[Germany] 23 Y old. My portfolio of Index ETFs. Suggestion please.

[aquarius1985]

Hi,
I am an Indian living in Germany. I recently graduated with Masters in Germany. I found a new job .
I would like to set up a sparplan to periodically (monthly) invest money into Index ETFs.
As I am just starting, I wanted to set up a simple three fund portfolio that looks as follows:

• COMSTAGE MSCI WORLD TRN UCITS ETF - 40%
• COMSTAGE DAX TR UCITS ETF - 40%
• db x-trackers II IBOXX SOVEREIGNS EUROZONE 3-5 UCITS ETF - 20%

I choose DAX over STOXX 600 because : 1. DAX has low TER and 2. Historically, both have the same returns.
As, I earn more money I was planning to diversify by adding money into emerging markets, large-values, small-value and REITs.
I am planning to stay in Germany at-least for the next five years. After that, I do not know whether I will move back to India or stay back here in Germany. What do you guys think of my portfolio? Any suggestions/ideas would also be greatly helpful.

Now, to evaluate whether my portfolio is a good strategy, I read through the other posts in this group. After going through, I have few questions.

• I read in one of the posts that :

If you buy euro bonds right now you won't be making more than 1.5% annually if you invest for the long run any even less for short-term investments. (Even if the bonds you are buying have nominal rates of 5% or more). So personally I definitely won't be buying bonds as long as rates are this low - I will consider them again if rates go up again.

Does this mean, for the time being, my portfolio should not have any bond allocation at all (20%)? Should it be completely in stocks? I read in one of William J. Bernstein's book that, the stock allocation in your portfolio should never be more than 80%.

• I thought when you buy a capitalizing/accumulating ETF, you are taxed only at the time of selling (for the realized captial gain). But here in some posts, I saw that you are taxed every year for the rise in stock value even if it is an accumulating ETF. Is this true?

Thanks for reading through. I would appreciate any replies .

 

[tanasee]

@aquarius1985 Disclaimer: only my personal opinion.

• I would bump up MSCI World to at least 50%
• I would add a MSCI EM ETF with 5-15%
• I would either weight the DAX with a max of 20%, or replace with STOXX600 (see below)
• I would kick out the Bonds (see below)

I choose DAX over STOXX 600 because : 1. DAX has low TER and 2. Historically, both have the same returns.

The difference between the TER's range from 0.04 to 0.1%. Personally I would always trade that for a way higher diversification. Before I would ever start buying a DAX ETF I would just build it myself... I wouldn't call 30 holdings well diversified.

Does this mean, for the time being, my portfolio should not have any bond allocation at all (20%)? Should it be completely in stocks?

I'm 100% in stocks. In the end it just depends on how much of a risk you are willed to take, based on your time in the market. Currently I would prefer to hold my "risk-free" portion of my portfolio into a Tagesgeld account instead of Bonds. The returns are pretty much the same right now.

But here in some posts, I saw that you are taxed every year for the rise in stock value even if it is an accumulating ETF. Is this true?

Yes it is true, but just for accumulating ETFs that are not based in Germany and report "Ausschüttungsgleiche Beträge". For example, the comstage MSCI World is accumulating and based in Luxemburg but since it has a swapping partner it just swaps away all the gains which results in 0,00 reports (tax easy). Be aware that this can change at any time and a tax-easy ETF can turn into an ETF that is not easy for your taxes.

 

[aquarius1985]

@tanasee Perfect. That pretty much answers all my question.
Maybe, I will swap the DAX with EURO STOXX 600.

Apart from the MSCI EM, do you also hold other index funds for diversification?

My research showed small-value, large-value and REITs are good ones for diversification. Do you hold any of those? If yes, which ones?

Would it be possible for you to share your portfolio? Thank you.

 

[tanasee]

@aquarius1985 I've shared my Portfolio in another thread in this /r:

https://www.reddit.com/r/eupersonalfinance/comments/3mp1vp/_/cvhvpi8

Small caps, Mid caps and Large caps are already part of MSCI World and STOXX600, so no need to diversify anything because it already is.

I'm not really interested in REITs, there are a good amount of real-estate stocks in both MSCI World and STOXX600 so I don't see a reason to overweight this sector.

 

[camperjen]

@aquarius1985 I'm the one you quoted. Note that this is only valid for Euro government bonds. I didn't investigate international bonds nor european company bonds.

