Is this a good ETF composition? Is it the right moment to invest in ETF?

Hi Mustachians. Quick introduction abput me as this is my first post.
I’m living in Zurich since 7 years and I’m originally Italian.
I’m looking at investing part of my 2016 bonus with a long term view (15 to years).

So far I’ve opened 2 Savings Account for my daughters (since 2010) which I’m funding on yearly basis with recurring amount. The today interest return for these accounts is on average 1,5%/year.
I want to look at alternative solutions with an higher potential and “not extremely high risk” and I’ve looked deeper at ETF which seem to be a good solution, at least for me. And this how I found this blog.

My idea is to equally share the investment of 200K USD in 5 different ETFs (20% each) whith a portfolio divided in 5 different ETFs where the overall allocation will be 59% Bond, 39% US Stock and 2% on the rest.
On yearly basis I will continue grow reinforce this ETF portfolio with a planned 50K USD per year in total.

After an initial study, based on performances, risks and costs, I’ve considered the following ETF, all from Vanguard:
VOO
VTI
BND
VCIT
VCSH

Is this a good strategy? Do you see any drawback? Is this a good moment to invest in ETF or would you advice for any better solution?
I’m looking at having an average yearly return around 5%.
Thanks for this great blog and for your answers.
P.

Hi Cangaroo,

I am very curious, why do you want that much bonds in your portfolio?
Especially when rates are expected to be raised in 2017, which mean that mechanically bonds will go down?

You surely have good reasons, but if you want to absolutely invest a lot in bonds, I would make sure that the average duration of the ETF is quite low (it should be written in the prospectus). (The duration is the sensitivity of a bond to a change in interest rates and is expressed in years. If for instance, a bond has a duration of 8 years, it means that a raise of 1% in the interest rates will induce a loss of 8% in the price of the bond. Better have a short duration).

Best regards,

Julianek

Hi Julianek, thanks for the feedback.
To answer your question, there’s not a specific reason to have such bond % in the portfolio.

Few considerations I made are the following:

  • I want to have different composition of my ETF portfolio (so, not only shares or only bonds);
  • I’m still relatively young so I can afford the risk to have a large majority of bonds and shares vs. other less risky instruments;
  • the evaluation I did was to consider the top 5 ETF based on level of risk (feedback from Vanguard and MorningStar), level of yearly and average return and current collection of money done by each ETF;
    In particular:
    VOO and VTI are the one with higher risk ad higher return/loss
    BND is the medium one and VCIT/VCSH are the lowest.

Hope this answer your question
BR

Hi Cangaroo,

For a 15 years investment horizon, in my opinion, it’s definitely better to look beyond a savings account.

  • All the ETFs listed are in USD so unless your daughters plan to spend in USD, the investment is subject to currency exchange rate volatility which may be good or bad. I’d advise to look at historical conversion rates to be sure you’re fine with it.
  • All the ETFs invest in US based assets, what if the rest of the world economy performs well and US lags behind? Are you sure you should put all your eggs on one country?

ETF is just a tool to trade underlying assets such as company stocks, bonds, real estate, commodities etc.
You can ask the opposite question, what if you don’t invest:

  • The bank will invest on your behalf the money from the savings account. By taking the risk on your behalf, they give you a little interest at the end of the year but keep the bigger part for themselves.
  • You will neither collect dividends/interests from stocks/bonds nor take the chance to have your principal grow (capital gain or loss)
  • You’re nearly sure to get back the full amount from the savings account minus inflation.

BND’s short term equivalent is BSV and the intermediate one is BIV.
VCIT/VCSH invest in corporate debt only.

You could look at Larry Swedroe’s advice (elegantly explained on this blog post), which turns the question into how much your principal can shrink before you freak out and sell at loss.

As per morningstar, BND’s last 12 months yield is 2.47% and VOO 12% annual return + 2% Dividends/Yield.
Let’s say you invested 100 USD last January, if my math still work, you would end up with your asset allocation with 590.0247 (1.4573) + 390.12 (4.68) + 39*0.02 (0.78) = 6.9173 before tax, forex/broker fees.
So in theory this can work but I don’t think one can expect VOO to return as much every year for the next 15 years.