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The One Thing All Investments Have in Common
All investments have at least one thing in common: no matter if you choose investing into real estate, bonds with investment grade rating, gold, diamonds, shares, and even saving money via „boring“ bank time deposits - all investments come along with risks.
E.g., even time deposits - widely considered as super safe investment - could go bust in case of a bank run if some banks go bankrupt and the security funds are not sufficient to compensate investors with the „guaranteed“ amount per account holder.
Remember the financial crisis in 2008… we were close to that. Recent closing of the Silicon Valley Bank and Signature Bank in the US have shown that this could happen any time. Likelihood for such a worst-case scenario surely is low - but cannot be totally excluded.
What Is Your Current Level of Diversification?
In general, it is wise to avoid clump risks in your total asset allocation: e.g., not investing all your money into shares or only into real estate but better diversifying into different asset classes (e.g., mix of equity, bonds, real estate, commodities). In a separate article we go into further details regarding benefits of portfolio diversification. But before pushing the buy button, let's switch off emotions and systematically work off a check-list.
First, draw up a pie chart and add approximate values of what you own (after deducting mortgage or other debts): apartment, cash (time deposit) minus cash buffer for 6 months, bonds, gold, diamonds, shares etc. That is to assess how concentrated (clumpy) you are currently invested.
If all your money stays within 1-2 categories, you probably should ask yourself if you are comfortable with the level of (risk) diversification or if it would be better to further diversify into other asset classes. How, that depends on your personal risk appetite. Some people cannot sleep if they see their portfolio value jumping up and down or even temporarily entering red territory (losses on paper). For them, a low-yielding income ladder consisting of investment grade government bonds or time deposits might be the better option.
Long Investment Periods Help Achieving Attractive Returns
However, with regards to equities, research has shown that it was impossible to lose money if you buy and hold a globally diversified equity portfolio for min. 10-14 years (considering the unlikely event of buying always at the worst time = before market turns south).
But even when always hitting the worst moment for buying, investors can earn an attractive yield. Check out the funny short-movie with Bob, the worst market timer who only invested at market peaks, and see how his portfolio has performed.
Investors Can Participate in Global Economy via Diversified Equity Portfolio
What could make sense is - based on scientific research - to participate in the real economy by investing into shares. You become shareholder in a stock exchange listed company. Since we all do not know how the global or regional economy will evolve in the future or especially single companies (would be glass ball reading), it could make sense to invest into as many different „industrial chimneys“ worldwide as possible.
The idea is, to also diversify here into different regions worldwide. Who does know if and how a Bayer AG, Shell or Verizon company will perform over a longer period of time… nobody. You can develop an opinion but you cannot predict the future performance.
One could say, that the oil & gas industry is the backbone of all economies, it should perform very well also in the future. But recent developments regarding greenhouse gas emissions were quite threatening to oil & gas company’s business model. The same is valid for the banking industry: who would have assumed that once these profit machines become candidates for rescue actions? Diversification is the appropriate medicine to lower that risk.
Best ETFs to Invest
An amazingly comfortable way of investing into the global economy is by running a monthly saving plan with exchange traded funds (ETF), a passive investment vehicle. Passive, because there is no (highly paid) investment team picking actively stocks. Instead, the money is invested into a basked of shares replicating an index (e.g., like S&P 500, Nasdaq, MSCI World, FTSE All-World, FTSE North America, Dax, ATX, etc.): you basically own the companies in an stock exchange index. Huge advantage: extremely low management fees (below 0.4% p.a. vs. often >1.5% for actively managed funds) and you don’t have to pick an investment strategy (growth stocks with tech companies or value stocks like coca cola etc.). You simply invest into a worldwide basket with thousands of different companies. Coca Cola will be in your basket as well as Google, Microsoft, Apple etc. - just not highly concentrated. But that is exactly what is desired: to achieve diversification as best preparation for the event that one industry sector is not running well (e.g., tech companies or banking), to own only a small portion of such underperforming sector and to participate into the better performance of other sectors - worldwide.
How Safe is ETF Investing
As owner of ETF-units, you own shares of the company - and not a bank certificate which is guaranteed (or not) etc. Meaning, in the unlikely case of bankruptcy of the ETF provider (e.g. BlackRock iShares, Vanguard,…) your money is kept separately and will be not effected by that.
Same is valid for the broker where you buy and sell the ETFs: If the broker goes bankrupt, you pick another broker and units will be transferred to that new broker. Nothing lost. Also, you can sell any time at the stock market shown price. It is a very liquid asset - especially compared to real estate.
Which ETFs to Choose for a Global Equity Portfolio
Unsure how to find the best ETFs for your global equity portfolio? Here some of the most important filters you should apply during your search:
Fees
The lower the fees, the better for the portfolio's return. Often, well-established ETFs charge fees of below 0.4% p.a. - that's significantly lower than the 1.5% or more which are usually applied by actively managed equity funds. And such actively managed funds underperform passive investing big time (see statistical proof for underperformance of actively managed investment funds) in the long run.
Fond Volume (Assets Under Management)
The minimum fond volume should be higher than 200-300 mn. assets under management to minimise risk of closing the ETF. If the assets under management within an ETF is too low, the investment company would not be able to run the ETF in a profitable way.
