[CZ] Portfolio Advice - 3-fund or 5-fund portfolio?

For investors outside the US. Personal investments, personal finance, investing news and theory.
Sister forums: Canada, Spain (en español)
---------------
Post Reply
Topic Author
cz_raven
Posts: 4
Joined: Sun Nov 17, 2019 4:49 am

[CZ] Portfolio Advice - 3-fund or 5-fund portfolio?

Post by cz_raven » Sun Nov 17, 2019 5:05 am

Hi,
i am 33 y.o. investor from the Czech Republic. I would like to know your opinion about my future portfolio.
I was advised by independent financial advisor (no commission based, I paid him fixed fee for financial plan) to split my money among these funds:
  • Amundi IS MSCI Europe ETF DR 45%
  • iShares Core S&P 500 ETF USD Acc 15%
  • Fidelity US Quality Income ETF Acc (USD) 15%
  • SPDR® S&P 400 US Mid Cap ETF 7%
  • iShares Core MSCI Japan IMI ETF USD Acc 8%
Reasons were that it will pay of to be diversified between regions (Europe, US, Japan) in the future because I will be able to adjust allocation more flexibly among Europe, US, Japan. I was advised not to put money into bonds (reason was that they are overvalued). I hold some bonds in my government-sponsored retirement account (10% bonds, 90% stocks).

However since I am reading this forum ( which I like very much BTW:) ) I got a feeling that it can be done in a more simple way (3 funds only):
  • Vanguard Global Aggregate Bd ETF EUR Hedged Acc (IE00BG47KH54) 10%
  • iShares Core MSCI World ETF USD Acc (IE00B4L5Y983) or SPDR MSCI World UCITS ETF USD Acc (IE00BFY0GT14) 70%
  • iShares MSCI World Small Cap ETF USD Acc (IE00BF4RFH31) 10%
This option includes small exposition to bonds but it does not allow that much flexible approach as portfolio above.

I would like to hold 10% in cash in both portfolios in order to buy more when markets fall accidentally (more than 10%)

I plan to invest approx. 730 USD per month over at least next 20 years. I do not want to invest into emerging markets because of political risks.

My question is : Does it worth to have 5-fund portfolio for me ? Or can I easily follow 3-fund portfolio.

Thank you in advance
Last edited by cz_raven on Sun Nov 17, 2019 9:59 am, edited 2 times in total.

TedSwippet
Posts: 2517
Joined: Mon Jun 04, 2007 4:19 pm
Location: UK

Re: [CZ] Portfolio Advice - 3-fund or 5-fund portfolio?

Post by TedSwippet » Sun Nov 17, 2019 6:20 am

Welcome. Some observations below.
cz_raven wrote:
Sun Nov 17, 2019 5:05 am
I was advised to split my money among these funds:
  • Amundi IS MSCI Europe ETF DR
  • iShares Core S&P 500 ETF USD Acc
  • Fidelity US Quality Income ETF Acc (USD)
  • SPDR® S&P 400 US Mid Cap ETF
  • iShares Core MSCI Japan IMI ETF USD Acc
You do not give the percentages that you plan to (or were advised to -- and by whom?!) allocate to these, so it is hard to say very much about this.

However, the splitting of US holdings into three separates ETFs is probably just over-complicating things. If you compare the performance of the S&P 500 index against the US total market index (for example, the performance of Vanguard's US domiciled VOO and VTI ETFs), you will see that there is no noticeable difference between the two. For a non-US based investor in particular then, there does not seem to be much of a reason to slice up the US stock asset allocation, and a single S&P 500 tracker should do fine.

Although you state that you do not want any emerging markets, a modest allocation, perhaps in line with what a full global or all-world fund would hold, seems like a good idea. There may be political risks with that, but then there are political risks everywhere, including the US.

Also, this allocation entirely omits Pacific ex-Japan stocks that are not emerging markets.
cz_raven wrote:
Sun Nov 17, 2019 5:05 am
Reasons were that it will pay of to be diversified between regions (Europe, US, Japan) in the future because I will be able to adjust allocation more flexibly among Europe, US, Japan.
Consider though when you might want to adjust your allocation. If you buy holdings that mirror world market capitalization now, and Japan (say) suddenly takes off, or drops heavily, or whatever, your holdings will reflect that so that you would still hold assets by market capitalization. No need to adjust anything there, then.

