How to determine portfolio holdings

When determining the makeup of your portfolio, there are several questions to consider:

• What is your investment horizon?

  An investment horizon is the amount of time that you expect to be invested. If you’re saving to buy a house in the next couple of years, perhaps your investment horizon is small; but if you’re saving up for retirement 35 years from now, you have a longer investment horizon. To a certain extent, your investment horizon will dictate your risk tolerance.

• What are your goals?

  Again, why are you investing? Are you saving for a house, college, or retirement?

• How much risk are you willing to take on?

  The amount of risk you’re willing to take on should depend somewhat on your age. The younger you are, the more time you have to make up any losses realized by risky equity holdings. As you age, your risk tolerance is likely to decline, pushing you into less risky assets such as bonds.

How to build an ETF portfolio in 5 easy steps

The best way to go about assembling a portfolio of ETFs is the same as for any other type of investment: paying close attention to your goals, risk tolerance, and asset allocation.

Consider these five points in assembling your ETF portfolio:

Costs are paramount.

The whole point of buying ETFs is to keep expenses low to boost your net returns (the pre-tax money you make after costs).

Keep in mind that expenses should be assessed relative to the particular asset class you’re considering. For example, expense ratios for emerging market ETFs tend to be higher than those for domestic ones.

Size counts.

Avoid ETFs with low asset values, as these are much more likely to close than large ones. Small funds tend to charge more because their expenses relative to their total assets are higher. 

A fund with less than $100 million under management is more likely to merge with others or close and return your money.

Dividends count, too.

The major ETF companies let you reinvest your dividends (in additional shares of the funds producing them) or take them as cash. If you take the cash, you can supplement your income with (usually) quarterly dividend checks. 

ETFs generally list dividend payouts per share and dividend yield, the annual cash dividend per share divided by the share price of the ETF.

Be careful about bond ETFs.

Investment yields are low in developed countries, especially on bonds. 

Interest rates for corporate and government bonds are affected by prevailing rates, which are 0 percent or less in Japan and parts of Europe right now, prompting banks to charge depositors interest to hold their money!

Avoid long-term bonds.

Now is a good time to avoid bonds of long duration (10 years or more) because inflation may eat away at your returns and interest rates are expected to rise from these historic lows. 

If long-bond holders try to sell before maturity, the market may punish them because new bond issues could pay higher rates that reflect new, higher prevailing interest rates.

Source: Bloomberg, ABC news, etfdb