[BELGIUM]: Portfolio Advice

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Tjiftjaf
Posts: 4
Joined: Wed Oct 04, 2017 5:59 am

[BELGIUM]: Portfolio Advice

Post by Tjiftjaf » Wed Oct 04, 2017 6:19 am

Hi you wonderful people,

I have been reading lots on this forum and must say that I really like your content, so thank you for that! I especially like the Belgian Wiki page, that stopped me from investing my money in Vanguard ETF's :beer .

Let me shortly introduce myself. I am 25 year old and want to invest 22K of the money I have saved into index funds. The goal is to never touch this money ever again until my retirement and add €100 each month. This brings my time horizon to about 40 years.

The sample portfolio I found on the Belgian Wiki page is about the same that I came up with myself. I only had no idea there existed a World Small Cap ETF with location in Ireland. So thank you Bogleheads for sharing this knowledge! The portfolio I had in mind is the following:

* 65% iShares Core MSCI World UCITS ETF (IWDA)
* 25% iShares Core MSCI Emerging Markets IMI UCITS ETF (EIMI)
* 10% SPDR® MSCI World Small Cap ETF (WDSC or ZPRS)

I have chosen to allocate more money to emering markets as these are believed to involve more risk and thus more reward (but is this true?). I am thinking to perhaps also allocate a bit more to small cap. Further I am not sure whether I want to add bonds to my portfolio. In the long run stocks should always outperform bonds so I do not really see the point to include bonds in my portfolio at the start with a 40-year horizon. Further both dividends and capital gains on bonds ETFs have a 27% tax which makes them less appealing as well. Finally I am also not sure whether I should include more US stocks (now only about 38% of the portfolio) as these have shown to consistently outperform stocks in other location.

So basically I have three questions that I hope you can help me with:

1) Does it make sense to include no bonds at all considering my time horizon and the Belgian tax laws?
2) What do you think of this portfolio allocation considering my time horizon and the fact that I don't mind deep flucuations (I have more than I want to invest). Do you think allocating more to emering markets will acutally cause higher gains? Historically this does not seem the case. And what about more small cap stocks?
3) Should I include more US stocks? Actually, since the S&P500 has outperformed other stocks consistently (including MSCI World), why not allocate everything to an S&P500 Index Fund?

I would appreciate answers to these questions so much!

Best regards,

Tjiftjaf :sharebeer

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BeBH65
Posts: 840
Joined: Sat Jul 04, 2015 7:28 am

Re: [BELGIUM]: Portfolio Advice

Post by BeBH65 » Thu Oct 05, 2017 1:57 am

Hallo TjifTjaf,
Tjiftjaf wrote:
Wed Oct 04, 2017 6:19 am
* 65% iShares Core MSCI World UCITS ETF (IWDA)
* 25% iShares Core MSCI Emerging Markets IMI UCITS ETF (EIMI)
* 10% SPDR® MSCI World Small Cap ETF (WDSC or ZPRS)

I have chosen to allocate more money to emering markets as these are believed to involve more risk and thus more reward (but is this true?). I am thinking to perhaps also allocate a bit more to small cap. Further I am not sure whether I want to add bonds to my portfolio. In the long run stocks should always outperform bonds so I do not really see the point to include bonds in my portfolio at the start with a 40-year horizon. Further both dividends and capital gains on bonds ETFs have a 27% tax which makes them less appealing as well. Finally I am also not sure whether I should include more US stocks (now only about 38% of the portfolio) as these have shown to consistently outperform stocks in other location.

[]

1) Does it make sense to include no bonds at all considering my time horizon and the Belgian tax laws?
2) What do you think of this portfolio allocation considering my time horizon and the fact that I don't mind deep flucuations (I have more than I want to invest). Do you think allocating more to emering markets will acutally cause higher gains? Historically this does not seem the case. And what about more small cap stocks?
3) Should I include more US stocks? Actually, since the S&P500 has outperformed other stocks consistently (including MSCI World), why not allocate everything to an S&P500 Index Fund?
Welcome to the forum.

