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Keeping things simple with a 2 Fund portfolio Investment Portfolio

Caveat: The post below is not a financial advise. I am not a certified or trained financial adviser. This is just a log of my own experience with investing.

Some times in March 2021, I made 3 changes to my investment portfolio. Before now I had a 4 fund portfolio:

1 **40% Vanguard S&P 500 UCITS ETF USD (VUSA):** This is the UK version of the Vanguard S&P 500 tracker. This index gives me exposure to the top US companies
2 30% FTSE All-World UCITS ETF (VWRD): It replicates the FTSE All-World Index which is made up of companies in the developed and emerging markets. across Europe, North America, Asia, Middle East and Africa.
3 15% EUR Eurozone Government Bond UCITS ETF (VETY): This represent the safe side of my portfolio. It is meant to give it some stability. It basically tracks Government Bonds issued by EU countries. EU is the most stable region of the world and also the most wealthy.
4 **15% Global Aggregate Bond UCITS ETF USD Hedged (VAGU):** This ETF follows Government bonds mostly developed countries around the world with some well rated emerging markets.

On the equity side of things, I realized I was over exposed to the US market with the S&P500 making up 40% of my equity portfolio and FTSE All-World making up 30%.

When you consider that over 60% of the FTSE All-world is made up of US companies. This meant in real terms US companies made up over 80% of my over all equity holding with ex US international making up under 20%. My investment stratgy is to have diverification in both sectors and geography. Yes Being over weight to the US market had it's merits:

  • The US has been on a bull run for the past 10 years and it remains the engine room of global growth and the biggest economy in the world.
  • There is also a lot to be said about how ex US international equities tend to be positively correlated to the US market. This means when the US stock market hits a snag that snag often to drag down global equity markets.

While the above are valid reasons to remain bullish about the US, It should also be noted that global equity market are currently under priced while US is serious over priced ( from all major indicators) This means international market have lots of room to grow. I am also a long term investor and the idea of have a sizable portion of my portfolio in ex US international makes sense when you consider the growth potential of many emerging markets like china, india and the middle east.

1 Equity Fund to Rule them all

As a result I decided to collapse my equity portfolio into the Vanguard FTSE All-World ETF which is made up of over 3200 Large and Mid Cap Companies from around the world. This essentially captures every single company that is worth anything around the world. It is a portfolio that essentially gives me exposure to the global equity market.

I also made sure to choose the Accumulating version of the fund. Accumulating funds automatically reinvest dividends. This means dividends paid by the different stocks that make up the fund are automatically paid back into the funds.

You can read more about why I chose an accumulating fund over a distributive funds.

The other change I made was to collapse my 2 bond portfolio - The EU Government Bond ETF was collapsed into the Vangaurd Global Agregate Fund.

I initially choose EU government bond because I considered the EU to be one of the most stable region in the world and as a result their government bond would fit perfectly into the safe aspect of my portfolio.

Unfortunately, VETY is not hedged to the dollar it is priced in Euros and this means everytime I buy the fund, I am incuring exchange rate fees but more importantly it leaves the fund vunerable to currency flunctuation between the dollar and the Euro. A hedged funds essentially protect you from currency flunctuation. Currency flunctuation defeats the purpose of the stability and safety bonds are suppose to bring to my porfolio.

Thankfully The Vanguard Global Agregate bonds is made up bonds from many EU countries so I do not miss much and it does include government bonds from The US, G7 and development countries around the world with good credit ratings. I choose the dollar hedge version of fund since essentially the dollar is my investment currency so I can be sure that things would be stable and it is protected from currency instability.

Having a 2 fund portfolio VWRA and VGPA further simplifies my portfolio. I have global exposure in both bonds and stocks while removing further investment hassle.
This changes ties in perfectly with simple boring investment strategy focused on the long term.