This question is a follow up question to this " Is my "retire young" strategy a sensible one? "

I am attempting to structure a early retirement strategy. It involves dumping into a 401k (already in progress). Buying rental properties (already in progress) and most recently, building an ETF and mutual fund portfolio (just started this year).

The ETF and Mutual fund plan is as follows:

Purchase $5,000 of each of the following in lump sums, then let sit until I deem them mature.

(Three more ETFS or Mutual funds that haven't been chosen yet but will not focus in the same sectors as those above. I know I want an industrials focused one and also a healthcare focused one.)

My questions are:

For a young person (29) who is attempting to build a retire early nest egg, does it make sense to use mutual funds and ETFs as the vehicle or is there specific reasons why I shouldn't?

Does the fact that they are managed outweigh the fact that I wouldn't pay expenses if I managed my own?

My assertion is that at very least, I am saving by letting the managers of the funds trade for me so I don't get the trade fees from my bank. Is this on point?

  • 3
    Can you explain what mature means? As a man whose 17 year old daughter has told me to "grow up" more than once, clearly I don't understand this word in any sense. – JTP - Apologise to Monica Oct 27 '15 at 15:54
  • @JoeTaxpayer when it hits my pre-specified held length or return rate target it has matured. – Anthony Russell Oct 27 '15 at 16:00
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    There's nothing wrong with buying ETFs or mutual funds, but (extrapolating from your previous question) I think you're mistaken if you anticipate that putting $10k into ETFs and letting it sit for 10 years will leave you in a position to retire at age 40. Also, missing from both this and your previous question is an explanation of what your 401k is invested in. A 401k is just an account. Inside that account you can often invest in a range of mutual funds with radically different risk/return profiles. The details of investments inside the 401k need to be considered when planning your savings. – BrenBarn Oct 27 '15 at 16:13
  • I'm not putting $10k into ETFs and letting it sit. I am putting $10-$15k annually into ETFs while also purchasing rental properties every one to two years while also putting into my low expense 401k. Also, like I said, the plan really isn't to retire early. It's just to put myself into a position that I potentially could. – Anthony Russell Oct 27 '15 at 16:15
  • @AnthonyRussell Bonds are better for income portfolios if that is what you are trying to build. Market risk can hit ETFs hard. – Ross Oct 27 '15 at 16:50

I think the dividend fund may not be what youre looking for. You mentioned you want growth, not income. But I think of dividend stocks as income stocks, not growth. They pay a dividend because these are established companies that do not need to invest so much in capex anymore, so they return it to shareholders. In other words, they are past their growth phase. These are what you want to hold when you have a large nest egg, you are ready to retire, and just want to make a couple percent a year without having to worry as much about market fluctuations.

The Russel ETF you mentioned and other small caps are I think what you are after. I recently made a post here about the difference between index funds and active funds. The difference is very small. That is, in any given year, many active ETFs will beat them, many wont. It depends entirely on the market conditions at the time. Under certain conditions the small caps will outperform the S&P, definitely. However, under other conditioned, such as global growth slowdown, they are typically the first to fall.

Based on your comments, like how you mentioned you dont want to sell, I think index funds should make up a decent size portion of your portfolio. They are the safest bet, long term, for someone who just wants to buy and hold. Thats not to say they need be all. Do a mixture. Diversification is good. As time goes on dont be afraid to add bond ETFs either. This will protect you during downturns as bond prices typically rise under slow growth conditions (and sometimes even under normal conditions, like last year when TLT beat the S&P...)

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This is the chart going back to the first full year of this fund.

enter image description here

To answer your question - yes, a low cost ETF or Mutual fund is fine. Why not go right to an S&P index? VOO has a .05% expense. Why attracted you to a choice that lagged the S&P by $18,000 over this 21 year period? (And yes, past performance, yada, yada, but that warning is appropriate for the opposite example. When you show a fund that beat the S&P short term, say 5 years, its run may be over. But this fund lagged the S&P by a significant margin over 2 decades, what makes you think this will change?

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  • I found this fund by looking for high dividend mutual funds. The goal for this fund was to get the highest dividend possible. I'll admit that I probably didn't do enough research but that's why I am here I guess. It's a learning experience and I am bound to take lumps. – Anthony Russell Oct 27 '15 at 16:03
  • @AnthonyRussell: Why did you search for high dividend mutual funds? – BrenBarn Oct 27 '15 at 16:09
  • Because originally the plan was to build a residual income portfolio. However I decided that growth and not paying (as much) tax until it's sold was a better option. I didn't want to sell it though. – Anthony Russell Oct 27 '15 at 16:11
  • Given the above comparison, both returns will drop a bit due to taxes in the non-retirement accounts, but the S&P will still show superior. Keep in mind, dividends and long term gains are tax favored anyway. "Don't let the tax tail wag the investing dog" – JTP - Apologise to Monica Oct 27 '15 at 16:16
  • Haha noted. I'll make sure to keep this in mind during my next fund selection round. – Anthony Russell Oct 27 '15 at 16:18

If your intention is to purchase ETFs on a regular basis (like $x per month), then ETFs may not make sense. You may have to pay a fixed transaction cost like you were buying a stock for each purchase. In a similar no load mutual fund, there are more likely to be no transaction costs (depending on how it is bought).

The above paragraph is not very definitive, and is really dependent upon how you would purchase either ETFs or Mutual funds. For example if you have a Fidelity brokerage account, they may let you buy certain ETFs commission free. Okay then either ETFs make great sense. It would not make sense to buy ones that they charge $35 per transaction if you have regular transactions that are smallish.

The last two questions seem to be asking if you should buy MF or buy stocks directly. For most people the later is a losing proposition. They do not have the time or ability to buy stocks directly, effectively. Even if they did they may not have the capital to make enough of a difference when one considers all the cost involved.

However, if that kind of thing interests you, perhaps you should dabble. Start out small and look at the higher costs of doing so as part of the "cost of doing business".

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  • Thank you for your answer. I have clarified the purchasing strategy above. – Anthony Russell Oct 27 '15 at 15:18

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