The free portfolio is here....

• Covestor said this week it is building portfolios of ETFs for free.
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• Look out, smalltime financial advisors!

The wall of investment-management fees has been crumbling for some time. Wealthfront, another firm offering basic, pre-set ETF portfolios, last year said it would manage up to $1 million for 501(c) nonprofit organizations for free. Fees after the first million: 0.25%. The firm recently surpassed $1 billion in assets under management.

These efforts turn the typical model of the financial-advice business on its head. Advice is a scale business. The wealthier you are, the lower your fees. But it’s arguably the smalltime investor who could benefit the most from being freed of high fees.

In that regard, advisors often charge 1% or more a year to manage your money, on the theory that you won’t do it yourself, they can’t do it for much less and you can’t get a better deal elsewhere.

But if, like me, you don’t expect more than 6% annual long-term gains from stocks, an advisor who puts you in expensive mutual funds after laying in his own fee is siphoning away perhaps a third of each year’s expected return. Of course, he takes none of the risk. That’s reserved for you.

Compound lost returns over 20 or 25 years to see why your advisor drives a Jaguar and you drive a Honda.

Covestor’s program entails no management fee, just the underlying ETF expense ratios, which are measured in fractions of a percentage point, and trading commissions, which the firm estimates to be $20 a year.

So what about the portfolios? They’re about as basic and low-cost as the ETF market offers.Covestor Core Balanced Portfolio, targeting the Dow Jones Moderate Index, is invested in four funds from Vanguard Group and one from BlackRock’s (BLK) iShares.

That’s 33% in Vanguard Total Stock Market ETF (VTI), 24% in iShares Core U.S. Aggregate Bond ETF (AGG), 15% in Vanguard FTSE Emerging Markets (VWO), 13% in Vanguard FTSE Developed Markets ETF (VEA), and 5% in Vanguard REIT ETF (VNQ). Those ETFs’ combined weighted expense ratio is less than 0.08%. 

This is no threat to the high-end financial advisor. But I expect to be a threat to the ones who charge smalltime investors 1% or more.

Chart from Bill Gates on China's cement consumption

Chart from Bill Gates on China's cement consumption

Warning, Warning: This could only be launched into boiling mkt froth

New Short Squeeze ETF Coming to Market http://www.
http://www.etftrends.com/2014/06/a-new-short-squeeze-etf-in-the-works/

"From Dec through May; the Federal Reserve bought 73% of all new US Treasuries." Strategas

Why You Have Way Too Much Invested In U.S. Stocks

Japan’s stock market rose to account for nearly half of the world’s market cap. And if you believed in the efficient market, you would have invested half of your equity allocation in Japan.But  Japan returned approximately -2% per year from 1990-2010, including more than 20 years of negative returns. A value-driven approach works not just by investing in the cheapest markets, but also by avoiding the most expensive.

What is the biggest country in the world by market cap now? The U.S., with nearly half of global stock-market capitalization.

Figure 5 shows the cheapest and most expensive countries in the world. Notice that the U.S. is one of the most expensive countries in the world.

Figure 5 – Five Cheapest and Five Most Expensive Countries, May 2014

If you look at where we stand today with world valuations in the chart below, the U.S. is actually above the upper end of the range for expensive countries. This chart could be used to help guide when to allocate more to the U.S. versus the rest of the world. The U.S. was cheap relative to the rest of the world in the early 1980s, which also happened to be the start of the long bull market. The late 1990s saw the U.S. near the top of the range, which preceded the bear market that began in 2000. 

Will the current overvaluation signal another bear or perhaps a time to shift more assets to foreign markets? Time will tell.

Figure 6 – CAPE ratios of expensive, cheap, USA and all countries

I examine how to form portfolios of the cheapest countries in a new book, Global Value: How to Spot Bubbles, Avoid Market Crashes, and Earn Big Returns in the Stock Market.

The bad news is the U.S. stocks are expensive, although not in bubble territory.  I expect U.S. stocks to return about 4% per annum for the next 10 years.  The good news is most of the rest of the world is quite cheap. Here are a few actions investors can take to improve the future returns of their equity portfolio:

1. At a minimum, allocate your portfolio globally reflecting the global market-cap weightings. For a U.S.-based investor, that means allocating 50% of your portfolio abroad.
2. To avoid market-cap-concentration risk, consider allocating along the weightings of global GDP. This would mean closer to 80% in foreign stocks.
3. Ponder a value approach to your equity allocation. Consider overweighting the cheapest countries and avoiding the most expensive ones. Currently, this would mean a low or zero allocation to U.S. stocks. This does not mean simply picking one or two countries, but rather a basket of the cheapest countries – 10 is a reasonable number.

For U.S. investors, how many of your stocks are in the domestic market? Once you account for the fact that the U.S. is one of the more expensive markets around the globe, it could be a good time to rethink your stock allocation.