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A few months ago, I updated my portfolio to add more bonds and more dividend yielding stocks. Since then, I had a lot of discussions on this portfolio. I discussed it on the comments on this blog. I also discussed it on the bogleheads forum. Since these discussions, I have given a lot of thoughts on my portfolio. I realized there were several issues with the portfolio. I am going to discuss these issues here and present the new portfolio on which I have settled on. The biggest issue was the complexity of the portfolio.
I am going to start with the decisions that I made about my portfolio and the reasoning behind them. If you want to checkout the new portfolio, simply jump to it ;)
First a few acronyms:
- Exchange Traded Fund (ETF): A fund that is traded like a stock
- Total Expense Ratio (TER): The amount of yearly fees in a fund
Too much overweight in Tech
At the beginning of my investing, I decided to invest 5% of my portfolio in Tech. I bought shares in Vanguard Information Technology ETF (VGT). Why did I choose to add Tech ? Mostly because it was earning a lot and I wanted a part of it. I was a bit greedy on that one. Secondly, since I work in the Tech industry, I know what this is about.
However, I came to doubt this decision. First, the Vanguard Total ETF (VT) already has around 15% of Tech. Since VT is already a large part of my portfolio, it is not necessary to add more Tech. Plus, 5% is very small and will not make a large enough difference. An other problem is that since I am also working in Tech, there is a strong correlation between the risk of the Tech stocks crashing and loosing my job. This correlation should probably be avoided. Finally, VGT has a very low dividend yield.
The solution is simple: Sell my Tech ETF. I sold my tech ETF in April 2018, for a nice profit (around 6%). Since I also increased my overall allocation to VT, this means also a small increase in Tech. But this will be weighted to global world allocation of Tech. With both ETF at the same TER, it will not make a difference in overall TER. This will also increase my overall yield. This always interesting.
Pacific is not China
When I started investing, I decided to give an edge to China. So I over-weighted China by using Vanguard Pacific ETF (VPL). I allocated 5% of my portfolio to it. However, I did not pay enough attention to the description of the fund. This fund invests in stocks from countries in the Pacific regions. China is part of the region. However, this fund only invests in Developed countries. And for growth reasons, in investing, China is still considered as an emerging market. For me, it does not really make sense, but that is not up to me. The result is that China is not part of the Vanguard Pacific ETF. So I basically invested in an ETF to overweight on China stocks. But the ETF does not have any China stocks. Well done!
Again, the solution is simple: Sell the Pacific ETF! I sold my Pacific ETF in April 2018, for a small profit. The big advantage is that this simplifies my portfolio. I do not plan to overweight over China again. My global ETF (Vanguard Total World (VT)) already has some Chinese stocks. And they are weighted according to the world distribution. This is better to keep the real weighting of the market. As China grows, its distribution inside VT will grow. This means my portfolio will automatically follow the rise (or decline) of China. Since both ETF have the same Total Expense Ratio (TER), the overall TER of my portfolio does not change.
Too much bonds
Recently, I started considering my second pillar into my net worth. This makes a big difference in terms of my current bond allocation. Before, I was only considering a small part of my entire net worth. This led me to believe that I needed more bonds. So I actually bought more bonds in March. For this, my reasoning was also that this could help for rebalancing. However, I already have too much bonds. I need to concentrate on building my stock allocation. Indeed, I realized that my overall bond allocation was 45%. This is too much.
The solution was to sell my two bond funds. Again, I made a small profit, around 2% for each fund. Moreover, as seen in the next section, their allocation (2.5%) was too small. Since their fees were higher than the average fee of my portfolio, my overall fee is now lower. I also choose to use some corporate bonds. I used them to increase the returns. This is not a really good idea since you want bonds to have low risk. And corporate bonds have generally higher risks than government bonds. Finally, the choice of bonds was probably not too good. Ideally, I would have wanted Swiss bonds, but their yield is negative. So I chose Europe bonds. The problem is that they will fluctuate with EUR/CHF changes. Moreover, it is not very well diversified. Half of the government bonds are in Italy and France. I am not very optimistic of these two countries economy. If I really needed bonds, I should simply have taken a global bond fund such as BND or BNDX or a combination of both. This would have given a better diversification.
Small percentages do not help
First, they do not make that much of a difference. Less than 5% of an asset in a global portfolio will have a small impact. They are costly to buy. Most of the time, there is a fixed cost when you buy the fund. If you have to buy a single share to balance your fund, you end up with a large cost. And, they can be difficult to balance. Unless you can buy a fractional share, it is difficult to have the correct allocation.