If you think you might move country in future, that could be a time to adjust things. Even then though, somewhat questionable, since 'home country bias' is a debatable feature of any portfolio.
cz_raven wrote:
Sun Nov 17, 2019 5:05 am
However since I am reading this forum ( which I like very much BTW:) ) I got a feeling that it can be done in a more simple way (3 funds only):
  • Vanguard Global Aggregate Bd ETF EUR Hedged Acc (IE00BG47KH54)
  • iShares Core MSCI World ETF USD Acc (IE00B4L5Y983) or SPDR MSCI World UCITS ETF USD Acc (IE00BFY0GT14)
  • iShares MSCI World Small Cap ETF USD Acc (IE00BF4RFH31)
This option includes small exposition to bonds but it does not allow that much flexible approach as portfolio above.
The first thing you need to decide is what ratio of stocks to bonds you want. Only after that is it time to select individual funds or ETFs. Something built out of two or three of the above looks fine to me. Others may have more ideas here.
cz_raven wrote:
Sun Nov 17, 2019 5:05 am
My question is : Does it worth to have 5-fund portfolio for me ? Or can I easily follow 3-fund portfolio.
There is nothing especially magic about the number three in terms of how many funds. If five makes sense, or seven, or more -- perhaps there is a limited choice in retirement accounts -- then fine. However, the five fund portfolio you were advised to use, although reasonable overall, seems to me like it is probably a bit over-complicated for what it aims to achieve, and a bit under-diversified (especially if you decide you want to include bonds).

Again though, without knowing the ratios in which you would hold these, it is hard to comment further on that. Maybe you could add a follow-up post or edit your original posting to include the percentages of each ETF that you plan to hold.

User avatar
tre3sori
Posts: 27
Joined: Wed Jul 24, 2019 3:13 am

Re: [CZ] Portfolio Advice - 3-fund or 5-fund portfolio?

Post by tre3sori » Sun Nov 17, 2019 9:41 am

2 Funds and be done with:

VWCE: Vanguard FTSE All-World UCITS ETF USD Accumulating, ISIN IE00BK5BQT80
VAGF: Vanguard Global Aggregate Bond UCITS ETF EUR Hedged Accumulating , ISIN IE00BG47KH54

An allocation to small caps (10%) won*t help nor hurt much.
Let every man divide his money into three parts, and invest a third in land, a third in business, and a third let him keep by him in reserve. Talmud.

Topic Author
cz_raven
Posts: 4
Joined: Sun Nov 17, 2019 4:49 am

Re: [CZ] Portfolio Advice - 3-fund or 5-fund portfolio?

Post by cz_raven » Sun Nov 17, 2019 10:03 am

TedSwippet wrote:
Sun Nov 17, 2019 6:20 am
You do not give the percentages that you plan to (or were advised to -- and by whom?!) allocate to these, so it is hard to say very much about this.
@TedSwippet Thank you very much for valuable insight! :happy I added allocation in % for each fund + some background how I was advised :wink:

What do you think now?

glorat
Posts: 305
Joined: Thu Apr 18, 2019 2:17 am

Re: [CZ] Portfolio Advice - 3-fund or 5-fund portfolio?

Post by glorat » Sun Nov 17, 2019 10:27 am

tre3sori wrote:
Sun Nov 17, 2019 9:41 am
2 Funds and be done with:

VWCE: Vanguard FTSE All-World UCITS ETF USD Accumulating, ISIN IE00BK5BQT80
VAGF: Vanguard Global Aggregate Bond UCITS ETF EUR Hedged Accumulating , ISIN IE00BG47KH54

An allocation to small caps (10%) won*t help nor hurt much.
+1

Topic Author
cz_raven
Posts: 4
Joined: Sun Nov 17, 2019 4:49 am

Re: [CZ] Portfolio Advice - 3-fund or 5-fund portfolio?

Post by cz_raven » Mon Nov 18, 2019 3:18 pm

glorat wrote:
Sun Nov 17, 2019 10:27 am
tre3sori wrote:
Sun Nov 17, 2019 9:41 am
2 Funds and be done with:

VWCE: Vanguard FTSE All-World UCITS ETF USD Accumulating, ISIN IE00BK5BQT80
VAGF: Vanguard Global Aggregate Bond UCITS ETF EUR Hedged Accumulating , ISIN IE00BG47KH54

An allocation to small caps (10%) won*t help nor hurt much.
+1
Thank for your comment.
Just 2 ETF from same provider? Wouldn't be better at least split it between more providers?

Based on comments above I was thinking about following allocation:
  • SPDR MSCI World UCITS ETF USD Acc (IE00BFY0GT14) 70%
  • Vanguard Global Aggregate Bd ETF EUR Hedged Acc (IE00BG47KH54) 10%
  • iShares Core MSCI EM IMI ETF USD Acc (IE00BKM4GZ66) 10%
Cash 10%

What do you think?

