What are the upsides / downsides of these two portfolios? (European Investor)

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MountainTop
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What are the upsides / downsides of these two portfolios? (European Investor)

Post by MountainTop » Sat Nov 10, 2018 1:50 pm

The portfolios below are two options I'm considering for the stock portion.

While they are somewhat similar in approach: being agnostic in regards to LC/SC, they are different in the 'tilt' towards certain regions.

What are the upsides and downsides of both of these portfolios?

'5 FUND':

Europe:
#1: 30%: Large: Lyxor Core Stoxx Europe 600 (DR) UCITS ETF (0.07 ER)
#2: 30%: Small: Xtrackers MSCI Europe Small Cap UCITS ETF (0.30 ER)

US:
#3: 15%: Large: iShares Core S&P 500 UCITS ETF (0.07 ER)
#4: 15%: Small: iShares MSCI USA Small Cap UCITS ETF (0.43 ER)

Emerging:
#5: 10% IMI: iShares Core MSCI EM IMI UCITS ETF (0.18 ER)

Total ER: 0.204

Total Market Cap
  • Giant 26.8735
  • Large 18.7785
  • Mid 33.435
  • Small 19.1165
  • Micro 1.7965
World Regions
  • United States 30.684
  • Canada 0.039
  • Latin America 1.366
  • United Kingdom 17.921
  • Eurozone 27.327
  • Europe - ex Euro 13.3155
  • Europe - Emerging 0.6825
  • Africa 0.6795
  • Middle East 0.247
  • Japan 0
  • Australasia 0
  • Asia - Developed 3.1
  • Asia - Emerging 4.633
'3 FUND':

World:
#1: 45%: Large: iShares Core MSCI World UCITS ETF (0.2 ER)
#2: 45%: Small: SPDR® MSCI World Small Cap UCITS ETF (0.35 ER)

Emerging:
#3: 10% IMI: iShares Core MSCI EM IMI UCITS ETF (0.18 ER)

Total ER: 0.2655

Total Market Cap
  • Giant: 28.4095
  • Large: 18.9525
  • Mid: 30.963
  • Small: 20.0225
  • Micro: 1.6615
World Regions
  • United States 54.216
  • Canada 3.1185
  • Latin America 1.384
  • United Kingdom 5.933
  • Eurozone 8.7825
  • Europe - ex Euro 4.491
  • Europe - Emerging 0.6135
  • Africa 0.6555
  • Middle East 0.5245
  • Japan 8.9505
  • Australasia 2.448
  • Asia - Developed 4.135
  • Asia - Emerging 4.747

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BeBH65
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Re: What are the upsides / downsides of these two portfolios? (European Investor)

Post by BeBH65 » Sat Nov 10, 2018 6:34 pm

You are doing different tilts with the two portfolio's.

If you start from market cap, and use msci indexen, you should have about:
- 75% world developped Large cap
- 15% world developped small cap
- 10% emerging markets all cap
If you build a m* portfolio with the Iwda, Wsml, and Emim fonds to understand the neutral position.

You can then decided how you want to tilt away from it. What you want to overweight and what you will underweigh.

What spli are you considering for the stable portion of you portfolio?
Last edited by BeBH65 on Sun Nov 11, 2018 1:44 am, edited 1 time in total.
BeBH65. (only an investment enthusiast, not a financial adviser, perform your due diligence).

DJN
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Re: What are the upsides / downsides of these two portfolios? (European Investor)

Post by DJN » Sat Nov 10, 2018 9:52 pm

hi,
have a look at the EU section in Wiki if you haven't already done so:
https://www.bogleheads.org/wiki/EU_investing

There you will find guidance on typical portfolios for BH style.
good luck
DJN

typical.investor
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Re: What are the upsides / downsides of these two portfolios? (European Investor)

Post by typical.investor » Sat Nov 10, 2018 11:58 pm

A potential advantage of your 5 funder is that it's weighted more heavily to the currency I presume you'll be spending in retirement.

A disadvantage of it is that it's further away from global cap weighting.

In the end, the less expensive portfolio that reduces currency risk and isn't buying into a the tail end** of a strong US (equities and USD) bull looks good to me.

** which could go on for a long time, I don't really know

On second review, the 5 funder is entirely missing Japan, Australia and pretty much Canada. So, I would add the Lyxor and Xtrackers European funds to the 3 funder.

