How to understand expenses matter relative to investment type for mutual funds?
The net return reported to you (as a percentage) by a mutual fund is the gross return minus the expense ratio.  So, if the gross return is X% and the expense ratio is Y%, your account will show a return of (X-Y)%.  Be aware that X could be negative too. So, with Y = 1, If X = 10 (as you might get from a stock fund if you believe historical averages will continue), then the net return is 9% and you have lost (Y/X) times 100% = 10% of the gross return. If X = 8 (as you might get from a bond fund if you believe historical averages will continue), then the net return is 7% and you have lost (Y/X) times 100% = 12.5% of the gross return. and so on and so forth.  The numbers used are merely examples of the returns that have been obtained historically, though it is worth emphasizing that 10% is an average return, averaged over many decades, from investments in stocks, and to believe that one will get a 10% return year after year is to mislead oneself very badly. I think the point of the illustrations is that expense ratios are important, and should matter a lot to you, but that their impact is proportionately somewhat less if the gross return  is high, but very significant if the gross return is low, as  in money-market funds.  In fact, some money market funds which  found that X < Y have even foregone charging the expense ratio  fee so as to maintain a fixed $1 per share price.  Personally,  I would need a lot of persuading to invest in even a stock fund with 1% expense ratio.
"This turned out be a lot longer than I expected.  So, here's the overview. Despite the presence of asset allocation calculators and what not, this is a subjective matter.  Only you know how much risk you are willing to take.  You seem to be aware of one rule of thumb, namely that with a longer investing horizon you can stand to take on more risk.  However, how much risk you should take is subject to your own risk aversion.  Honestly, the best way to answer your questions is to educate yourself about the individual topics.  There are just too many variables to provide neat, concise answers to such a broad question.  There are no easy ways around this.  You should not blindly rely on the opinions of others, but rather use your own judgment to asses their advice. Some of the links I provide in the main text: S&P 500: Total and Inflation-Adjusted Historical Returns 10-year index fund returns The Motley Fool Risk aversion Disclaimer: These are the opinions of an enthusiastic amateur.  Why should I invest 20% in domestic large cap and 10% in developing markets instead of 10% in domestic large cap and 20% in developing markets? Should I invest in REITs? Why or why not?  Simply put, developing markets are very risky.  Even if you have a long investment horizon, you should pace yourself and not take on too much risk.  How much is ""too much"" is ultimately subjective.  Specific to why 10% in developing vs 20% in large cap, it is probably because 10% seems like a reasonable amount of your total portfolio to gamble.  Another way to look at this is to consider that 10% as gone, because it is invested in very risky markets.  So, if you're willing to take a 20% haircut, then by all means do that.  However, realize that you may be throwing 1/5 of your money out the window. Meanwhile, REITs can be quite risky as investing in the real estate market itself can be quite risky.  One reason is that the assets are very much fixed in place and thus can not be liquidated in the same way as other assets.  Thus, you are subject to the vicissitudes of a relatively small market.  Another issue is the large capital outlays required for most commercial building projects, thus typically requiring quite a bit of credit and risk.  Another way to put it: Donald Trump made his name in real estate, but it was (and still is) a very bumpy ride.  Yet another way to put it: you have to build it before they will come and there is no guarantee that they will like what you built. What mutual funds or index funds should I investigate to implement these strategies?  I would generally avoid actively managed mutual funds, due to the expenses.  They can seriously eat into the returns.  There is a reason that the most mutual funds compare themselves to the Lipper average instead of something like the S&P 500.  All of those costs involved in managing a mutual fund (teams of people and trading costs) tend to weigh down on them quite heavily.  As the Motley Fool expounded on years ago, if you can not do better than the S&P 500, you should save yourself the headaches and simply invest in an S&P 500 index fund. That said, depending on your skill (and luck) picking stocks (or even funds), you may very well have been able to beat the S&P 500 over the past 10 years.  Of course, you may have also done a whole lot worse.  This article discusses the performance of the S&P 500 over the past 60 years.  As you can see, the past 10 years have been a very bumpy ride yielding in a negative return.  Again, keep in mind that you could have done much worse with other investments. That site, Simple Stock Investing may be a good place to start educating yourself.  I am not familiar with the site, so do not take this as an endorsement.  