An introduction to long-term investing into a globally diversified ETF portfolio

Welcome

I built this website to share some research I did into how Robo-advisors work and to practice several programming languages including Python/django, Bootstrap 4 and Javascript. Before we start, the site and investment approach is heavily inspired by (and deriving from):


Wealthfront Investment Methodology whitepaper


My Independent Study Project during INSEAD


A variety of articles from Wikipedia.org

If you are interested to learn about...

How Robo-advisors work

Diversified ETF investing

My investment approach

... please continue reading!

(If you don't care how it works and
just want to see which ETF's to buy,
go and build your own portfolio)

Active vs. Passive investing

Before you dive into the details of this investment approach there is a fundamental question which is whether you want to be a Passive investor (ie. aim for average market returns) or an Active investor (ie. aim for above-average market returns).

There are arguments for each approach, but for the sake of this article you need to know that Robo-advisors generally tend to follow a Passive investment strategy and your returns will not be significantly higher (or lower) as compared to the market average.

I strongly believe in passive investing for all retail investors, but if you prefer to outperform the market (e.g. through stock-picking), the below strategy will not be the best choice for you.

The investors' objective

This article describes an investment approach that aims to maximize long-term "take-home" returns (ie. after-fees and after-inflation), given a specified risk profile.

After fees

For each of the investment vehicles (ie. ETF's) that will be used, fees should be reviewed and compared. This includes direct fees (e.g. TER) as well as indirect fees (e.g. Bid-Ask).

After inflation

An investor should constantly look at real returns, as opposed to nominal returns. Retail investors care about the real value of their money and their purchasing power.

Specified Risk profile

In this article we will consider different risk / reward profiles, which are aiming at different types of investors and / or different investor objectives.

Long-term horizon

Investors and investment objectives have different time horizons. The basis of this article will be assuming a long-term perspective (ie. ~20 years).

Asset Classes

"An asset class is a group of securities that have similar financial characteristics, behave similarly in the marketplace, and are subject to the same laws and regulations."
(Source: Wikipedia)

For this investment approach we are considering the following three asset class categories:

  1. Equities: Equities have historically outperformed other asset classes but also have a relatively high volatility, especially in the short run. Equities are effective in providing a long-term capital growth as well as protection for inflation.
  2. Fixed Income: Fixed income instruments, ie. bond investments generally include a set of coupon (interest) payments and return the principal at the end of the investment period. As such they are generally more stable than equity instruments but the value of the instruments can still fluctuate as a result of changes in interest and inflation.
  3. Inflation assets: For real assets one can consider Real Estate and Commodities as they are tied to the value of ‘real’ (physical) underlyings and typically tend to be highly correlated with inflation. Another subgroup is Inflation linked bonds. This asset class offers effective protection from inflation and at the same time can help to generate income and further diversify the portfolio.

I am not considering the asset class “Cash Equivalents”, such as Money Market instruments. Here I assume that you as a reader will determine the optimal allocation between relatively risky investments (ie. using this investment approach) and relatively risk-free assets (ie. keeping money in your savings account). In other words, always keep some cash in your backpocket!

There are also other asset class categories that are not being considered here (e.g. Alternative investments, Private Equity, Derivatives, etc.), in my perspective these investment categories are not designed for the average retail investor, are intransparent/costly and/or add limited value to achieve the above described investors' objective.