Building a non-US Boglehead portfolio

The purpose of this paper is to set out at high level the steps needed to build an EU portfolio and to provide some background to the current Wiki portfolio suggestions (July 2019) for EU investors and to tie that back to the original Boglehead philosophy.

In addition some justification for the investor is put forward for the choice of current Wiki suggested portfolios for EU investors. The paper seeks to form a bridge between the Boglehead philosophy as presented in Bogleheads' Guide to Investing and what is applicable to the EU retail investor.

Practically this information can also provide a clear and logical path for any new EU investor into the world of Boglehead investing so as to avoid some well known pitfalls and in particular will lead to an understanding that apart from the fundamental principles, for EU investors; the building blocks, the construction process for their portfolio and its implementation are quite different than for US investors. To that end links and references to the more detailed notes on important underlying subjects are provided. This will assist in linking the technical aspects and the high level investment aspirations.

It may also provide some support to an investors desire to adjust their portfolio by the inclusion of funds other than those suggested in the Wiki portfolios for whatever reason.

Creating an EU version of the Boglehead 3 fund portfolio
The Wiki for EU investors includes some suggested portfolios that are considered appropriate for the Boglehead approach in investing. In addition various suggested portfolios are presented under some of the individual country Wiki pages. For example the UK investing page has various suggested portfolios and links to Vanguard target funds.

These solutions should form the outcome of a considered step by step process for the investor in constructing their portfolio taking into consideration all the technical requirements of investing in the EU.

In the absence of readily available research data and without willingness of the main providers to provide explicit advice on portfolio construction other than in very high level terms to support the suggested portfolios for EU investors, a high level analysis of some of the offerings and the publicly available research has been used to review the context for the use of the suggested portfolios. The conclusions from this review are included below.

The information in this paper may be of benefit to other non-US retail investors.

The investor should carefullly research all potential investments and seek professional investment advice prior to making any investments.

Outline of Non-US domiciles
The section of Wiki entitled Outline of Non-US domiciles is essential reading for the new EU investor. Outline of Non-US domiciles contains content on many of the key technical issues facing the EU based investor and acts as a base for understanding the complexities of:


 * Domicile
 * Tax
 * Currency

These issues are set out carefully there and can be further researched.

This section contains the links to the various country profiles that will assist the investor in understanding some of the key issues related to each individual jurisdiction listed:

Links are included to pages that contain material pertaining to jurisdictions that are outside of the EU and the US:
 * Belgium‎
 * Germany‎
 * Ireland
 * Italy
 * Netherlands‎
 * Spain
 * United Kingdom


 * Investing in and from non-European Union countries

The section also contains links to pages covering important issues such as:


 * EU investing (describes the current Wiki version of the Bogleheads portfolios for EU investors)
 * EU non-habitual residence (describes tax regimes available in Europe that may be advantageous for retirees and others)
 * Bond basics for Non-US investors (examines the suitability of the fixed income side of the Wiki portfolio for EU investors)
 * Cash equivalents for EU investors (examines the cash equivalents available in the EU for retail investors)

Boglehead portfolio
Strictly speaking the original and still entirely relevant 2 or 3 fund Boglehead portfolio is a US centric construction and many US bogleheads stick fairly carefully to the original formula notwithstanding the long debate about the introduction of international elements to the equities side of the equation.

The 2 fund version uses entirely US assets and the later 3 fund version includes some international equities. In addition Vanguard and Blackrock now include international bonds in their bond fund offerings to those who wish to diversify further. Why change something which has worked in the past and is elegantly simple to construct and maintain?

Basic parameters of a Boglehead portfolio
The basic parameters for the creation of a simple Boglehead portfolio are to found here: Bogleheads® investment philosophy where the following key steps are set out: The original Boglehead portfolio is now based upon the following ETFs:
 * 1) Develop a workable plan
 * 2) Invest early and often
 * 3) Never bear too much or too little risk
 * 4) Diversify
 * 5) Never try to time the market
 * 6) Use index funds when possible
 * 7) Keep costs low
 * 8) Minimize taxes
 * 9) Invest with simplicity
 * 10) Stay the course


 * Vanguard Total Stock ETF (VTI)


 * Vanguard Total International Stock ETF (VXUS)
 * Vanguard Total Bond Market ETF (BND)

The original Boglehead portfolio is included here as Jack Bogle and others were very clear that they considered this simplified approach to be best and would reward the patient US investor over time. Our conundrum is how to replicate this approach outside the US.

Portfolio construction process for an EU investor
The general advice contained in the Wiki for the creation of a simple Bogleheads portfolio is entirely relevant to non-US investors and the EU investor should follow this guidance carefully, get comfortable with their risk appetite and prepare an investment policy statement based upon these principles and stick to it.

An excellent guide to the process of building a portfolio is provided by Vanguard and can be accessed here: Vanguard Portfolio Construction Guide.

This Vanguard guide provides high level information on the process for the creation of a portfolio, however it doesn't provide any particular guidance as to the choice of particular funds relevant to an EU investor which information is key to the implementation phase of building a portfolio.

Non-US aspects of approach to portfolio construction
Certain aspects of the build up of the Bogleheads portfolio cannot be so easily applied to and adopted by the DIY retail investor in the EU. It is essential for the new DIY investor to be aware of these differences to the original Boglehead approach before starting their investment journey, this should help to avoid costly mistakes, delay and avoid undue complexity in the construction of their portfolios. Examples of these differences such as the choice of funds based upon geography and currency are fairly obvious.

