(If you don't care how it works and
just want to see which ETF's to buy,
go and build your own portfolio)
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.
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.
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).
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.
In this article we will consider different risk / reward profiles, which are aiming at different types of investors and / or different investor objectives.
Investors and investment objectives have different time horizons. The basis of this article will be assuming a long-term perspective (ie. ~20 years).
For this investment approach we are considering the following three asset class categories:
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.