By the way, why is the 5 funder so heavy into the UK? I presume the UK is in the Europe funds. Will anything happen due to Brexit? Will the index change? I wouldn't want to put 18% into the UK for it to be rolled out of the index (likely at a low). Maybe the index won't change at all - I can't easily find anything on it.

MountainTop
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Re: What are the upsides / downsides of these two portfolios? (European Investor)

Post by MountainTop » Mon Nov 12, 2018 1:11 pm

BeBH65 wrote:
Sat Nov 10, 2018 6:34 pm
You are doing different tilts with the two portfolio's.
Indeed. I was wondering which one of the two Bogleheads preferred and why.
BeBH65 wrote:
Sat Nov 10, 2018 6:34 pm
If you start from market cap, and use msci indexen, you should have about:
- 75% world developped Large cap
- 15% world developped small cap
- 10% emerging markets all cap
If you build a m* portfolio with the Iwda, Wsml, and Emim fonds to understand the neutral position.
Interesting. Had seen it posted before but wasn't 100% sure this was the neutral position. Thanks.
BeBH65 wrote:
Sat Nov 10, 2018 6:34 pm
You can then decided how you want to tilt away from it. What you want to overweight and what you will underweigh.
Do I need to sign up for that here? https://www.morningstar.com/members/reg ... folio.html
BeBH65 wrote:
Sat Nov 10, 2018 6:34 pm
What spli are you considering for the stable portion of you portfolio?
Good question.

This is what the the distribution will end up looking like:

57% savings accounts (0.6% to 1% net return per year depending on the savings account)
25% Tak 21 (bonds with a 3% - 2.5% net return of the past two years. Insured. No risk of losing any part of initial investment. Assets are a mixed bag of coporate and goverment bonds.)
18% stocks

MountainTop
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Re: What are the upsides / downsides of these two portfolios? (European Investor)

Post by MountainTop » Mon Nov 12, 2018 1:15 pm

DJN wrote:
Sat Nov 10, 2018 9:52 pm
hi,
have a look at the EU section in Wiki if you haven't already done so:
https://www.bogleheads.org/wiki/EU_investing

There you will find guidance on typical portfolios for BH style.
good luck
DJN
Thanks for your help. :)

MountainTop
Posts: 61
Joined: Wed Sep 03, 2014 7:59 pm

Re: What are the upsides / downsides of these two portfolios? (European Investor)

Post by MountainTop » Mon Nov 12, 2018 1:28 pm

typical.investor wrote:
Sat Nov 10, 2018 11:58 pm
A potential advantage of your 5 funder is that it's weighted more heavily to the currency I presume you'll be spending in retirement.
Correct. That was my thinking for this portfolio.
typical.investor wrote:
Sat Nov 10, 2018 11:58 pm
A disadvantage of it is that it's further away from global cap weighting.
Which should have priority over the other in your opinion? A portfolio more geared to home currency or global cap weight?
typical.investor wrote:
Sat Nov 10, 2018 11:58 pm
In the end, the less expensive portfolio that reduces currency risk and isn't buying into a the tail end** of a strong US (equities and USD) bull looks good to me.

** which could go on for a long time, I don't really know
Exactly. Who knows what the market will do. People have been saying for years a crash is to come, with the market only going further up and up.

Anyhow... I'm not here to market time a specific region. I do want to find a portfolio I'm comfortable holding for the long term no matter what's going on in the market.
typical.investor wrote:
Sat Nov 10, 2018 11:58 pm
On second review, the 5 funder is entirely missing Japan, Australia and pretty much Canada.
How much of an impact could that potentially have?
typical.investor wrote:
Sat Nov 10, 2018 11:58 pm
So, I would add the Lyxor and Xtrackers European funds to the 3 funder.
This is a really neat idea. Here is what it ends up looking like. Thanks so much for the suggestion.

'3 + 2 FUND':

World:
#1: 30%: Large: iShares Core MSCI World UCITS ETF (0.2 ER)
#2: 30%: Small: SPDR® MSCI World Small Cap UCITS ETF (0.35 ER)

Europe:
#3: 15%: Large: Lyxor Core Stoxx Europe 600 (DR) UCITS ETF (0.07 ER)
#4: 15%: Small: Xtrackers MSCI Europe Small Cap UCITS ETF (0.30 ER)

Emerging:
#5: 10% IMI: iShares Core MSCI EM IMI UCITS ETF (0.18 ER)

