If you want to build a diversified portfolio with just a handful of ETFs, you are in the right place. In another post I compared a winning investment portfolio to a successful football team. We will discuss which players we can select to fill those positions.
Content
- Introduction
- The Goalkeeper: Gold
- Right-back: Corporate Bonds
- Left-back: Commodities
- Right center-back: Sovereign Bonds
- Left center-back: Cash
- Right defensive midfielder: Residential Property
- Left defensive midfielder: Rental Properties
- Attacking midfielder: Developed Market Equities
- Left winger: Emerging Market Equities
- Right winger: Silver
- Striker: Growth Equities
- Conclusion
Introduction
If you have not read it yet, here is the comparison between a solid portfolio and a winning team: The Winning Investment Portfolio.
If we had to assemble a football or basketball team, we would not only focus on scoring the most goals or points. Defense is also important. Our goal would be to win titles at the end of the season.
Building a successful, diversified investment portfolio is no different, and it can be accomplished with index funds.
Given we used the analogy of a football with 11 players, we want to fill 11 positions in our portfolio. All of them can be filled with passive funds. Hence, we will build a diversified portfolio with exchange-traded funds, commonly known as ETFs.
The Goalkeeper: Gold
Gold is our safe haven asset. It has been so for thousands of years. And while gold can be bought and stored physically, there are alternatives for those who want to manage everything from the convenience of their investment account.
Thus, we can choose an ETF that invests in physical gold. We send them our money and they simply buy gold.
Some examples would be the ETF managed by the Swiss bank ZKB (CH0139101593) or the Xetra-Gold fund (DE000A0S9GB0).
Right-back: Corporate Bonds
Corporate debt can also serve its role in a diversified portfolio of ETFs. For this example, we will look for funds investing in investment grade bonds. Those are bonds with low credit risk.
Two examples of index funds that would serve that purpose would be those of Vanguard (IE00BZ163G84) and State Street (IE00B3T9LM79).
Left-back: Commodities
Commodities can play a key role in an investment portfolio. Apart from being a diversifying asset, they can offer great protection against inflation. And we should bear in mind that when commodity prices go up, they can go up a lot.
Because commodities are mostly traded in the form derivative contracts known as futures, investing in them through funds is recommended. Two examples would be those from Invesco (IE00BD6FTQ80) and UBS (IE00BYYLVJ24).
Right center-back: Sovereign Bonds
Despite interest rates being lower than historically, sovereign bonds can bring diversification to our ETF portfolio. Sovereign bonds tend to rise in price when there are risks of recession or deflation. Precisely the worst type of scenarios for other asset classes.
Two useful funds to fill this position would be those managed by Blackrock (IE00B3F81K65) and DWS (LU0378818131).
Left center-back: Cash
Cash, apart from gaining us some interest, is a great asset to own. Why? Because cash is dry powder. It has a lot of value as an option. If there is a crash in the markets, we will be able to deploy that cash to acquire cheap assets.
You can decide to put your cash a money markets fund or bank deposit, either in a single currency or multiple currencies. Perhaps it makes sense to have allocation to US Dollars and Swiss Francs regardless of where you live.
Right defensive midfielder: Residential Property
In this position we have our residential property. In the long term, having a home of our own will help you build wealth. It also makes it easier to reach financial independence.
Left defensive midfielder: Rental Properties
Here we have our real estate investments, excluding our main home. We own this real estate to generate regular cash flow and seek long term price appreciation.
Although investing in rental properties directly will allow you to achieve the highest returns in this asset class, I will give you a couple of alternatives in the form of REITs, real estate investment trusts, so you invest in real estate from your home.
Two good REIT ETFs are those managed by Blackrock and Fidelity. Because most REITs are listed in the United States, you may need to look at what REIT ETFs are available to you.
Attacking midfielder: Developed Market Equities
In this key position we have developed market equities. This market is best tracked by the MSCI World index. It is a great way to invest in stocks of American, European, Japanese and Australian companies.
Two large ETFs are those managed by Blackrock (IE00B4L5Y983) and Amundi (LU1437016972).
Left winger: Emerging Market Equities
Here we have the other portion of the global stock market: emerging countries. Having emerging market stocks in our ETF portfolio can yield a lot of long-term growth. But we must be bear in mind these stocks tend to be very volatile.
One of the indexes that best tracks this market is the MSCI Emerging Markets. Two ETFs that replicate it are those of Blackrock (IE00BKM4GZ66) and DWS (IE00BTJRMP35).
Right winger: Silver
In the position of right winger is silver. Its older and wiser sibling, gold, plays as a goalkeeper. However, silver, the other precious metal historically used as money, is much more speculative. It has more risk and greater reward potential.
While it is possible to buy and hold physical silver, there are ETFs available. And that makes your purchase much easier. Two good options are the Swiss ETFs ZKB (CH0183135992 ) and UBS (CH0118929048).
Striker: Growth Equities
Finally, we have our striker. Its role is to achieve long term growth in the portfolio, although it may go through difficult times. The tech sector usually plays a key role in this position.
The Nasdaq stock index would be a very good representation. Two ETFs that follow it are those managed by Blackrock (IE00B53SZB19) and Amundi (LU1681038243).
Conclusion
Finally, I want to remind you that this post is not intended to be investment recommendation. While I consider the ETFs we have discussed good investment options, it is important to consider how they fit within your portfolio.
I want to give you tools and information, so you take the best decisions for yourself. Only then will you be able to stick to your long term investment goals.
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