Ah, the traditional pleasures of September. Summer's heat starts to recede. Pumpkin spice-flavored things start to appear on menus. People get in their first complaints of the year at seeing retailers roll out the Christmas marketing before they've even picked out their Halloween costumes. And, of course, here at Fool HQ, the month would not be complete without a mailbag show from Motley Fool Answers podcast hosts Alison Southwick and Robert Brokamp. To help them address all your autumnal financial conundrums, Sean Gates, a financial planner with Motley Fool Wealth Management (a sister company of The Motley Fool) returns to the studio.
In this segment, they weigh an asset allocation question: If you have, say, only $500 to invest in ETFs, should you pick a single, well-diversified fund or get your diversification manually by investing in several funds?
A full transcript follows the video.
This video was recorded on Sept 25, 2018.
Alison Southwick: The next question comes from [Brian]. "If you had $500 to invest, would you put $100 into five different ETFs [maybe an ETF in five different sectors, for example] or would you put all $500 into one more diversified ETF?"
Robert Brokamp: I choose this one because...
Southwick: It makes it look like a bunch of Motley Fool investing teams are sitting around a campfire. It sounds like one of those questions that a bunch of Motley Fool analysts would talk about for days around a campfire.
Brokamp: That's probably true.
Southwick: Why did you choose this question?
Brokamp: I chose it because my wife and I recently added some money to our kids' brokerage accounts and we were thinking how we wanted to do that. And we chose to split it up. We chose a couple of stocks [with a little bit of input from the kids] but then also chose three ETFs. I chose a large-cap ETF, a small-cap ETF, and then an international stock ETF. If I were feeling saucy, I would have also chosen an emerging markets ETF which have been clobbered recently. You just have to be ready for a wild ride. I think over the next 10 years, they'll be one of the best investments you can make, but who knows?
Sean Gates: I'll take the other side of this because typically if I get the question, "I have $500. How should I invest it," it means that that person is new or they are just getting started with their savings journey. In theory you should be diversified, but one of the things that I run into from a behavioral finance perspective is that if you invest $500 in a diversified ETF, you could maybe expect it to go up 8% over the course of a year. 8% on $500 isn't going to jazz anyone to the sky. And so what you could do is invest that $500 in maybe one or two stocks, because the potential that that $500 turns into something more meaningful is greater and then you've hooked them on the idea of investing and longer term that develops good habits. But that would always be couched in the fact that they need to be able to risk this $500.
Brokamp: With small amounts, you always have to be concerned about commissions. The good thing about ETFs is that most brokerages, now, have some commission-free ETFs, so that's part of where we started, as well.