Total ER: 0.2385

Total Market Cap
  • Giant 27.3265
  • Large 18.96
  • Mid 32.4915
  • Small 19.4915
  • Micro 1.7365
World Regions
  • United States 36.6315
  • Canada 2.0925
  • Latin America 1.3735
  • United Kingdom 12.8645
  • Eurozone 19.5045
  • Europe - ex Euro 9.6225
  • Europe - Emerging 0.6465
  • Africa 0.6705
  • Middle East 0.445
  • Japan 5.967
  • Australasia 1.632
  • Asia - Developed 3.8395
  • Asia - Emerging 4.708
typical.investor wrote:
Sat Nov 10, 2018 11:58 pm
By the way, why is the 5 funder so heavy into the UK? I presume the UK is in the Europe funds.
Correct.
typical.investor wrote:
Sat Nov 10, 2018 11:58 pm
Will anything happen due to Brexit? Will the index change? I wouldn't want to put 18% into the UK for it to be rolled out of the index (likely at a low). Maybe the index won't change at all - I can't easily find anything on it.
I had the same question but assumed nothing would change (as they only are no longer part of European Union in name, geographically, nothing changes).

However, I will ask iShares and see what they say.

indexfundinvestor.eu
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Re: What are the upsides / downsides of these two portfolios? (European Investor)

Post by indexfundinvestor.eu » Mon Nov 12, 2018 5:33 pm

Which should have priority over the other in your opinion? A portfolio more geared to home currency or global cap weight?
I think currency risk plays a minor role in the returns of stocks as an asset class. Mostly because stocks are already so volatile that currency fluctuations end up being a minimal component of it (unlike bonds).

Therefore, what matters IMHO is returns. And since we cant predict returns, the easiest way to capture them is through a market cap weighted index. The major economies like the US will still have a major portion of it and you will still get some of the returns of other geographies.

typical.investor
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Re: What are the upsides / downsides of these two portfolios? (European Investor)

Post by typical.investor » Mon Nov 12, 2018 10:34 pm

Go for market cap weighting on the stocks. The portfolio has a lot in fixed income/safe assets which I presume will be in the spending currency.

MountainTop
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Re: What are the upsides / downsides of these two portfolios? (European Investor)

Post by MountainTop » Fri Nov 16, 2018 12:07 pm

indexfundinvestor.eu wrote:
Mon Nov 12, 2018 5:33 pm
Which should have priority over the other in your opinion? A portfolio more geared to home currency or global cap weight?
I think currency risk plays a minor role in the returns of stocks as an asset class. Mostly because stocks are already so volatile that currency fluctuations end up being a minimal component of it (unlike bonds).

Therefore, what matters IMHO is returns. And since we cant predict returns, the easiest way to capture them is through a market cap weighted index. The major economies like the US will still have a major portion of it and you will still get some of the returns of other geographies.
Thanks for your reply. I did 'a lot' of reading on the reasons why you want a market cap weighted fund. I didn't think I would ever have a portfolio with 55% US in it (as a European investor), but now I quite like the idea of it.
typical.investor wrote:
Mon Nov 12, 2018 10:34 pm
Go for market cap weighting on the stocks. The portfolio has a lot in fixed income/safe assets which I presume will be in the spending currency.
Thanks to you as well for your great contribution. Yes, the fixed income / safe assets are in my spending currency.

***************************************************************************************************

So now the big question is, what % do I allocate to fund #1 & #2 (World Large & Small Cap)? Market cap weighting (75% & 15%)? Double market cap weighting for small cap (60% & 30%)? Or 45% & 45%?

One one hand market weighted 'sounds' reasonable as the're would be no tracking error and I don't want to pretend to be smarter than the market. On the other, I want to take less equity risk (for the same value) and have a higher expected return.

(What Larry Swedroe talks about here: viewtopic.php?t=86424#p1240371)

'3 FUND':

World:
#1: ?%: Large: iShares Core MSCI World UCITS ETF (0.2 ER)
#2: ?%: Small: SPDR® MSCI World Small Cap UCITS ETF (0.35 ER)

Emerging:
#3: 10% IMI: iShares Core MSCI EM IMI UCITS ETF (0.18 ER)

***************************************************************************************************

75 / 15 / 10

Total Market Cap
  • Giant 44.0485
  • Large 29.2995
  • Mid 19.083
  • Small 6.9635
  • Micro 0.6145

Total ER 0.2205


60 / 30/ 10

Total Market Cap
  • Giant 36.229
  • Large 24.126
  • Mid 25.023
  • Small 13.493
  • Micro 1.138