If I had not sold them because I had too much bonds, I would have sold my two bonds funds because their allocations were too small. I do not think a portfolio should have allocations of less than 5%. And for me, I will try to not have allocations of less than 10% anymore.
Europe does not serve as home bias
At the beginning, I added a Europe ETF into my portfolio. Since Switzerland is very small, I wanted a bigger home bias. I also wanted to limit my exposure to USD. However, I am not really confident in Europe economy. Several countries are in bad financial shape. And the strong countries end up paying for the weak countries. Another point is that the index includes a lot of United Kingdom (27.5%) which is still in uncertainty due to the Brexit. A lot of France (17%) for which I do not have great hopes. And only 15% of Germany which the strongest country in current Europe (ex UK) in my opinion. It also has 10% Switzerland which is already in my Switzerland funds.
The solution is simple again: Sell my Europe ETF. I will allocate 20% to Switzerland as my home bias. This will be enough. With this, Europe will simply be weighted according to my world ETF. And I will not have to worry about the EUR too much.
Reduce the fees
The fees are one of the few things you can control when choosing funds. You cannot control how the market will do. But you can choose to stay with funds with low fees. This is one lesson from The Bogleheads Guide to investing and the Little book of common sense investing book.
Before the changes, the average fee of my portfolio was 0.1695%. It is really not bad. The worst funds were the Ishares Europe ETF (IMEU) with 0.35% TER and the Vanguard High Dividend Yield International (VYMI) with 0.32% TER. The Europe ETF was sold, for reasons explained in the previous section.
Therefore, I decided to sell my Vanguard High Dividend Yield International ETF. First, the fee is too high compared to my other funds. Moreover, the yield (3.23%) is not that great on a 10% allocation. But of course, it is better than the yield on VT (1.38%). Another reason is that the yield is lower than my Swiss dividend ETF (CHDVD). And CHDVD has lower TER and no currency risks.
New ETF portfolio
Finally, Here is the new ETF portfolio you have been looking for:
- 80% World Stocks (Vanguard Total World, VT)
- 20% Home Switzerland Stocks
- 10% Switzerland Dividend Stocks (iShares Swiss Dividend, CHDVD)
- 10% Switzerland Mid Cap (UBS SMIM)
I think it is a much more solid choice than the previous one. My new portfolio has a lot of advantages over the previous one:
- Simpler: Only three ETFs
- Lower fees: 0.12% TER compared to 0.1695% TER before
- More diversified: Fair distribution on sectors and regions
I did not directly mention simplicity in my list of reasons for updating my portfolio. But, my reasons are mostly related to simplicity. If you have a simple portfolio, it is easier to balance it. It is generally more fairly diversified. There are generally less costs in buying the shares. The allocations are higher. Simplicity is key!
The only thing I see changing in the future is the Mid Cap Switzerland fund. I will see in the future how this class works. If I am not satisfied, I may move more to the Swiss Dividend fund instead. But for now, I will stick with this. I could also change the domestic Swiss allocation to 25% instead of 20%. I will have to see with my retirement portfolios allocations. But for now, it is fine like this.
I mentioned that I did the error of not taking the big picture into account. So, let’s look at my overall allocation:
This includes my entire net worth. My checking account, savings, retirement accounts, and the investment portfolio. I have a large part of my net worth in bonds, about 42%. My cash is at a good level even if it makes a large part of my portfolio. This is mostly my emergency fund of about 15000 CHF. Since my net worth is not high, the emergency still makes a large part of it. The domestic stocks are coming from both my third pillar and the investment portfolio. And the international stocks are coming from my total world ETF.
I have to work now on increasing my current allocation to stocks. This means moving all my third pillar into PostFinance 75 to reduce the bonds allocation and increase domestic stocks allocation. And this also means simply to continue investing in my broker account each month.
In general, you should stick to your strategy and not sell like this. But my previous strategy was flawed. It was not well thought and may have caused me problems in the future. Therefore, it is better to make the necessary changes before it is too late. I am much more satisfied with this new portfolio than the last one. It should be better at reaching my goals.
I only sold funds with a profit. I would not sell with a loss just to simplify my portfolio. The profit was not great. But it is still better than nothing. The most important thing is that the portfolio is now better for me.
What do you think of my new portfolio? Would you advise something different? How is your own portfolio?