Why you should stay away from funds
I started seriously investing in the stock market in 2016. My first steps was a regular transfer (500 EUR / per month), to a managed funds called Keytrade Funds. The funds promised nice returns in the longer term. I picked out 6 funds in total (mostly stocks and one bond fund), and invested 500 EUR every month. What I liked was that I removed the emotional aspect here. Sometimes a month went by and I did not look at my investments. In 2018 when the stock markets had a larger loss, I did not really care.
But looking at it longer term, I realize that not one of these funds have managed to outperform the regular stock markets in developed countries in Europe and North America. No wonder since most of them charge 1-2.5% costs, and that is a HUGE deal especially when markets are just increasing 6% per year. Thats 1/3 of your profit you donate to them. And they are not able to outrun any index. Booo!
Time for change!
Avoid high risk Stocks
In the beginning of 2019 I started experimenting with stocks instead. Stocks I invested in mainly were Galapagos stocks. I saw them go up from 118 EUR to 165 EUR (when I sold them). The problem was that investing in one stock seemed incredibly risky. I watched the stock go up or down almost daily thinking if now would be the right time to sell or buy more. Eventually I sold them when the market went into a small dip in the summer. I was not able to switch off my emotions and it didn’t seem like a good alternative for funds, even if the stock I picked performed excellent (and still is btw).
What about Peer to Peer lending?
As you have seen I am experimenting with peer to peer lending as well. These experiments are not finished and peer to peer lending will still have a spot in my portfolio. The main downside is the high taxes (30% in Belgium) that you cannot avoid, and added risk caused by lack of European regulation.
The taxes would be fine if that would mean that after taxes you would still have a gain of about 7%, but that is hard to tell right now.
What I can say is that I absolutely love peer to peer, perhaps just because its new and volatile, so it will keep a place in my portfolio. If the stock market would start to drop at some point, the money in peer to peer can help me leverage the advantages of a sudden drop.
In a later blog I will be deciding on what exactly my peer to peer portfolio should look like.
So I will not go deeper into peer to peer right now as there will be room another time to discuss this component. Stay tuned for my perfect peer to peer portfolio in a later blog!
I am ignoring real estate you have (that should play a role in your portfolio) or money market (emergency fund) who could also be in your account. I am also ignoring a pension fund that you might not control. But here I just want to focus on assets that are right now more liquid then a pension fund or real estate, but that you still want to hold on to for a long time (I’m talking decades). You should not be touching this fund until you have reached Financial Independence so you can retire early.
So lets talk ETFs!
The next thing I had my eyes on was an ETF at first glance ETFs seemed boring. They just followed an index and there was not much action.
But by now I realize an ETF has a lot of advantages. Because it “just” follows an index there is no emotion attached. Furthermore those indexes usually contain hundreds of stocks worldwide! This gives you a HUGE diversification. If you focus on one stuck even if there is just a 0.1% chance the stock goes bankrupt, that means you will lose all your money. If you manage to spread it over hundreds of stocks you will just follow the general trend of the market. And as we all believe (or we would not be reading about FIRE), the general trend is up.
Taxes are important!
The first tracker I bought was the SP500 tracker from Vanguard. An excellent stock that has performed very well for me. The only downside is that it pays out dividends. And dividends are taxed at 30% in Belgium! Ouch!. Even tough the dividends are only at 1.81, and dividends are sexy its not very cost efficient.
One more thing that is important is that there is no or almost no bonds in the tracker. Bonds are taxed in Belgium so should be avoided. Again check the local tax rules of your country to find out if this is the case for you as well. Generally I do not like bonds anyway. For me peer to peer is the part of my portfolio in bonds, as its reasonably liquid (I can get everything out in about a year, and about 8% per month), and has a better performance then bonds.
Apart from dividends the second thing to look at is domicile of the ETF. Domicile is important because also the country where your ETFs are hosted could be charging you taxes! Countries like France or Germany are to be avoided for example. My preference is Ireland as domiciled as its completely tax free!
Building the perfect portfolio
Based on our above requirements I have selected the following portfolio that I will be working towards with these properties:
|SPDR MSCI |
|IShares Core |
MSCI EM IMI
UCITS ETF (CEMU)
|IShares Core |
EURO STOXX 50
UCITS ETF (CSX5)
|IShares Core |
|Peer To Peer |
And when we visualize it I have come to the following division:
Note that if dividends were not taxed so high I would choose a different approach, but right now I look mainly at market diversification and tax efficiency.
Lets look into a bit more detail to the ETFs I have picked.
SPDR MSCI World UCITS ETF (SWRD)
Why get this ETF?
As you can see this will take up 58.7%(!) of my Portfolio.
