Thoughts on portfolio

[raiah16]

Portfolio update: please feel free to comment and add thoughts. Thanks very much in advance. I know the portfolio is tech-heavy, but some of that is intentional, and I am working on making it less tech-heavy

Background: 39M non-EU national living in Germany for the last 12 years, have been working for the last 9 years. Late beginner in the investment journey; started only in Feb 2021. Use Scalable Capital as the broker account. We bought a house recently, so the last year has been a bit slow (though I DCAed every month), but plan to ramp up the DCA, going ahead. The main goals are to save enough for the mortgage (we would need about 500K to close the mortgage in 15 years) and for retirement. As of now, am not thinking about separating those 2 goals, with the aim of saving the maximum possible. Since the goal is quite ambitious, aggressive saving and somewhat aggressive investing is the plan. Current portfolio is worth about 50K. Plan to invest at least 2500-3000 EUR every month, going ahead.

Current Portfolio with weightage:

ETFs:

1. iShares Core MSCI World: 30% (DCA)
2. Lyxor MSCI World Information Technology: 20% (DCA)
3. Amundi NASDAQ 100: 5% (stopped investing now; was an initial ETF that I bought)

Individual Stocks:

1. Amazon: 12% (DCA)
2. Apple: 6%
3. Microsoft: 6% (DCA)
4. Visa: 6% (DCA)
5. Coca-Cola: 3% (DCA)
6. Procter and Gamble: 3% (DCA)
7. Tesla: 3% (intend to sell soon)
8. Miscellaneous individual stocks that I buy only for short term and sell only when there is a gain: 5%

Other than this, I have about 7K in crypto, most (>90%) of which is BTC and ETH. I buy BTC and ETH only now and then.

I do realise the stock portfolio is very tech-heavy. Even the ETFs have tech-representations in them. To some extent this is intentional; want to give myself a chance at buying the top S&P500 companies, which happen to be tech now, so as to get a bit more return than an all-world ETF. This is a risk, and yet, I am fine with some part of my portfolio being risky to meet the challenging goal. Having said that, I want to increase the iShares Core MSCI World from 30% to 50% eventually. I also do realise even this ETF has tech-representation, but that's ok.

A few specific questions:

1. I think about stopping DCA into ETF #2 and instead just buy individual tech stocks as I already do. Or perhaps replace ETF #2 by an S&P500 ETF like the Vanguard one? Or is the iShares Core MSCI World as the sole ETF good enough? Any advice on the ETF part of the portfolio in general?
2. As part of my plan to make things less tech-heavy, maybe increase weightage of stocks such as Visa, Coca-Cola, P&G, etc. Would this help?

 

[krevikes]

@raiah16 The whole point of etfs is invest and forget as they’ll do the rebalancing for you. This is counterintuitive with individual stocks because while apple might be doing well for the next 20 years can you say it will also do for 30 years and if the answer is no that means you are basically actively investing rather than passive. I get its all interesting right now but unless this is truly your passion you will get bored with following markets and individual stocks which then puts you at risk of selling later than intended.

Try to adopt a new approach to how you view your portfolio. You have a slow and steady part (low risk low return) and an aggressive part (high risk, high potential return).

In that sense your crypto and tech stocks/etfs can be seen as risk overlap. If youre fine with it then ok.
To me it seems like you want to balance it all and not miss out anywhere hence you have all world, tech, individuals and crypto. This is fine if you know what you are doing but its a lot of work and active managing. Active managing also comes with tax reporting which is even more work.

Nobody can tell you what the best ratio of low risk-high risk is for you, BUT YOU. But personally i would drop individual stocks and IF NEEDED compensate for them via all world and nasdaq i.e. get rid of cola and get more all world, get rid of microsoft and get nasdaq.

Decide on your risk appetite and tolerance and then simplify your portfolio so you dont have to track. In your place I would have 3 assets only - all world, nasdaq and crypto (simplify crypto too by getting rid of all but btc). And that way, ideally your equity portfolio should only have 3 tickers in it. Don’t underestimate simplicity as it gives clarity and peace which leads to more clarity and crisper and better decisions. Confusion and analysis paralysis are your enemy.

 

[raiah16]

@krevikes Thanks so much for the response. I agree with the three-ticker suggestion. Though, actually, I believe companies like Apple, Microsoft may still be doing well in 30 years. Microsoft has been in the top 10 of the S&P500 for the last 25 years. Most companies in the Top 10 of the S&P500 are not doing bad now; many of them are still in the index. Not that am claiming that buying individual stocks will out-perform the index, but buying a good individual stock may not be bad either.

Two follow-up questions though:

1. Would you consider Core MSCI world an all world ETF, though it is essentially a developed country ETF? So, would you advise switching from Core MSCI world (currently 30% of my portfolio) to a true all-world ETF?
2. Lyxor MSCI World Information technology is the second ETF that am DCAing into now for tech stocks. Is this fine, or would you recommend switching to a true NASDAQ 100 ETF?

Thanks so much again!

 

[krevikes]

@raiah16 Glad i could help.
Individual stocks are just very risky long term holds by their nature. Out of the 5 top companies now only 2 will probably still be there in 30 years. So its an odds game and therefore a risky play. Im not saying dont do it but its something you will always have to manage and keep an eye on which is mentally taxing.

