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       Investor's Insight - September 11, 2006           
          "A Digest of Investment Opinion From the 
             World's Leading Financial Advisers"


by Scott Burns

Nearly three years ago I wrote that I was going to shift 
my 401(k) from the menu of funds offered by my employer 
to a "brokerage window."

Today, I'm very glad that I made the change. 

It's also easier and less expensive today than it was 
three years ago -- Fidelity has dropped the $100-a-year 
account fee (for my plan), brokerage commissions have 
continued to decline, and the number of exchange-traded 
funds (ETFs) has continued to increase. 

I can also tell you that making such a move isn't for 



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At the end of August, Fidelity calculated the year-to-
date return on my account at 9.8 percent. The trailing 
12-month return was 14.1 percent. The three-year annual-
ized return, which I calculated because the Fido calc-
ulator is limited to 24 months, was 15.5 percent. 

These returns compare, according to Morningstar, with 
4.4 percent, 6.57 percent and 9 percent for the "moderate 
allocation" or balanced fund average, respectively. The 
comparable figures for "world allocation" funds are 8.37 
percent, 11.66 percent and 15 percent, respectively. 
Either way, I'm a happy camper.

I made the change to reach two goals. First, I wanted 
to reduce "manager risk" -- the dreary tendency 
of portfolio managers to have periods of "hot hands" 
followed by periods of "cold hands." Second, I wanted 
to do what I advocate in this column -- reduce expenses 
by concentrating on index funds.

Today, for instance, you can build my "margarita 
portfolio" (one-third each of domestic stocks, inter-
national stocks and Treasury Inflation-Protected Se-
curities) by investing in two Fidelity index funds, 
Spartan Total Market (ticker: FSTMX, minimum investment: 
$10,000) and Spartan International (ticker: FSIIX, 
minimum investment $10,000). These funds have annual 
expenses of only 10 basis points each. You can buy the 
iShares TIPS exchange-traded fund (ticker: TIP) with an 
annual expense ratio of only 20 basis points. That means 
you can run the entire portfolio at an average cost of 
13 basis points a year plus one or two commissions.

You can achieve additional asset class diversification 
by adding ETFs that focus on real estate investment trusts 
(REITs). The Vanguard REIT index exchange-traded fund 
(ticker: VNQ) has an expense ratio of 12 basis points. 
You can make a broad commitment to energy, as I suggested 
in my book "The Coming Generational Storm," by investing 
in an energy ETF such as Vanguard energy (ticker: VDE). 
This fund has an expense ratio of 26 basis points.

In other words, you can manage your 401(k) account for 
about 20 basis points a year plus a few commissions. 
Since many people can now trade for commissions of $10.95 
or lower at Fidelity and still lower at pricing leaders 
such as USAA ($6.95), it's pretty easy to see that comm-
issions are not a big deal.

Here's an example. Suppose your 401(k) account has $50,000 
invested in relatively low-cost mutual funds averaging 1
percent a year. Switching to index funds at 0.2 percent 
would save you 0.8 percent a year. You'd have to make 
20 trades a year at a $20 commission rate before your self-
directed portfolio would cost more than the managed option. 
As a practical matter, many older workers will have larger
accounts and lower commission rates.


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Should everyone do this?

No. Many people should pick a few funds and focus on adding 
new money.

There are two reasons for this. First, eliminating the ma-
nager risk of a mutual fund by having a self-directed acc-
ount may be just another form of manager risk. Worse, the 
manager taking the risk is you.

Second, even if you limit your self-directed choices to 
three, four or five index funds, you've got to pay att-
ention and rebalance every once in a while -- particularly 
in 401(k) plans where you are adding new money regularly.
Many people don't want to pay that much attention to their 

You can discuss this issue or any other topic in the new 
Investor's Insight forum. Check it out here...

Investor's Insight Forum

(Investor's Insight reflects the opinions of experts. It does 
not recommend any specific investments, and no endorsement is 
implied or should be inferred. For more information, contact 
the individual firms cited).



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