A quick once-over of the material on the site leads me to believe that it may provide a good bit of information in readily digestible forms.  The Motley Fool was a favorite site of mine in the past for the individual investor.  However, they seem to have turned to the dark side, charging for much of their advice.  That said, it may still be a good place to get started.  You may also decide that it is worth paying for their advice. This blog post, though dated, compares some Vanguard index funds and is a light introduction into the contrarian view of investing.  Simply put, this view holds that one should not be a lemming following the crowd, rather one should do the opposite of what everyone else is doing.  One strong argument in favor of this view is the fact that as more people pile onto an investing strategy or into a particular market, the yields thin out and the risk of a correction (i.e. a downturn) increases.   In the worst case, this leads to a bubble, which corrects itself suddenly (or ""pops"" thus the term ""bubble"") leading to quite a bit of pain for the unprepared participants.  An unprepared participant is one who is not hedged properly.  Basically, this means they were not invested in other markets/strategies that would increase in yield as a result of the event that caused the bubble to pop.   Note that the recent housing bubble and resulting credit crunch beat quite heavily on the both the stock and bond markets.  So, the easy hedge for stocks being bonds did not necessarily work out so well.  This makes sense, as the housing bubble burst due to concerns over easy credit. Unfortunately, I don't have any good resources on hand that may provide starting points or discuss the various investing strategies.  I must admit that I am turning my interests back to investing after a hiatus.   As I stated, I used to really like the Motley Fool, but now I am somewhat suspicious of them.  The main reason is the fact that as they were exploring alternatives to advertising driven revenue for their site, they promised to always have free resources available for those unwilling to pay for their advice.  A cursory review of their site does show a decent amount of general investing information, so take these words with a grain of salt.  (Another reason I am suspicious of them is the fact that they ""spammed"" me with lots of enticements to pay for their advice which seemed just like the type of advice they spoke against.) Anyway, time to put the soapbox away.  As I do that though, I should explain the reason for this soapboxing.  Simply put, investing is a risky endeavor, any way you slice it.  You can never eliminate risk, you can only hope to reduce it to an acceptable level.  What is acceptable is subject to your situation and to the magnitude of your risk aversion.  Ultimately, it is rather subjective and you should not blindly follow someone else's opinion (professional or otherwise).  Point being, use your judgment to evaluate anything you read about investing.   If it sounds too good to be true, it probably is.  If someone purports to have some strategy for guaranteed (steady) returns, be very suspicious of it.  (Read up on the Bernard Madoff scandal.)  If someone is putting on a heavy sales pitch, be weary.  Be especially suspicious of anyone asking you to pay for their advice before giving you any solid understanding of their strategy.  Sure, many people want to get paid for their advice in some way (in fact, I am getting ""paid"" with reputation on this site).  However, if they take the sketchy approach of a slimy salesmen, they are likely making more money from selling their strategy, than they are from the advice itself.  Most likely, if they were getting outsized returns from their strategy they would keep quiet about it and continue using it themselves.  As stated before, the more people pile onto a strategy, the smaller the returns.  The typical model for selling is to make money from the sale.  When the item being sold is an intangible good, your risk as a buyer increases. You may wonder why I have written at length without much discussion of asset allocation.  One reason is that I am still a relative neophyte and have a mostly high level understanding of the various strategies.  While I feel confident enough in my understanding for my own purposes, I do not necessarily feel confident creating an asset allocation strategy for someone else.  The more important reason is that this is a subjective matter with a lot of variables to consider.  If you want a quick and simple answer, I am afraid you will be disappointed.  The best approach is to educate yourself and make these decisions for yourself.  Hence, my attempt to educate you as best as I can at this point in time. Personally, I suggest you do what I did.  Start reading the Wall Street Journal every day. (An acceptable substitute may be the business section of the New York Times.)  At first you will be overwhelmed with information, but in the long run it will pay off.  Another good piece of advice is to be patient and not rush into investing.   If you are in a hurry to determine how you should invest in a 401(k) or other such investment vehicle due to a desire to take advantage of an employer's matching funds, then I would place my money in an S&P 500 index fund.  I would also explore placing some of that money into broad index funds from other regions of the globe.  