Q. Are exchange traded funds (ETFs) suitable for a retiree's portfolio? If the retiree makes regular withdrawals to live on, and attempts to keep his portfolio balanced, he would need to make regular withdrawals from an ETF, thus incurring commission expenses. Wouldn't this make the ETFs unsuitable for such a portfolio? —D.W., by email

A. There was a time when this might have been a problem for smaller accounts. But with Schwab, Fidelity and now Vanguard offering no-commission ETF trades on the most important ETF asset classes, concern about the burden of commissions on ETF portfolios should diminish greatly.

Beyond that, there are simple ways to minimize commissions. One is to raise cash for spending when the portfolio is rebalanced. If you rebalance once a year and take an annual cash withdrawal at that time, retirement income won’t cause any increase in commissions. Since the annual cash drawdown will be relatively small, its only impact will be a modest reduction in overall portfolio risk.


Q. In a recent column you discussed the “7Twelve Balance Fund” portfolio. This sounds interesting to me. At the end of your article you mentioned that it is easy to build them. My question: How? To whom do I go to invest in them? Can you recommend an investment firm that would help me with this? My husband and I have been investing in mutual funds for years: American Funds and more recently, through Waddell & Reed. We made the change from American Funds to Waddell & Reed to try something new, but it really ended being the "same old, same old"— mutual funds with yearly fees. —J.G., by email from Seattle, WA

A. Professor Craig Israelsen builds his 7Twelve portfolio with a method that is very similar to my Couch Potato Building Block portfolios— while he has seven core asset classes, the actual portfolio is built with equal investments in each of 12 “sub-asset” classes. So, by definition, each investment gets 8.33 percent of the total value of the portfolio. His 12 sub-asset classes are:

Large-cap U.S. companies, mid-cap U.S. companies, small-cap U.S. companies, international developed markets, emerging markets, global real estate, natural resources, commodities, total U.S. bond market, inflation protected bonds, international bonds and domestic money market fund.


Today it is possible to invest in each of these areas through an inexpensive exchange traded fund. This avoids “management risk” and reduces overall investment expenses. With Vanguard, Fidelity and Schwab now offering a good number of ETFs free of commissions, and discount brokerage commissions down at $8 or $9 per trade, the total annual cost of managing this portfolio would be very low, even compared to the relatively low expenses of American Funds funds. Doing it yourself will eliminate the added cost of having a third party manage the portfolio. That cost is often an additional one percentage point, so learning to DIY pays rather nicely.

Suppose, for instance, you have a $300,000 retirement portfolio. Saving 1 percent means saving $3,000.

Q. I am a 44-year old single man with no children. I went through many hard financial times over the last few years. They left me with no real assets and an empty 401(k). I have stable employment now and am contributing to my 401(k). What additional types of investment should I focus on to build a realistic retirement portfolio, given my late start? —J.M. by email from Dallas, TX

A. You’re not alone. Many people don't start saving until they are in their 40s. While compounding does more for you the earlier you start saving, the reality is that most people are busy doing other things in their 20s and 30s. So the real saving for retirement doesn't start until later.

My suggestion: Save as much as possible, invest in low cost index funds whenever possible, and use a very simple plan such as my Margarita portfolio. It will put equal amounts in TIPS, domestic stocks and international stocks. You can learn more about it, including regular updates of trailing period returns, on this website.