Total ER 0.243

45 / 45 / 10

Total Market Cap
  • Giant: 28.4095
  • Large: 18.9525
  • Mid: 30.963
  • Small: 20.0225
  • Micro: 1.6615
Total ER: 0.2655

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BeBH65
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Re: What are the upsides / downsides of these two portfolios? (European Investor)

Post by BeBH65 » Fri Nov 16, 2018 12:49 pm

For the Morningstar style box the neutral split is
- Large cap - 70%
- Mid cap 20%
- Small Cap 10%


Smaller cap stocks have a higher expected (but not guaranteed) return, but are more volatile.
The MSCI small cap index is about equally split between mid cap and small cap.
A split of 70/20/10 in your equity fund martches the neutral cap-weighted split.

Now it is up to you to decide if you want to be neutral or tilt-to small cap or tilt-away from small cap.
BeBH65. (only an investment enthusiast, not a financial adviser, perform your due diligence).

MountainTop
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Re: What are the upsides / downsides of these two portfolios? (European Investor)

Post by MountainTop » Fri Nov 16, 2018 1:40 pm

BeBH65 wrote:
Fri Nov 16, 2018 12:49 pm
For the Morningstar style box the neutral split is
- Large cap - 70%
- Mid cap 20%
- Small Cap 10%

A split of 70/20/10 in your equity fund martches the neutral cap-weighted split.
Thanks for your helpful reply BeBH65. :)

Can I asked what fund you used to get those results for the style box?

Vanguard Total World Stock Index Investor Shares (VTWSX )for example gives:

- Large 76
- Mid 18
- Small 6

http://portfolios.morningstar.com/fund/ ... ture=en-US

So something a little different.

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BeBH65
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Re: What are the upsides / downsides of these two portfolios? (European Investor)

Post by BeBH65 » Fri Nov 16, 2018 3:01 pm

- 70% IWDA, 20 WSML and 10% emerging market would give you the market cap allocation. Knowing that the latter 2 are more volatile and risky.

http://www.morningstar.com/InvGlossary/ ... e_box.aspx
BeBH65. (only an investment enthusiast, not a financial adviser, perform your due diligence).

indexfundinvestor.eu
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Re: What are the upsides / downsides of these two portfolios? (European Investor)

Post by indexfundinvestor.eu » Sat Nov 17, 2018 3:29 pm

I did 'a lot' of reading on the reasons why you want a market cap weighted fund. I didn't think I would ever have a portfolio with 55% US in it (as a European investor), but now I quite like the idea of it.
I stumbled into Credit Suisse's Global Investment Returns Yearbook 2018 and found it insightful to see the returns of the different countries over time and how owning a global portfolio would perform too.

MountainTop
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Re: What are the upsides / downsides of these two portfolios? (European Investor)

Post by MountainTop » Thu Dec 06, 2018 5:38 pm

Yeah. That's interesting indeed, @indexfundinvestor.eu. :happy

---

So, how would one decide what the rebalancing bands would be on a 70% Large Cap / 20% Small Cap / 10% Emerging Markets portfolio?

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BeBH65
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Re: What are the upsides / downsides of these two portfolios? (European Investor)

Post by BeBH65 » Fri Dec 07, 2018 12:59 pm

5/25 is a rule that is used a lot.
BeBH65. (only an investment enthusiast, not a financial adviser, perform your due diligence).

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galeno
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Re: What are the upsides / downsides of these two portfolios? (European Investor)

Post by galeno » Fri Dec 07, 2018 1:28 pm

KISS. Start with:

X% VWRL (equities) and IUAG (bonds).

If you want VWRL to look more like VT (0% SC vs 5% SC) you'll want to use

12.5% WSML + 88.5% VWRL as your equity allocation.

If you want to tilt to smaller use 25% WSML + 75% VWRL (11% SC).

Instead of WSML which is denominated in USD you can use SPDR® MSCI World Small Cap UCITS ETF (0.45 ER).

You can buy SPDR® MSCI World Small Cap UCITS ETF (0.45 ER) on the German bourse so it's denominated in Euros. See:

https://uk.spdrs.com/en/professional/et ... tf-ZPRS-GY
AA = 40/55/5. Expected CAGR = 3.8%. GSD (5y) = 6.2%. USD inflation (10 y) = 1.8%. AWR = 4.0%. TER = 0.4%. Port Yield = 2.82%. Term = 33 yr. FI Duration = 6.0 yr. Portfolio survival probability = 95%.

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