Blackrock in a recent survey Portfolio insights Q1 2019 Blackrock of their major clients in Europe (EMEA 600 clients) concluded that the two main risks to their clients’ portfolios are:


 * Equity risk

Equity risk affects all investors in stocks.
 * Currency exchange risk

For non-US investors the Wiki suggested portfolios propose global aggregate equity ETFs and global aggregate and/or global government hedged bond ETFs as the basis for building a Boglehead style portfolio. These suggestions as noted above are not strictly in conformance with the original Boglehead portfolio particularly as expressed in the 2 or 3 fund portfolios. Below some of the main differences that may affect each individual EU DIY investor are reviewed, some or all of these issues will be covered elsewhere in the appropriate Wiki section.

Currency risk
Concentration and the currency issue immediately impact the choice of bonds and equity funds for the non-US investor should they choose US assets only. Therefore a more diversified range of assets are included in the non-US portfolios. As an aside any evidence for the comparison of this approach and the original Boglehead portfolio is difficult to access for the retail investor.

The bond elements which form the basis for the ballast side of the portfolio are generally hedged back to the investors local currency to remove additional currency volatility where a global aggregate or global government fund is used. The hedging while reducing volatility will also reduce the returns of the bond fund.

The advice to include or base your fixed income side of your portfolio on bonds in your country would lead some retail investors to include local bonds either government or aggregate in their portfolios. This approach introduces bias, has lower diversity and may lead to lower returns in the long run.

Geographical spread
The geographical spread of the global funds is entirely different to the original 2 and 3 fund approach.

On the one hand over reliance on US equities such as is represented in the total stock market fund of the original Boglehead 2 or 3-fund would expose the non-US investor to additional risks and on the other hand over emphasis in the allocation to an EU investors home country introduces a different bias that may also lead to reduced returns.

The choice of a global aggregate asset for the EU investor becomes a necessity in order to avoid bias to either the US market or to an individual country preference. This is unlike the situation for an US investor who can concentrate on the largest market in the world and feel comfortable.

Diverse and multiple countries
The EU consists of 27 different countries with different legal and regulatory systems. In addition the savings and investment industries are not aligned and the taxation, level of costs and the quality of services can be quite different.

Pension systems across the EU are different and the take up of the existing pension schemes varies. This results in varying levels of interest in DIY investing. In addition pension legislation across the EU is under revision, however this process will take many years and in the meantime the differences in access to DIY investing across the EU continue. One example of this situation is the freely available self investment and tax advantaged ISA system in the UK, this freedom to invest is not available consistently.

Tax issues
The EU as a collection of individual countries with disparate tax regimes, presents the investor with a range of differences to the US approach, the tax issues are set out here: Tax_issues. The immediately obvious difference is that EU investors in the main can access and use accumulating versions of the same funds that are available only in distributing versions in the US. Thus the EU suggested Boglehead portfolios come in two versions: accumulating and distributing to be chosen to suit the local tax laws or to the investors preference.

In the case of individual investors across the EU each one needs to be aware of the tax implications of investing from their own country and this will affect the choice of sub assets. These choices may affect the returns of that investor.

EU legislation
The introduction of EU wide legislation, see this section: EU legislation : UCITS, MiFID II and PRIIPs in respect to investment has introduced significant hurdles for EU investors in regards to their access to US domiciled funds and introduces complexity in respect to various matters including taxation.

Weak support for understanding the EU investors portfolio strategy
So what you might ask, but without empirical evidence to demonstrate the quality of the returns it is not a given that the non-US versions are equal to or superior to the original versions. How do the non-US investors’ portfolios perform in comparison to the US Boglehead approach?

Sources of information in regards to the basis for the construction of portfolios following the boglehead philosophy or their subsequent performance are not readily available or accessible for the non-US investor with the exception of Canada and perhaps to a lesser extent Australia where Vanguard sells direct product.

Suggested portfolios for EU based Boglehead investors
Please refer in the first instance to the section EU investing to view the current selection of ETFs that are suggested for an EU investor. Item Sample Portfolios includes two tables which divide the choice of suggested portfolio in to two general categories, the first table showing accumulating and the second table showing distributing suggestions.

Boglehead compliance
In constructing a portfolio the principles of the Boglehead approach are based upon the tenets noted above

Some of these tests are aimed at behavioural issues however it is a good idea to check any proposed purchase of an asset against these criteria in order to give yourself reassurance that you are acting within the parameters of Boglehead style investing and that your returns should reflect the indices your individual portfolio assets are following less the drag of costs.

In the case of the Boglehead portfolio suggestions unlike our US based friends we have little or no ability to compare the performance of our Boglehead style portfolios for EU investors as this information isn't available and the bases for comparison are as wide and varied as pointed out in the section above regarding the Non-US aspects of approach. Even anecdotal evidence isn't readily available however individuals can assess these returns for themselves.

EU: Industry approach to portfolio construction
How does the DIY retail investor in the EU gain reassurance that the simple Boglehead portfolio suggestions are appropriate and allow the investor to apply the Boglehead approach taking into consideration the number of countries in the EU and their differences?

In order to justify the current EU Boglehead suggestions for portfolios it might be useful to review the material that is publicly available from Vanguard, Blackrock and others.

Vanguard and Blackrock are major players across the globe in investment products, but they are not the only major providers in the EU, however they have a large range of products and are focused on lowering costs and providing transparent access for retail customers.

In addition the very large pension industry in Europe has a much longer track record than the US asset managers in investing from Europe and will have tried and tested portfolio solutions. Reference to the publicly available information in regards to pension fund portfolio construction may be useful and some information is included.

A separate study into the approach of the investment and pension industry in Europe to portfolio construction has been carried out and you can read the full paper Industry approach to portfolio construction here.