The joy of cooking diversified portfolios by Burns:

Burns: The joy of cooking diversified portfolios

By SCOTT BURNS Univeral Press Syndicate

Sept. 7, 2010, 10:13PM

It has never been easier or cheaper to build a well- diversified portfolio. And you can do it in your spare time at home.

This year, competition has brought one cost reduction after another. First Schwab introduced its commission-free exchange-traded funds. Fidelity followed, making 25 iShares ETFs available commission-free. Then Vanguard dropped commissions on its ETF stable.

The stumbling block for small investors — commission costs - has been nearly eliminated. You can now start a basic three-part Margarita portfolio at Vanguard for annual expenses as low as 0.13 percent. You can do much the same at Schwab for about 0.14 percent, plus one $8.95 commission. And you can do the same thing at Fidelity for about 0.23 percent and no commissions.

This is a big deal.

The average net expense ratio of all managed world allocation funds, according to Morningstar, is 10 times as as much, about 1.5 percent. If your portfolio is as small as $10,000, taking the time to do an annual portfolio rebalancing will save you about $135.

Honk if you'll work 15 minutes for $135.

That 1.35 percent annual cost saving is one of the reasons your home-built portfolio is likely to do better than the majority of managed funds. The marketers want us to believe that investing is rocket science. But simple arithmetic works better.

That 1.35 percent annual cost saving is one of the reasons your home-built portfolio is likely to do better than the majority of managed funds. The marketers want us to believe that investing is rocket science. But simple arithmetic works better.

If you haven't read about the Margarita portfolio before, it's one of my Couch Potato Building Block portfolios, a simple system for managing your money. Using this system you can build a portfolio of two to 10 "blocks." The more blocks you have, the greater your diversification. You can build a basic portfolio with two blocks, an international portfolio with three. You can cover all the basic asset classes, including energy and REITs, with six blocks. (Learn more about these portfolios, including monthly performance updates, at my website, www.assetbuilder.com.)

The basic Couch Potato portfolios are the least expensive - but the cost of building the larger portfolios isn't a lot higher. I found, for instance, that the Six Ways From Sunday portfolio, with six blocks, would cost about 0.22 percent at Vanguard and 0.27 percent at Fidelity. Similarly, the Ten Speed portfolio, with 10 blocks, would cost 0.23 percent at Vanguard and 0.31 percent at Fidelity. Schwab portfolios were neck and neck with Vanguard's costs.

And, no, you don't have to slavishly follow my recipes. What you do may depend on where you choose to have your account. Here are a few recipes with small variations.

A starter Couch Potato portfolio at Schwab: You do this by putting half your money in Schwab Total Market ETF (ticker SCHB, expense ratio 0.06 percent) and the other half in Schwab Total Bond Market index mutual fund (ticker SWLBX, expense ratio 0.55). That will give you an average expense ratio of 0.31 and no commission expenses. Note that it was necessary to substitute the Schwab Total Bond Market mutual fund because Schwab does not offer its own inflation-protected bond fund.

A Margarita Portfolio at Fidelity: Mix equal parts of the iShares Russell 1000 Index ETF (ticker: IWB, expense ratio 0.15 percent), iShares Barclays TIPS Index bond ETF (ticker: TIP, expense ratio 0.20 percent), and iShares MSCI EAFE Index ETF (ticker: EFA, expense ratio 0.35 percent), and you'll have a commission-free portfolio with an average expense ratio cost of 0.23 percent.

A Six Ways From Sunday portfolio at Vanguard: Mix equal parts Vanguard Total Stock ETF (ticker VTI, expense ratio 0.09), substitute (for the usually called-for TIPS fund) Vanguard Total Bond Market Index ETF (Ticker: BND, expense ratio 0.15 percent), Vanguard Europe Pacific Index ETF (ticker VEA, expense ratio 0.16 percent), Vanguard REIT Index ETF (ticker: VNQ, expense ratio 0.25 percent), Vanguard Energy Index ETF (ticker: VDE, expense ratio 0.25 percent), and use the SPDR Barclays Capital International Treasury Bond Index ETF (ticker: BWX, expense ratio 0.50 percent). This portfolio will cost an average of 0.23 percent, plus one commission for the international bond ETF.

Try an interesting substitution of alternative indexes with Rob Arnott's Fundamental Index funds at Schwab. This would require using the Schwab Fundamental U.S. Large Company Index fund (ticker: SFLNX, expense ratio, 0.35 percent), Schwab Fundamental International Large Company Index (ticker: SFNNX, expense ratio 0.35 percent) and Schwab Total Bond Market mutual fund (ticker: SWLBX, expense ratio 0.55). This portfolio would cost an average of 0.42 percent a year with no commissions.

You can do this. Just remember what Auguste Gusteau said in the movie Ratatouille: "Anyone can cook!"

Universal Press Syndicate