I would switch away from core msci to TRUE all world with developped+EMERGING. The reason is the following… remember how i talked that you should change the way you look at your portfolio as a risky part and safe part? This is basically similar to the “boomer” portfolio 60-40 where 60 is aggressive (in their case stocks) and 40 is safe (in their case bonds). We are now living in a different age but the wisdom of the structure remains vital.
Our portfolios should still follow that structure but with different assets. The reason is that you want a part of your portfolio with minimal maximum drawback (safe part) that you can fall back onto in case you need to sell a part of your portfolio for cash (e.g. house deposit, serious emergency medical conditions, etc), or maybe to take advantage of a huge macro event (1-2 times in your life), or otherwise simply put “re-balancing”.
In that sense you want the most stable, most diversied, most boring (but still effective and efficient) asset. And that is a true all world consisting of both developped and emerging markets. Those things are like rocks. Not even market crashes affect them that bad while still averaging 7% cagr per year (as opposed to 10% by sp500). So for a 3% return premium cost you get maximum stability of your safe part of the portfolio. The reason why they are so stable is that global market crashes dont affect emerging countries as bad. If your etf is developped only a market crash like 2008 will destroy your value. Poor countries dont care about crashes that much. Meaning the drawback is less when diversified into a true all world.

So you get the safe part and why true all world is prefferable. The cost you paid for safety, insurance, or whatever you wanna call it is -3% return premium. You want that part of your portfolio to be between 25-40% in my opinion. The other 60%+ is your aggressive part with sp500, nasdaq, crypto, etc. This risky part will on average outperform by a lot and more than compensate the -3% risk premium paid by the safe part. But in certain times this part will be down a lot and you better hope you dont have to sell at a loss due to an unforseen event in your life.

Thats basically it. Its simpler than it seems. The safe part is your savings for rainy days providing security and flexibility whatever life throws at you allowing you to take hits on your aggressive part without losing sleep.

If your aggressive part gets too big (proportionately) at any point consider taking profits and reallocating to your safe part (this is rebalancing). Now that is true wealth. When you have a lot of money into an asset that cannot possibily crash down too much. People laugh at gold because its a horrible investment but if i were a multimillionaire it would be a great asset to park net worth worry-free because i wouldnt be that interesting in value accumulation.

And takking about networth, do annual or twice a year net worth analysis of yourself. That is simple just calc positive value of your assets and subtract negative value of liabilities. In most peoples case liabs are just a student loan, car loan and mortgage. So your networth is your (cash+investments+car resale value+house resale value) LESS (student loan principal+car loan principal+mortgage principal). I mention this because as life goes on your house will take a biggger and bigger portion of your portfolio (principal on its liability will keep going down while its value naturally grows as years pass). Once you become a portfolio millionaire, consider moving money out of the portfolio (take profits) and buy a secondary property so your real estate is at least 20-25% of your total networth.

1. I really cant advise on the proper IT etf, sorry. Probably doesnt matter all that much. Typically if you switch to a true all world you are reducing risk in your safe part of the portfolio, so probably need to compensate with a proper aggressive etf in the riskier part. Nasdaq is typically one of the most aggressive ones though i think it often inderperforms sp500 in the long term. Crypto (btc only!) is a good risky horse to have with huge asymmetrical bet potential. Google asymmetrical bets/investments, to get the most of your risky portion.

 

[raiah16]

@krevikes Thanks very much once again for your detailed thoughts.

On the all-world vs CoreMSCI World, I did a comparison of the following three popular options:

1. Vanguard All World Accumulating
2. iShares ACWI
3. iShares Core MSCI

The third is the one I currently have and is only a developed country ETF.

Options 1 and 2 are very similar, both in terms of holdings and returns. Option 2 has been around longer in Europe and has a larger size. So, comparing Options 2 and 3, the top 10 holdings are very similar. Understood Option 3 does not have developing countries, but looking at returns, I have the following for Option 2 vs 3.

5 year return: 6.8% vs 7.7%

10 year return: 9.1% vs 10%

Pretty comparable with a slight advantage for Option 3. Would you still avoid Option 3? By the way, I see larger numbers than what I would have expected (annualised return of about 5%), don't know if am missing something.

Also, I think about investing a bit in my home country (developing country in Asia) as I understand how things work there, so that should sort of take care of investing in the developing market? Still, would you recommend not to have Core MSCI World as a safe option?

Thanks again for the perspective on safe vs risky parts in the portfolio.

 

[krevikes]

@raiah16 Youre welcome!
On option 2 vs 3 i dont really have much to say. As long as YOU understand the differences between both and are comfortable with your choice, either is fine. The difference in return (and volatility) is relatively small. Much more attention will require the overall allocation and proportions of safe vs risky. The safe part is there just to anchor the portfolio and ensure you got something to lean on in troubled times or through market opportunities. So either is fine as long as you understand (vs potentially ingorant) and are comfortable.
Investing in own country doesnt make much sense to me, its called “home bias” and unless you know something that the rest of the market doesnt (which i doubt) you shouldnt overallocate to your own more than what is already allocated by the all world index, which is “market cap weighted”. (Or unless your country isnt even included in which case it might be fine but be very careful with allocation and dont overallocate, most likely not more than 1-2% of the overall safe part allocation which is negligible anyway)

 

[englishcatholic17]

@raiah16 This is too complicated for no good reason. Just buy S&P 500 and be done with it.

It seems like you're bullish on tech, so you can add a NASDAQ 100 ETF to the mix and you should be good to go.

 

[raiah16]

@englishcatholic17 Thanks very much for the response.