A Professor Who Was Right About Index Funds All Along

For example: If you know you need to use $200,000 within next two years, you might want to start moving part of that sum slowly from stock index fund into other less volatile assets (like bonds etc).

You can do that for yourself approximately without knowing about theory, but if there is cheap automated system that can provide personal solution based on portfolio management theory with few bucks, it's can be worth of the small sum they ask.

Retail brokers typically charge a commission per trade. If you want to buy many different securities ('cuz diversification), and you don't have a whole lot of money to invest in the first place, you're going to end up paying a large percentage of your initial investment in commission. The exact amount will depend on your broker and how much money you had to begin with, and how many stocks you're diversifying among. That means you might be starting from a fairly deep hole to have to dig yourself out of before you're truly earning a positive return.

By contrast, with ETFs you only have to pay commission on no more than a handful of trades to get a well-diversified initial investment laid out. Your expected earnings rate might be fractionally lower, but since you're starting from a much shallower hole, you might have a decent head start compared to buying a well-diversified portfolio individual stocks.

So then you've got two theoretical curves describing how your wealth might grow, and whether one is more favorable than the other depends on whether those two lines are likely to intersect at a point that comes before your investment horizon.

Then you can throw in still more complications that, IMO, can make ETFs still look quite a bit more favorable than stocks for most investors. One is that many retail brokerages (Vanguard, for example) will let you buy a selection of ETFs for zero commission. That's a gift that keeps on giving, since it dramatically reduces the cost of making smaller investments more frequently.

Another is that picking stocks is a time-consuming process - you have to spend time learning how to do it, and then you have to spend time researching stocks. If you agree that time is money, then you should probably be including some estimate of the value of your time into the formula. You want your expected returns from manually selecting a portfolio to be great enough to justify your time. Which is yet another calculation that is going to be heavily influenced by individual factors, particularly how much money you have to play with, what your current earnings are, and most importantly, whether or not you think it's fun to pick stocks.

I think recently their performance slipped a bit and they started taking money again, but the above point was true for a long time.