User avatar
tre3sori
Posts: 27
Joined: Wed Jul 24, 2019 3:13 am

Re: [CZ] Portfolio Advice - 3-fund or 5-fund portfolio?

Post by tre3sori » Mon Nov 18, 2019 7:15 pm

Concerning provider risk diversification all ETFs are separate assets. The holdings belong to the investors and not the ETF provider. A provider risk diversification does not seem necessary.

The holdings belong to the investors... with a grain of salt: The providers engage in securities lending to generate profits and to track the index more closely. This leads to counterparty risk. Regarding securities lending Vanguard seems to be on the conservative side and lends out only small parts of assets.

Vanguard just lately reduced TER on a bunch of ETFs. The other providers seem to be more reluctant to do that. With SPDR, iShares you are more likely to be locked into an ETF TERwise. You have to face capital gains taxes in order to switch to a lower TER product. Because of its corporate structure (cooperative investment society) Vanguard belongs to its US investors. The other corporations are for-profit and belong to shareholders.

To be fair: iShares just reduced the TER on existing ETF Core Euro Government Bond from 0.20 to 0.09.

Summary: Keep an emergency fund and put the rest of your money into 2 funds: an all-world market cap stock fund and a currency hedged global aggregate bond fund.

Listen to John and Taylor and avoid the complexities of factors, regions, providers, etc. It probably will save you a bunch of money in the long run.
Let every man divide his money into three parts, and invest a third in land, a third in business, and a third let him keep by him in reserve. Talmud.

User avatar
tre3sori
Posts: 27
Joined: Wed Jul 24, 2019 3:13 am

Re: [CZ] Portfolio Advice - 3-fund or 5-fund portfolio?

Post by tre3sori » Mon Nov 18, 2019 7:19 pm

...but don't listen to closely to John and Taylor because they are proponents of a strong home bias :D
Let every man divide his money into three parts, and invest a third in land, a third in business, and a third let him keep by him in reserve. Talmud.

andrew99999
Posts: 532
Joined: Fri Jul 13, 2018 8:14 pm

Re: [CZ] Portfolio Advice - 3-fund or 5-fund portfolio?

Post by andrew99999 » Mon Nov 18, 2019 10:53 pm

tre3sori wrote:
Mon Nov 18, 2019 7:19 pm
...but don't listen to closely to John and Taylor because they are proponents of a strong home bias :D
+1

Listen to the information and reasoning and make your own decision rather than assuming someone highly intelligent is Infallible.
PassiveInvestingAustralia.com

engineerahead
Posts: 37
Joined: Wed Aug 21, 2019 11:57 pm

Re: [CZ] Portfolio Advice - 3-fund or 5-fund portfolio?

Post by engineerahead » Tue Nov 19, 2019 1:24 am

Hello!
Not sure how much of your own research did you do beforehand; the portfolio you were advised will work but it is probably a bit overcomplicated.
It also kinda overlaps in ways and you might be missing parts of the world like Canada etc. I still believe it will work.
Also, did you decide using what platform will you be investing? For example if you're going for degiro, it's good to include comission free ETFs into planning.
As a Czech citizen, the most efficient for you is an accumulating fund, Ireland domiciled. Additionally, the TER comissions etc. make a difference as well.

You were advised a Vanguard bond that is hedged; hedging has pros and cons that you should be aware of before putting money in it.

The general allocation allocation advised for Europeans is usually:
88% IWDA iShares Core MSCI World UCITS ETF USD (Acc) ISIN IE00B4L5Y983
12% EMIM iShares Core MSCI Emerging Markets IMI UCITS ETF (Acc) ISIN IE00BKM4GZ66

that kinda copies the MSCI ALL World index, covering the world's both developed and emerging markets.

Also, if the investing topic is something you're interested in, it's always good to make more of your research to better understand the fundamentals. On the other hand, this forum's help + the allocations already mentioned will work just the same if you buy them with long term investment in mind.
Good luck!

Topic Author
cz_raven
Posts: 4
Joined: Sun Nov 17, 2019 4:49 am

Re: [CZ] Portfolio Advice - 3-fund or 5-fund portfolio?

Post by cz_raven » Sun Nov 24, 2019 3:33 pm

Hi!
thanks for your advice! I am gonna use Lynx broker (which is Interactive brokers white label broker available in CZ).
I have been investing for some years so I am not complete beginner in this area. However I have been selecting individual stocks which is something different :happy

Post Reply