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The Portfolio I Would Recommend to 90% of Investors

April 21, 2024
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Josh Viljoen
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Josh Viljoen

Investing does not need to be scary and complex. Sometimes simple is better.

 

This evening I posed the question to myself what advice I would give to a close friend looking to kickstart their investing career with no previous experience.

 

I decided that the solution needed to be as simple as possible with the least amount of effort and manual intervention. The solution I came up with was a simple portfolio consisting of only two assets that I would recommend to 90% of people looking to invest in the stock market. Picking stocks is a time-consuming exercise that requires a solid understanding of finance and how to evaluate a business. Most people simply dont have the time or desire to pick individual stocks to try and beat the stock market. So, for most people instead of trying to beat the market why not just try to follow the market?

 

The portfolio consists of the following two assets:

 

- Global Equity ETF

- Global Bond ETF

 

What Is an Exchange-Traded Fund (ETF)?

An exchange-traded fund (ETF) is a type of pooled investment security that operates much like a mutual fund. Typically, ETFs will track a particular index, sector, commodity, or other assets, but unlike mutual funds, ETFs can be purchased or sold on a stock exchange the same way that a regular stock can. An ETF can be structured to track anything from the price of an individual commodity to a large and diverse collection of securities. ETFs can even be structured to track specific investment strategies.

 

A global equity ETF is simply an ETF that tracks the stock market as a whole. When you buy a global equity ETF, you essentially own a fraction of thousands of listed companies around the world. While ETFs like the S&P 500 and the JSE TOP 40 track the stock market of a specific country, a global equity ETF will be diversified across multiple stock markets in both developed and developing economies. This reduces the risk that a catastrophic event in the country you are invested in will wipe out your portfolio. A global equity ETF should be the core of the portfolio, and this is where the capital appreciation will come from. Global equity ETFs have returned approximately 10% a year compounded over the last 30 years. In terms of percentage allocation, this will largely depend on your age and how close to retirement you are. If you are still at least 10 years from retirement I would recommend allocating 80% of your portfolio to a global equity ETF. When deciding which global ETF to invest in the TER (total expense ratio) should be your main concern. As investors, we should focus on what we can control, and this includes the fees we pay. We want to keep our fees as low as possible and thus picking an ETF with a low TER is crucial to maximizing your long-term portfolio value. I would recommend the following global equity ETFs:

 

  1. CoreShares Total World ETF: Trades on the JSE under the ticker $GLOBAL and has a TER of 0.27%
  2. Satrix MSCI World ETF: Trades on the JSE under the ticker $STXWDM and has a TER of 0.35%
  3. Vanguard Total Stock Market ETF: Trades on the NYSE under the ticker symbol $VTI and has a TER of 0.03%

 

A global bond ETF tracks the global bond market. Bonds are debt-based instruments that offer a fixed return. Adding a bond ETF to your portfolio adds some stability and acts as a cash reserve. While the stock market typically delivers substantially greater returns than the bond market, bonds tend to perform well in times of economic uncertainty and during a recession when interest rates rise. Holdings bonds will protect a portion of your portfolio should a global financial crisis occur, that would cause equity markets to plummet. This is also the perfect investment vehicle if you need cash at short notice for an emergency. If you are more than 10 years away from retirement, I would recommend holding 20% of your portfolio in bonds. If you are within 5 years of retirement, I would recommend having at least 40% of your portfolio in bonds. I would recommend the following bond ETFs:

 

  1. 1nvest Global Govt Bond ETF: Trades on the JSE under the ticker symbol $ETFGGB and has a TER of 0.4%
  2. Satrix Global Aggregate Bond ETF: Trades on the JSE under the ticker symbol $STXGBD and has a TER of 0.24%
  3. Vanguard Total Bond Market ETF: Trades on the NYSE under the ticker symbol $BND and has a TER of 0.03%

 

To truly take the decision-making out of investing it is important to automate your portfolio. This can be done by setting a monthly debit order to buy a fixed amount of each of the two ETFs monthly. I would recommend rebalancing the portfolio semi-annually. What this means is that if you have decided to go 80% equity and 20% bonds and after 6 months the equity portion has grown and now makes up 83% of the portfolio you should sell off a portion of the equity in order to maintain the 80/20 split.

 

Investing does not need to be scary and complex. If you follow a simple but sound approach and invest consistently you will be on track to creating a rock-solid portfolio and long term wealth.


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