Vanguard 500 vs Vanguard Total

[jively]

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Your recommendations only involve Vanguard? A list composed by "rockrock" (http://forumserver.twoplustwo.com/sh...t=all&vc=1) recommended index funds by iShare and Forward also. I am a newbie so I do not understand the reasoning behind this. Please clarify jively.

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I think Vanguard has normal (open-end) mutual funds, and ETF (closed-end) mutual funds for the same indexes. He just converted my recommendation to ETFs. He also suggested 2 others asset classes (international small and commodities - note check out QRAAX* and DFISX (and DISVX)).

I recommend the normal, open-end mutual funds over ETFs. ETFs trade like stocks, so when you buy them, you have to pay the custodian (like E-trade, Ameritrade, Charles Schwab) a transaction fee for each trade. It might only be $5, but could easily be $20 or more per fund. This definitely is not best if you are saving regularly, maybe saving money each month. With the open-end funds, when the money is held directly by the mutual fund company, there are generally no transaction fees at all.

Plus, ETFs have a bid-ask spread. If the fund's price (NAV) is 61.26, maybe you can buy at 61.26 but have to sell at 61.16 or something like that. You pay a tiny bit more when you buy and lose a tiny bit when you sell. If you are holding a really long time, this is trivial. But if you are saving regularly or rebalancing once a year, you do get a hit a little bit. Plus, the funds with less liquid stocks (like Emerging Markets, or Internation Small Value) have a higher bid-ask spread. Some funds may have a 3% bid-ask spread, where you buy at 61.26 but can only sell for 59.45.

(Some arbitrage traders profit when a bid-ask spread is wide by shorting the ETF and buying the individual stocks in the index. However, with illiquid asset classes, if they buy the stocks they move them up and can't profit from the arbitrage. So, the bid-ask spreads stay wide, and ETF buyers can lose up to 3%.)

-Tom

* Many of the smart people at DFA don't recommend buying commodities, because there is no positive expected value. It is true that the correlations with stocks and bonds are low. However, there is no reason that commodities have a positive return over time. Stocks obviously have a positive expectation because of dividends and growth, and bonds because of the interest paid. Historically there have been positive returns for commodities, but there is no reason to believe it will continue in the future. [I don't want to start inflation arguments with perma-bears in this thread.] Some asset allocation authors, like Roger Gibson , do recommend commodities (with maybe a smaller allocation to real estate stocks). That's fine.

[Sniper]

jively, I like your thinking in general, but lets not overstate things too much. You're obviously not going to use an ETF that's so lightly traded that it has a huge bid/ask spread, unless you know how to use that to your advantage.

You can also use NTF (no transaction fee) funds in a regular brokerage account, and they usually also have options for no cost automatic monthly investments.