-World ex-US ETF (ticker VEU) to cover all other countries.  With just two instruments, we get low cost exposure to more than 95% of the global investable universe. 

Since we’d like to be market cap weighted, all that remains is discovering the USA’s percentage of world market cap…(insert Jeopardy theme music)…okay, this was surprisingly difficult to track down, but the World Federation of Exchanges does publish this data on a monthly basis.  Using their monthly domestic market cap figures, I have the US share of global market cap at roughly 40% as of this writing.

So that’s it!  40% goes into VTI and 60% goes into VEU.  We can check the World Federation of Exchanges data on a yearly basis to ensure that our portfolio is still representative of world market cap.  Except for the real world nuisances of adding additional capital and dividend reinvestment, the beauty of this plan is that it never needs to be rebalanced.  Remember, we are not setting some arbitrary division like 50% US and 50% rest of world.  We are simply investing in the entire world by market cap weight.  Whether the US percentage of world market cap shrinks or grows in the future, our portfolio will automatically reflect it.

  Keep in mind that this was just one example, and it’s provided for illustration only…your mileage may vary…blah blah blah…etc….I am not an investment advisor.

Now as soon as someone gives us a good All-World in One index fund option, this plan will get even simpler…100% in one fund…set it and forget it!

Perhaps you’ve seen a TV ad here and there advertising some great rate on an online only savings account or certificate of deposit.  HSBC Direct, ING, and E-Trade come to mind for me.  E-Trade loves to tout the fact that their savings account yields 8 times the national average.  Well that sounds very impressive, and if it motivates you to find a better place to park your savings, then great!  But don’t sign up just yet…

Use BankRate.com to find the best opportunities, and check that these opportunities are relatively safe.  First, go to the checking and savings tab, and be sure to select “High Yield MMA/Savings”.  This will show you all the high yield savings products available.  Very many of these products are FDIC insured, and the site also shows you a star rating to indicate how “safe and sound” the institution is.  This information can be accessed separately as well.

Here is a checklist of things to watch for when evaluating these accounts.

1) FDIC Insurance — As I said, most if not all of what’s on BankRate is FDIC-insured, but it would be negligent not to double check.

2) Safe and Sound star rating — 3 or more stars indicates that this institution shows no signs of trouble.  Bank failures that make the news are rare, but I do recall NetBank going belly up in 2007, but this bank had a one-star rating long before that happened.

3) Annual Percentage Yield (APY) – Superior returns…this is why we are bothering with this in the first place! 

4) Minimum Balance Required to Open  — Many have no minimums.

5) Fees — Many are no fee accounts.

6) Number of Withdrawals Allowed Per Month — These accounts tend to be dressed up money markets, and as such typically restrict withdrawals to somewhere in the area of 3 to 6 per month.

7) How to Make Deposits and Withdrawals — In order to give you these great yields, most of these products are online-only, meaning that you link them to a checking account at another institution and transfer money to and from the savings account online only, but some of these will offer a debit card for withdrawals as well.

The king of this space is ING Direct.  Despite the fact that they are not at the top of the APY list, lots of folks seem to like them because of the additional features they provide, such as sub-accounts for specific savings goals and linking to multiple external accounts.

You can also repeat this process to find the best deals on certificates of deposit, but in today’s interest rate environment, you may find that that the yields you can get on a CD are not much better than what you can get on a savings / money market account.

Happy saving!