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What's not to like about it?

temsike,

You've put together a thoughtfully-constructed portfolio that would meet the needs of some investors. No doubt about it. But bond ETF's aren't bonds and, thus, have no maturity.

Yes, for sure, emerging-market bonds have been on a rip this year, and a fund --an ETF or otherwise-- is the most effective way to access the asset class. But bond funds --ETFs or otherwise-- are merely trading vehicles. They are nothing to own on a buy-and-hold basis. You get in, and you get out.

Bonds, OTOH, can be held to maturity, and if the asset class is easily accessed --e.g., Treasuries and Corporates-- the owner of individual bonds can easily beat the returns of those classes of bond funds with very little effort. Over the long haul, less than 5% of bond fund mangers will beat what even the most average of investors can do with individual bonds. It takes no brains to beat the fundies due to how funds are managed. So suggesting to anyone, much less someone whom I care about, that he or she buy a bond fund if the underlying is easily accessed is dead from the getgo. That's bad advice that I won't give anyone. (Well, almost anyone. There's a few people whom I'd urge to buy bond funds, so I could laugh at their mistake.)

OTOH, a well-constructed stock fund, index or active, is another matter, because stocks have no maturity. So whether it is the underlying being traded, or a derivative of the underlying, doesn't make much difference if the intention is to buy and hold, because something like 85% of the returns will come from the asset class itself. So a stock fund is a macro economic bet, and because the future is unknowable, hedging the future with a long bet isn't a bad idea. In fact, that's the default result of the much-used formula for rotating assets from equities into fixed income. (100 minus one's age is the suggested allocation to bonds. Thus an 80 year-old would still have a 20% toe in the stock markets.)

Given that sis is only 62, she should be hugely into stocks with her investments. But she's not, for having no investments. Like a typical Californian who bought back in the '70's, she's sitting on a half million of easily realizable house equity, has a pension tied to PERS, and is super-sensible about her spending. So if she just lets her accumulating surplus income sit in cash, no great harm will result. If she can invest it prudently, so much the better. But it's small money, and, like most people, she has zero interest in investing as a hobby, much less as a necessity.

Let me guess that she'd want to put $10k to work/year. Under the best of circumstances, how much would her money earn compared to substitute teaching two days per month? That, I suspect, will be the reality for her. If she wants some "mad money" to blow on a trip, she could earn it faster and easier by working than from investing. Where investing makes a lot of sense is when a lot of money is being put to work. Then elaborately constructed and carefully managed plans make sense. But for $10k of what amounts to petty cash, just splitting it between a basket of five bonds and five stocks wouldn't be a bad way to go.

However --and here come more "buts"-- dealing with small accounts is a hassle. Yes, Scottrade changes no minimum account fees, and they would be a good broker to use for buying either stocks or stock funds (ETFs or otherwise). But they suck majorly for bonds (due to their ten bond minimum/ticket and limited inventory). E*Trade wouldn't be as good for stocks/ stock funds as ST due to higher commish. But there is currently no broker who is doing a better job with bonds (although Zions comes close).

ET abuses its customers with minimum account fees, but a $10k balance would solve that problem. So that was my initial thought. When she has $10k to put to work, then we go shopping. If the bond market is hugely over-priced when she's ready to buy, or if div stocks seem preferable to her (as individual holdings or through a fund that focuses on div stocks), then we pursue that route. But launching the project is months away. Now it's summer, and time to play with grand kids, go back-packing, and oversee her house remodeling project. Come the Fall is when she'll want to talk money and investing.

What I was trying to do was to think a few moves ahead of her, so I wouldn't be scrambling for ideas while she's losing patience. I love her dearly, but I know she hates getting bogged down in details. So whatever I pitch will have to be clean and simple. She's smart enough see a recognize a good idea when she sees one, and independent enough to say "No" to those she doesn't like. So making the pitch puts me on the hook for figuring out something that is (1) worth doing and (2) won't blow up on her. I know bond as well as anyone, but prices in the Fall might not justify initiating new positions. So I need a fallback plan, which is kind of why I was poking around in the posts on div stocks. That's an investing format she's familiar with from the example our parents set for us though their own investing and through the stock shares given to us as kids, and, in turn, to her kids by our parents (as presents to their grand kids.)

Thanks for your taking the time to think about the problem and offering a solution that makes sense to you. Sis wouldn't like it, though. Too many parts. She really will want clean, simple, and concrete, which means individual securities, rather than funds. That's an old-world prejudice, but those were our parents' values, and investing is nothing if not mainly an expression of culture and values (wrapped in emotions) most of which are denied (or not even recognized) but very operative when it comes to making choices. So a lot of my success with the "pitch" will depend on saying things that have nothing to do with numbers but whose "heart and feeling " resonates with her.

(ARRGH!. Why anyone would want to be a financial adviser is beyond me.)

Charlie
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