In the 1979 film, Breaking Away, a cycling obsessed kid named Dave is thrilled when his favorite team flies from Italy to do a local bike race. Dave is the only American who can keep up. Despite chatting to the Sicilian boys in Italian, they aren’t impressed.  While climbing a hill, one reaches for Dave’s shifter and jams it into a big gear.  As a result, Dave momentarily struggles.  When he recovers, they toss a pump into his front wheel. Dave lands in the ditch.

Forty eight year old Patti Smaldone, a teacher in Connecticut, experienced a similar sabotaging attempt from her financial service company.  She had read a couple of books on investing and learned that her best odds of success would likely come from owning low cost index funds.  She opened an IRA with a firm that offered both index and actively managed funds. Patti’s portfolio comprises U.S. and international stock indexes, as well as a government bond index. But like Dave’s gesture to his Italian heroes, when she reached out, a rep from the investment company tried wrecking her account.

Last week, Patti figured it was time to rebalance her portfolio.  Since starting the account in 2012, her U.S. index had risen 57 percent.  Her international index was up 53 percent.  She needed to sell some of each and add the proceeds to her bond index.

Forgetting how to buy and sell, she called the investment company for help.  But they tried jamming her gears.  “They asked me why I was in those products,” Patti explained.  “And they recommended I buy their actively managed funds instead, saying they would do better.” 

Unfortunately, this is common. Express a smidgeon of uncertainty, open the door to suggestions, and you’ve let the Big Expense Genie out of the bottle.
Investment firms make more money selling expensive products. Whether their investors land in the ditch, it appears to matter little.

Those breaking clean of silver-tongued reps might choose a discount brokerage such as Charles Schwab.  Reps offer help to those unsure how to buy or sell. But they won’t make investment suggestions.

Fortunately, you don’t need them to.

Schwab doesn’t charge commissions on its brand of ETFs. And their expense ratios are a tightwad’s delight.

Schwab’s U.S. Broad Market ETF charges a paltry .04 percent.  Investors with $10,000 would pay just $4 in annual fees. 

Schwab’s International Equity ETF costs just .08 percent.  The company’s Short-Term U.S. Treasury ETF charges the same amount.  Investors splitting their money between these three indexes would pay just .053 percent per year.

Long-term studies, however, show small stocks have outperformed large ones. They won’t win during every time period.  But Schwab investors should consider adding a smidge of small caps to their portfolio.  They can do so for a tiny .08 percent per year.

Adding real estate income trusts furthers diversification.  Schwab’s U.S. REIT ETF charges just 0.07 percent. 

Choosing an allocation depends on your risk tolerance and circumstance:

  • Conservative investors may want slightly more in bonds than stocks.
  • Those owning rental real estate properties might forgo property exposure in their Schwab account.
  • Young or aggressive investors might choose a lower percentage in bonds.

 Here are a few sample portfolios below.

Category Aggressive Investor Allocation Moderate Investor Allocation Balanced Investor Allocation Conservative Investor Allocation
U.S. Broad Equity 35% 25% 20% 15%
U.S. Small Cap Stocks 15% 10% 5% 5%
International Stocks 20% 20% 15% 15%
Real Estate Income Trusts 10% 10% 10% 5%
Short Term Government Bonds 20% 35% 50% 60%

Choose a portfolio allocation and stick to it. If small cap stocks have a great year, don’t bump up your allocation to small stocks the following year, expecting the asset class to continue scorching.  That rule applies likewise to each asset class.

You’ll do well, long term, if you shun forecasts and rebalance annually.  Best of all, by doing so, nobody can jam a pump in your wheel.