Also, not owning bonds doesn't mean you should have all your portfolio in stocks. Personally, I'm currently keeping some of my money in a money market account at an online bank that earns me 1%. Not much, but more than what investment-grade euro bonds will get me at the moment.

 

[marcod]

@aquarius1985

Does this mean, for the time being, my portfolio should not have any bond allocation at all (20%)? Should it be completely in stocks?

Bonds have their good years and their bad years, just like stocks. But the bad years of bonds are better than the bad years of stocks. (Or at the very least: have been better historically; and the expectation is that this will continue to be so).

So they act like a shock absorber in your portfolio.

If you don't need that, if you feel okay with 100% stocks and the big up- and downswings that your portfolio will take as a result of being 100% in stocks (a stock index can go up by 50% in a year, but can also go down by 50% in a year), then you can be 100% in stocks. In the long run, that might very well be best for the total value of your portfolio, too, because in the past stocks have on average outperformed bonds. But: of course this only works if you don't sell your stocks in a panic when the market is down (and when all newspapers and advertisements will be telling you to panic! And sell now!). If you do that, the average gains you personally make on your stocks go way way down.

If you add 20% bonds, then if the stock market goes down by 50%, your portfolio goes "only" down by 40% (and probably a bit less, because probably the value of your bonds will increase). You might probably feel more comfortable with that and not sell your stocks in a downturn; thus you will be able to also profit from the next upswing. A similar effect will happen on the upswing; if stocks go up 50%, you'll only see an increase of a bit less than 40%. And in the long run, the bonds in your portfolio will on average probably earn less than the stocks in your portfolio.

 

[resjudicata]

@marcod TLD;R: don't be this guy

If you invest into stocks, you should do so for a long period of time and you should not try to beat the market by chosing when to enter or exit. In the long run this will not work out for you.

/@marcod is right that adding bonds will add a "security cushion" that will likely not take a hit when your stocks take a hit, for the cost of gains not getting realized.

All your personal preference though, you gotta know what risks you are willing to take.

 

[aquarius1985]

@resjudicata As a beginner, this is the most difficult thing for me.

For example, I saw that DAX index had crashed a month back. I thought this a was very good buy opportunity. Hence, I bought a considerable amount of DAX with my money. My strategy was to just buy-and-hold this stock for a very long time. But, then I saw in my account the DAX was up by 12% from the time I bought it. That was some considerable amount of money. This is the kind of gain we expect over very long time. I know that I should never try to time the market. But here I am sitting with this kind of gain in short time. Should I not be selling it?

That leads me to my main question. To maintain your portfolio, you have to constantly re-balance the allocations. When do you exactly decide to do the "rebalancing"? Do you do periodically, say once every year, over time?

Or do you do at such instants, when you notice significant market jumps/downs, like my example above?

 

[marcod]

@aquarius1985 Rebalancing, something like once to four times per year is good. Not once every week or once every month. (Although, if you've got money coming in every month, you can choose to put that money towards the investment that is down at that moment, so for example if your stocks are down, you buy more stocks with your new investment money).

Other people rebalance only when their portfolio is off by a specific amount or percentage. So, for example, if the balance should be 20%/80% (bonds/stocks), they rebalance when it either hits 10/90 or 30/70...

Rebalancing too often isn't very useful for two reasons:

• It often costs money: a fee when selling and/or a fee when buying. And, depending on the country, taxes when selling.
• It costs a lot of time; and time is money.

 

[aquarius1985]

@marcod I was reading in this William J. Bernstein's book that, historically long term returns of stocks are 7.5% and bonds are 5-5.5%. Hence, he was recommending that it was wise to trade a bit of risk of stocks for the stability of bonds. He recommended never to hold more than 80% in stocks. But again, as you said, I think it depends on the risk tolerance.

Do you own any bonds in your portfolio? If yes, which ones. Are they short term?

 

[djstav]

@aquarius1985

I would like to set up a sparplan to periodically (monthly) invest money into Index ETFs.

Are you going to be looking into automating your investing? Or you want to do it manually every month?

 

[resjudicata]

@aquarius1985 Stocks = 100 - age in years %

Asia/EM/Japan = 10-15%

The ComStage MSCI World ETF appears to be in USD. I don't know if that is important..