How to create a simple asset allocation with trackers

The name of my game is index investing, passive index investing. Once that is settled, there is only 1 question left: what trackers will I use? There are a lot of sample portfolio’s out there, going from a simple 1 tracker portfolio to a sliced and diced 12 (or more) tracker portfolio. What would be the wise thing to do for me? Here are my rules: I want world coverage, I want it to be simple as hell and it needs to be tax optimized. Lets break it down.

I want world coverage

The goal of my tracker portfolio is to match the global evolution of the stock markets. This means I want exposure to the main developed economies in US, EU and Asia. Next to that, I want to get some EM as well. Frontier is optional.

The world is also constructed out of large caps, medium caps and small caps. Somehow, all these need to find a place in my portfolio.

I want it to be simple

Simple means that it should not take a lot of orders to build up the portfolio or a lot of buy/sells to re-balance the portfolio.This basically excludes anything more than 3 or 4 trackers. More than that means potentially a lot of smaller orders each month. This is not simple and not cost efficient.

Simple means that I do not need to have a perfect economy weighted or market share weighted or equally weighted world index. A rough sample of the world is fine.

Simple also means I do not want to bother with dividends. Accumulate all that can be accumulated.

It needs to be tax optimized

Living in Belgium, this brings us to accumulating trackers based in Ireland. The trackers should not be registered in Belgium.

Accumulating: In Belgium dividends are taxed, capital gains far less

Not registered in Belgium: they have the least stock market tax to pay when you buy and sell

Why Ireland: This is a tax heaven for the financial industry.

You can read more details on nomorewaffles breakdown on this. This post inspired my asset allocation.

What about bond vs stock allocation?

I consider myself lucky, I do not go for bonds now. I have a portfolio that acts as  stabilization to my overall portfolio. Next to that, my investment time frame for this part of the portfolio is about 29 years. This means I can go 100pct equity now.

Besides that, I consider bonds too risky right now. Interest rates are more likely to go up than to go down. I will consider bonds later.

My current asset allocation

Looking at my personal situation and the desires that I have for my portfolio, I started some research. I came up with the below portfolio that is perfect for me.

  1. IWDA – 70pct: This delivers the vast majority of world wide exposure to large cap stocks. I find it  too much US biased. This will be corrected by adding some EU and EM. I also need some medium and small cap.
  2. CESL – 20pct: Adding some EU to the mix and also some diversification into small caps.
  3. EMIM -10pct: EM was missing till now.

At the time of conception, using the fact sheets from the asset manager, this gives the following exposure to the world (almost 100 pct: rounding error)

  • US – 42,5 pct
  • EU – 35,6 pct
  • EM – 10 pct
  • Asia and other – 11,9 pct

Next steps

Now that this equation is solved, I can set my investing in auto gear and invest each month in one of the trackers above. I will not buy each month equally as this will create unneeded work and unneeded transaction costs.

The portfolio should be rebalanced each year in April. With each buy, I decide what needs to be bought in order to approximate the wanted asset allocation.

If you do your own research, what portfolio is bets for your specific needs?

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13 thoughts on “How to create a simple asset allocation with trackers

  1. What is the cost of that asset allocation? which broker do you think is the best? Sorry for the many questions, And Great blog!

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    1. What do you mean with cost of the asset allocation?
      Each ETF has its own internal costs, calculated in the price that you see on the exchange (It is more or less the TER). The Trackers above have a quite low TER for European standards. The site of iShares or Morningstar can give you taht info for each of the trackers above.
      Next to that, you have the cost to buy the ETF. This depends on the amount, broker and market where you buy. Some brokers have also custodian fees.

      I do not give an opinion on the best broker in the market, as I work in the industry myself.

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      1. To bad you can give an opinion on the best broker, but nice to know you don’t just say that one you work for. I do hope you can help me to find a pension fund (pensioenspaarfonds) that follows a World Wide Index or at least tries to track it. All I can find are realy expensive funds that have a good return (not as good as my index fond with meesman) or cheap ones with a realy bad return.

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  2. How does the IWDA reinvest dividends?
    Does a 1 cent dividend result in a 1 cent price increase for IWDA?
    Or do you get additional IWDA shares bought from the received dividends?

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    1. You do not get additional IWDA shares. The fund keeps the money and buys the underlying index. That means that at the end of the year, you have not 1 time the index per IWDA share but 1,01 time the index (If the dividend is 1pct). This is how I understand it based upon this: http://money.stackexchange.com/questions/23147/concerning-etf-that-do-dividend-reinvestment-for-you-is-that-taxable
      US etfs are required to pay out dividends, so it is a European story.

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