Guest Author - Guido Deboeck

Five hundred fifth teen years ago on October 12th, 1492 Christopher Columbus landed in San Salvador and thought he had discovered the Indies. He traveled back to Spain and was celebrated as a great discoverer.

Girolamo Benzoni, in his History of the New World wrote in 1565 Columbus was dining with many Spanish nobles when one of them said: 'Sir Christopher, even if your lordship had not discovered the Indies, there would have been, here in Spain which is a country abundant with great men knowledgeable in cosmography and literature, one who would have started a similar adventure with the same result'. Columbus did not respond to these words but asked for a whole egg to be brought to him. He placed it on the table and said: 'My lords, I will lay a wager with any of you that you are unable to make this egg stand on its end like I will do without any kind of help or aid'. They all tried without success and when the egg returned to Columbus, he tapped it gently on the table breaking it slightly and, with this, the egg stood on its end. All those present were confounded and understood what he meant: that once the feat has been done, anyone knows how to do it."

Unfortunately many who invest have yet to discover Columbus’ Egg! I was reminded of that when reading over the week-end Unconventional Success: A fundamental approach to personal investing by David Swensen. In this exceptionally easy to read book, David Swensen, who is the chief investment officer of Yale University and manager of close to 20 billion dollars (with a success rate that few have matched) has one simple message: mutual fund managers and brokers have a conflict of interest between making money for their clients and making money for their firm. Making profit for their firm always wins!

About a year ago on this site I posted an article (still in the achieves) that has as title Fire your mutual fund manager! Quite a number of you read that article, but no one wrote me that they actually did get out of mutual funds. In Swensen’s book you will find further reasons to take my advice seriously.

Besides providing ample evidence why mutual fund managers fall short – John Bogle wrote “their colossal failure” -- this book contains an excellent chapter on ETFs. In the last chapter that I recommend everyone to read in detail (the rest of the book you can absorb by reading the chapter summaries) I found further evidence about what I wrote about ETFs (also in the archives). Specifically that among all ETFs currently traded on the markets (i.e. more than 150) there are only a dozen that you should really consider for building a solid diversified portfolio.

Using the ETFInvestor from Morningstar, I retained SPY with an expense ratio of just 0.08, QQQQ with and expense ratio of 0.20, Vanguard European stock ETF, VGK with an expense ratio of 0.18, Vanguard Pacific stock ETF, VPL with an expense ratio of 0.18, Vanguard Emerging Markets ETF, VWO with an expense ratio of 0.18, Vanugard REIT ETF, VNQ with and expense ratio of 0.12 and XLE, an energy ETF which has an expense ratio of 0.24.

Depending on your current outlook of both the domestic and foreign economies, your reward objectives and your risk tolerance, a well-diversified portfolio can be constructed using just these instrument. For example allocate 60% of your assets to SPY and QQQQ, 20% to VGK and VPL, 10% to VNQ and 10% to XLE. Or given the current circumstances allocate more to QQQQ and XLE. Any of these allocations can be held for the long term with minimal costs, great tax efficiency, requiring only semi annual or annual rebalancing.

It’s like the egg of Columbus that is once demonstrated, anyone can adopt this rather simple approach to unconventional success in personal investing.