The reason for broad index funds is to provide some protection from the normal fluctuations and to reduce the risk of a sudden downturn causing you a lot pain while you determine the best approach for yourself.  In this scenario, think more about capital preservation and hedging against inflation then about ""beating"" the market." The main difference between an ETF and a Mutual Fund is Management. An ETF will track a specific index with NO manager input. A Mutual Fund has a manager that is trying to choose securities for its fund based on the mandate of the fund. Liquidity ETFs trade like a stock, so you can buy at 10am and sell at 11 if you wish. Mutual Funds (most) are valued at the end of each business day, so no intraday trading.  Also ETFs are similar to stocks in that you need a buyer/seller for the ETF that you want/have. Whereas a mutual fund's units are sold back to itself. I do not know of many if any liquity issues with an ETF, but you could be stuck holding it if you can not find a buyer (usually the market maker). Mutual Funds can be closed to trading, however it is rare. Tax treatment Both come down to the underlying holdings in the fund or ETF. However, more often in Mutual Funds you could be stuck paying someone else's taxes, not true with an ETF.  For example, you buy an Equity Mutual Fund 5 years ago, you sell the fund yourself today for little to no gain. I buy the fund a month ago and the fund manager sells a bunch of the stocks they bought for it 10 years ago for a hefty gain. I have a tax liability, you do not even though it is possible that neither of us have any gains in our pocket. It can even go one step further and 6 months from now I could be down money on paper and still have a tax liability. Expenses A Mutual Fund has an MER or Management Expense Ratio, you pay it no matter what. If the fund has a positive return of 12.5% in any given year and it has an MER of 2.5%, then you are up 10%. However if the fund loses 7.5% with the same MER, you are down 10%. An ETF has a much smaller management fee (typically 0.10-0.95%) but you will have trading costs associated with any trades. Risks involved in these as well as any investment are many and likely too long to go into here. However in general, if you have a Canadian Stock ETF it will have similar risks to a Canadian Equity Mutual Fund. I hope this helps. "How often should one use dollar-cost averaging? Trivially, a dollar cost averaging (DCA) strategy must be  used at least twice! More seriously, DCA is a discipline that people (typically investors with relatively small amounts of money to invest each month or each quarter)  use to avoid succumbing to the temptation to ""time the market"".  As mhoran_psprep points out, it is well-suited to 401k plans and the like (e.g. 403b plans for educational and non-profit institutions, 457 plans for State employees, etc), and indeed is actually  the default option in such plans, since a fixed amount of money gets invested each week, or every  two weeks, or every month depending on the payroll schedule. Many plans offer just a few mutual funds in which to invest, though far too many people, having little knowledge or understanding of  investments, simply opt for the money-market fund or guaranteed annuity fund in their 4xx plans.  In any case, all your money goes to work immediately since all mutual funds let you invest in thousandths of a share. Some 401k/403b/457 plans allow investments in stocks through a brokerage, but I think that using DCA to  buy individual stocks in a retirement plan is not a good  idea at all. The reasons for this are that not only must shares must be bought in whole numbers (integers) but it is generally cheaper to buy stocks in round lots  of 100 (or multiples of 100) shares rather than in odd lots of, say, 37 shares. So buying stocks weekly, or biweekly or monthly in a 401k plan means paying more or having the money sit idle until enough is accumulated to buy 100 shares of a stock at which point the brokerage executes the order to buy the stock; and this is really not DCA at all.  Worse yet, if you let the money accumulate but you are the one calling the shots ""Buy 100 shares of APPL today"" instead of letting the brokerage execute the order when there is enough money, you are likely to  be timing the market instead of doing DCA. So, are brokerages useless in retirement fund accounts?  No, they can be useful but they are not suitable for DCA strategies involving buying stocks. Stick to mutual funds for DCA. Do people use it across the board on all stock investments? As indicated above, using DCA to buy individual stocks is not the best idea, regardless of whether it is done inside a retirement plan or outside. DCA outside a retirement plan works best if you not trust yourself to stick with the strategy (""Ooops, I forgot to mail the check yesterday; oh, well, I will do it next week"") but rather, arrange for your mutual fund company to take the money out of your checking account each week/month/quarter etc, and invest it in whatever fund(s) you have chosen. Most companies have such programs under names such as Automatic Investment Program (AIP) etc. Why not have your bank send the money to the mutual fund company instead? Well, that works too, but my bank charges me for sending the money whereas my mutual fund company does AIP