But wait…what about diversification? The MSCI World Index tracks hundreds of large, mid and small cap stocks over different sectors over 23 developed countries, mostly North America and Europe, but also some in the pacific like Australia and Japan.
If diversification is important to you (which it is to me!), you can’t really get more divers in the developed world then this tracker!
What about costs? Usually World trackers come with a high cost base. Until this ETF came out a similar tracker of iShares had the best cost base. You will be surprised this tracker actually only costs 0.12% per year.
What about Taxes? Since this ETF invests all dividends back into the ETF there is no dividends, and that means if you live in Belgium, no local taxes! In the current tax climate at least. As you might know tax climates turn with the wind, but I always say go with what you know now. What about taxes in the country the ETF is domiciled? Well if you have noticed all trackers I have chosen are in Luxembourg or Ireland. And they charge no local taxes! So all your profits are tax free! Check the tax laws of your country to find out if its better to have dividends or no dividends.
Its a new ETF so we cannot say much about the historical performance, however iShares has a similar ETF that tracks the same index.
Since the cost is lower on the SPRD World ETF we will have a slightly better performance then its nearest competitor, the iShares tracker. As you can see it gained 253% in the last 10 years!
IShares Core MSCI EM IMI UCITS ETF (CEMU)
Why get this ETF?
For diversification its important that you also have a presence in the rest of the world. MSCI EM is an index for the emerging economies.
The tracker actually has a great track record and has given very nice profits in the last 30 years.
Just like the previous tracker the cost is very low, and the tracker is tax free!
The last 5 years this ETF has gained 46%. Not that huge compared to the S&P, but still there is a lot of potential to be had here.
IShares Core S&P500 UCITS ETF (CSPX)
Why get this ETF?
The S&P500 is one of my favorite index. I am already invested trough the Vanguard SP500 tracker. The only difference is that the cost is a bit lower on this tracker and there is no dividends (=no taxes).
I realize there is a certain overlap with my world tracker, but the SP500 is such a good tracker that it could not be missed in this portfolio! Still because of the overlap I decided to limit it to a mere 4%.
As you can see it gained 140% in the last 6 years. Of course we have been in the largest bull run in the stock market history, so the only thing it proves is that it has performed well the last years.
IShares Core EURO STOXX 50 UCITS ETF (CSX5)
Why get this ETF?
As Im European and I love Europe, a good European tracker could not be left out either! Again there is an overlap with the World tracker but I generally think having more large European / American companies in the portfolio will have slightly better results in the long run.
Still in the interests of diversification I kept the EURO STOXX 50 at only 8.8%
With a 43% gain in 5 years the performance is not as strong as its counterpart the SP500, however 2019 has shown a similar performance as the SP500, and there might be some untapped potential in this index!
What about Vanguard?
I absolutly like Vanguard trackers, most have a good cost basis and all give great dividends. But it all comes down to the taxes. If the taxes would not matter I would absolutely invest much more in Vanguard and at the very least mix my portfolio with dividend trackers. But as we know taxes matter, a 30% cut on your dividends really is a big deal. I do have Vanguard in my current portfolio and I will keep it but long term it will start to take up a lower % of my portfolio.
If you find a way to automate this cost efficient then you should absolutely do it! The next crisis will come and you want to avoid that emotions will prevent you from making investments. This portfolio is not meant to have an excellent 2020 with perfect results, its made with the belief that the world economy will further improve the next 10-20 years and by this portfolio you will be able to take advantage from that. If there is a crisis or two along the way it will not matter, as you are in this for the long run.
Avoiding stocks will make your portfolio less volatile, but that doesn’t mean it will be easy watching your portfolio take a drop of 50% or worse. The best thing you can do is not to look at it and keep investing if it happens. And the easiest way to do that is by automating your investments.
Put your (my) money where your mouth is!
Or more exactly I should put my money where my mouth is. I realize my portfolio is a long way from my perfect portfolio. As a first step today I have posted a letter, cancelling all my investments in funds (apart from retirement funds as I cannot actually cancel these). When you read my monthly portfolio update you can see that these funds, also known as keyplan, take up 21K of my investments.
This 21K I will put into SPDR MSCI World together with my monthly investment (I invest 2500 EUR / month), it will bring me a bit closer to my perfect portfolio. I keep my fingers crossed that the bank will process it before I do my monthly portfolio update. But in case they can’t then it will just take one month longer before it shows.
Your oppinion matters!
This is a perfect portfolio…perfect for me, but perhaps not perfect for you. Let me know in the comment section what you would change / improve or why you would do something different and perhaps next time I suggest a portfolio your suggestions will be included!
Interested to see me work on modifying my portfolio to match my perfect vision? Follow me and join me on a roadtrip to Financial Independence!