Related to your Asset Allocation.
You can find multiple threads on this forum related to 100% stock. Have a look at them.
On this forum it is often said that stable assets (bonds/cash) have multiple benefits for an investor. Maybe start here Never_bear_too_much_or_too_little_risk.
Personally I would suggest a maximum of 80% in equity.

Related to your equity allocation:
- At this moment I would not overweight emerging markets. I would wait until you have experienced real market volatility and a correction/bear market before allocating to a more risky portfolio. At that time you will understand how you behave in volatiely times and when you loose 10%-20% of your hard earned money.
- related to overweighting US stocks. Were you invested in US stocks in the beginning of this year when the changes in the USD/EUR ratio made them plunge for us Europeans? How did you feel about that? Within your world funds the US is already 60%, I would not furhter overweight the US at this time.

Related to your bonds/cash allocation.
- Don't let the tax-tail wag the dog. The bonds taxation situation in Belgium is not that disadvantageous compared to many other countries.
Many countries tax both dividends (when they are paid) and capital gains.
In Belgium we know the concept of accumulating funds; i.e. the dividends can be reinvested without being taxed. This is means the portion that would normally be paid in taxation can also compound. This is already a benefit compared to countries where dividends are immediately taxed when paid. For equity funds we have the additional benefit that capital gains are not taxed. There are very few countries with this benefit.
- that said, please also consider to keep cash (=savings accounts) as you stable part of your portfolio. Savings account have government guarantee up to 100k€, and there are a few savings account that still give more then 1%, for limited contributions. This is certainly a valid alternative to the safe, but low yielding, euro governmental bonds.

Note= taxation is 30% since this year not 27% anymore.
BeBH65. (only an investment enthusiast, not a financial adviser, perform your due diligence).

Tjiftjaf
Posts: 4
Joined: Wed Oct 04, 2017 5:59 am

Re: [BELGIUM]: Portfolio Advice

Post by Tjiftjaf » Thu Oct 05, 2017 3:34 am

Thank you! This has been really helpful! But note that the 22K I want to invest is money that I won't need anyway. And since it is not a huge amount I can perfectly bear a 50% decrease in its value. I still have my other savings and income (salary) that covers other expenses I might have to make. That is why I aim for an aggressive portfolio as possible as I will not ever touch this money until my retirement.

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BeBH65
Posts: 840
Joined: Sat Jul 04, 2015 7:28 am

Re: [BELGIUM]: Portfolio Advice

Post by BeBH65 » Thu Oct 05, 2017 5:50 am

Hello Tjiftjaf,


Regarding overweighting small cap and/or emerging market; your post made me ask myself how these would react compared to MSCI world.

Looking at the graphs for the three indexes in EURO:
1. In the last 10 years the MSCI world small cap index in euro seems to follow the MSCI world index in euro up and down, with higher peaks and deep drops.
2. The EM index:
- Seems to even more volatile, steeper on the rises and on the descends.
- This index seems sometimes not in sync with the two other indexes, e.g. 2011-2014 this index seems flat, where the others augmented continuously. Does this mean that this provides diversification and some protection? Looking at the drops EM always dropped when world dropped previously. Maybe>


Regards,
BeBH65. (only an investment enthusiast, not a financial adviser, perform your due diligence).

Mors
Posts: 35
Joined: Wed Aug 16, 2017 10:06 am

Re: [BELGIUM]: Portfolio Advice

Post by Mors » Thu Oct 05, 2017 6:58 am

Greetings.

I believe that the small cap etf does not worth the increase in ER, especially if it charges you with more broker commision fees on top of it, and factoring in the low liquidity. The research that promotes small cap exposure for better risk-adjusted returns suggests factor investing, especially small cap value or multifactor small cap, not small cap in general.

Emerging markets are supposed to outperform in the intermediate term mainly because of the better valuations. That does not mean that it has to happen though. It may be a risk that I would be willing to take, and I do not see you massively overweight EM, so it is a fine bet.

Going 100% in stocks is a valid approach. I would suggest to keep 5-10% of your investment portfolio in fixed income though, unless you tend to keep a lot of cash outside your investment portfolio. In a bull market everyone is tempted to ride the equity wave, but when the market starts to become more volatile the fixed income helps to preserve your invested capital.

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