Accumulating or Distributing ETF
Accumulating (Acc.) ETFs reinvest automatically dividends from the companies in the basket into additional shares of companies in the underlying index which leads to an increase of the value of the ETF units (the dividends will be reflected in the higher ETF price) over time. By reinvesting you benefit from the compound interest - an immensely powerful effect over the long run (e.g., calculate yourself how much 1,000 EUR can grow over a period of 20 years if interests / dividends of 2% p.a. would be reinvested every year).
Distributing (D) ETFs pay out the collected dividends to the holder (you), mostly on a quarterly base. Distributing ETFs could be more suitable for persons who „suffer“ when seeing red numbers on the statement during market downturns. It is nice to see a regularly generated cashflow… but you need to reinvest yourself into new ETF units - for example, via a free of charge ETF saving plan. For taxation it should be also easier to simply declare dividends… and that’s it.
Desired Level of Regional Diversification
Usually, the world economy is divided into economic regions like North America (Mainly USA, Canada), Europe, Emerging Markets (China, Brazil, South Africa, India…), Asia Pacific, Japan. By investing into ETFs with regional investment focus you own a major part of the total global economy at very low costs. At which ratio to invest into the regions? Why not using the gross income share of the regions in the world economy? That would mean you cover the entire world economy by only investing into 5-6 different equity ETFs.
Invest in Only One ETF
For those who want to do it the super lazy and uncomplicated way, you save money only into one investment product without missing out global diversification.
Here the most comfortable options:
Just pick one ETF on the MSCI World ACWI (All Country World Index = about 3000 different companies from 23 developed markets like US, UK, Western Europe… and 24 emerging markets; biggest holdings are Apple (4.3%, Microsoft 3.3%…), 5 biggest countries: USA 60%, Japan 5%, UK 4%, Canada 3.2%) or the FTSE Global All Cap index. FTSE is just a different index provider… content - except from minor differences - is the same as represented by MSCI indices. Performance is also pretty much the same.
Name | ISIN | Total Expense Ratio | Accu-mula-ting (A) / Distri-buting (D) | Content |
IE00B6R52259 | 0.20% | A | Large- and mid-cap companies from 23 developed and 24 emerging markets | |
IE00B3YLTY66 | 0.40% | A | In addition to MSCI ACWI covers also small-cap companies, therefore a bit more expensive | |
IE00B3RBWM25 | 0.25% | D | Developed & emerging markets worldwide | |
IE00BNG8L385 | 0.24% | D | In addition to FTSE All-World also small cap stocks from developed and emerging markets worldwide and additionally filtered for ESG criteria |
Where to Buy ETFs
Most banks offer broker services which allow to buy and sell ETFs but there are differences in price and service level, of course. Here are some criteria for selecting a broker:
Selection of Investment Products
Does your broker allow to buy and sell the ETFs you want to invest in?
Transaction Costs
Meanwhile, there are many neo-brokers on the market offering regular ETF investing via saving plans without order fees. Bear in mind, that special offers for free ETF saving plans usually have an expiration date and later you have to pay transaction cost.
Here are some brokerage firms which might be worth having a look at:
Scalable Capital: Lot’s of ETFs to choose from, zero costs for saving plans, German bank behind (Baader Wertpapierbank), nice and easy to use user interface in different languages, registration, and identification via video identification possible (no need to go to a notary or bank or post office). Opening a brokerage account is really fast and simple: register, identify yourself, transfer money via SEPA (for free) and just set up the saving plan (minimum saving amount: 1 EUR - saving amount can be lowered or increased any time and in worst case also stopped.
Trade Republic: Offer is absolutely comparable to Scalable Capital. Saving plans free of charge - huge basket of ETFs to choose from.
Should you be looking to invest not only into ETFs but also into derivative investment products at very competitive costs with excellent and comprehensive portfolio reporting inclusive, then Interactive Brokers is the best broker.
The multi-awards winning platform with lowest cost, global access to markets via user-friendly apps, professional trader working station or simple web interface and state-of-the-art reporting tools like the Portfolio Analyst - for free. Also, earn up to almost 4% on uninvested cash. Low commissions with no added spreads, ticket charges, platform fees, or account minimums.
One Last Word: Manage Your Expectations Regarding Return
The ambition should be not, to become rich fast. That would require extremely concentrated and therefore very risky bets which very often ends badly. But to earn a decent yield between 5-10% p.a. There will be years with economic downturns (war, national banks raising interests, …) and negative yields, but over the long run the yield should be between the 5-10% p.a. in average.
Assume 7.5% p.a. and you will double the money every 10 years without lifting a finger. What you have to do: stay disciplined during „rough“ periods and to invest regularly into your saving plan - there will be a HUGE psychological barrier to do so. Do not try to time the market - very often it does not work at all. So, if the market is going down by 10-20% or more, stay calm, relax - meanwhile cash in dividends and simply continue with your saving plan. If you invest 100 EUR per month, e.g., you obtain more ETF units for the 100 EUR when the market is down (cost average effect). And the more market crashes happen at the beginning, the cheaper you can buy. How awesome is that!
That’s it. Now you can go back to normal office work and generate the cashflow for your monthly saving plan. Hope it helps to make your own good investment decisions.
Disclaimer: The scenarios or investment products presented above should not be construed as investment advice. All investments involve some level of risk, and past performance is never a guarantee of future returns. As always, do your own research in order to validate and better understand the underlying risks.
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