for free. But YMMV. Dollar-cost averaging generally means investing  a fixed amount of money on a periodic basis. An alternative strategy, if one has decided that owning 1200 shares of FlyByKnight Co is a good investment to have, is to buy round lots of 100 shares of FBKCO each month. The amount of money invested each month varies, but at the end of the year, the average cost of the 1200 shares is the average of the prices on the 12 days on which the investments were made. Of course, by the end of the year, you might not think FBKCO is worth holding any more. This technique worked best in the  ""good old days"" when blue-chip stocks  paid what was for all practical purposes a guaranteed dividend each year, and people bought these stocks with the intention of passing them on to their widows and children." There are a number of mutual funds which claim to be 'ethical'. Note that your definition of 'ethical' may not match theirs. This should be made clear in the prospectus of whichever mutual fund you are looking at. You will likely pay for the privilege of investing this way, in higher expenses on the mutual fund. If I may suggest another option, you may want to consider investing in low-fee mutual funds or ETFs and donating some of the profit to offset the moral issues you see. The mutual fund will price at day's end, while the ETF trades during the day, like a stock. If you decide at 10am, that some event will occur during the day that will send the market up, the ETF is preferable. Aside from that, the expenses are identical, a low .14%. No real difference especially in a Roth. "A mutual fund could make two different kinds of distributions to you: Capital gains: When the fund liquidates positions that it holds, it may realize a gain if it sells the assets for a greater price than the fund purchased them for. As an example, for an index fund, assets may get liquidated if the underlying index changes in composition, thus requiring the manager to sell some stocks and purchase others. Mutual funds are required to distribute most of their income that they generate in this way back to its shareholders; many often do this near the end of the calendar year.  When you receive the distribution, the gains will be categorized as either short-term (the asset was held for less than one year) or long-term (vice versa). Based upon the holding period, the gain is taxed differently. Currently in the United States, long-term capital gains are only taxed at 15%, regardless of your income tax bracket (you only pay the capital gains tax, not the income tax). Short-term capital gains are treated as ordinary income, so you will pay your (probably higher) tax rate on any cash that you are given by your mutual fund. You may also be subject to capital gains taxes when you decide to sell your holdings in the fund. Any profit that you made based on the difference between your purchase and sale price is treated as a capital gain. Based upon the period of time that you held the mutual fund shares, it is categorized as a short- or long-term gain and is taxed accordingly in the tax year that you sell the shares. Dividends: Many companies pay dividends to their stockholders as a way of returning a portion of their profits to their collective owners. When you invest in a mutual fund that owns dividend-paying stocks, the fund is the ""owner"" that receives the dividend payments. As with capital gains, mutual funds will redistribute these dividends to you periodically, often quarterly or annually. The main difference with dividends is that they are always taxed as ordinary income, no matter how long you (or the fund) have held the asset. I'm not aware of Texas state tax laws, so I can't comment on your other question." Foreign stocks tend to be more volatile -- higher risk trades off against higher return potential, always. The better reason for having some money in that area is that, as with bonds, it moves out-of-sync with the US markets and once you pick your preferred distribution, maintaining that balance semi-automatically takes advantage of that to improve your return-vs-risk position. I have a few percent of my total investments in an international stock index fund, and a few percent in an international REIT, both being fairly low-fee. (Low fees mean more of the money reaches you, and seems to be one of the better reasons for preferring one fund over another following the same segment of the market.) They're there because the model my investment advisor uses -- and validated with monte-carlo simulation of my specific mix -- shows that keeping them in the mix at this low level is likely to result in a better long-term outcome than if i left them out. No guarantees, but probabilities lean toward this specfic mix doing what i need. I don't pretend to be able to justify that via theory or to explain why these specific ratios work... but I understand enough about the process to trust that they are on (perhaps of many) reasonable solutions to get the best odds given my specific risk tolerance, timeline, and distaste for actively managing my money more than a few times a year. If that. The question is valid, you just need to work backwards. After how much money-time will the lower expense offset the one time fee?  Lower expenses will win given the right sum of money and right duration for the investment.