Market Musings 220225: A Simple Diversified ETF Portfolio

22nd Feb by Edmund Shing

40 comments 2133 reads

Market Musings 220225:
A simple ETF portfolio

Podcast this week:
Is American exceptionalism here to stay? (click link to listen)

Reasons to believe that the US is exceptional.

The US economy has grown strongly over the last few years thanks to productivity and population growth.
The US is still the largest economy in the world and holds the world’s de facto reserve currency.
The US stock market, led by the S&P 500 index, has outperformed consistently over the past few years, while the US dollar has also strengthened.

The consensus view is: why buy any stock market outside the US? In this paper, I challenge this view.

US economic growth is set to slow.
The level of debt-funded government fiscal stimulus is gigantic and cannot be maintained, given the higher cost of debt.
The valuation of the S&P 500 index has become very extended compared to history.
Four hyperscalers among the Magnificent 7 plan to invest massive amounts in Artificial Intelligence. But how will this affect the return on investment?
The commoditisation of AI will boost economic productivity and accelerate AI adoption in the wider economy.

Conclusion:

Look beyond the US stock market and consider other stock markets: Euro area, UK, Japan, China.
Diversify away from the US technology sector towards other sectors: Financials, Industrials.

What should a model ETF portfolio look like?

This week, I am going to look at a request I have received from a friend of mine, Tony.

Tony has a relatively substantial amount of cash on deposit earning a good rate of interest at the moment, but is faced with lower interest rates in the near future as deposit rates are falling fast in line with the fall in central bank interest rates in the US, UK and Eurozone.

He is therefore looking to invest this money for the longer term to earn rather more than he will be able to get on cash deposits going forwards, but he wants:

a simple ETF-based portfolio which he can invest in for capital growth over the longer term, given that
he is still employed and thus has no immediate need for income from this investment portfolio;
A diversified portfolio that spreads risk and…

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Edmund Shing

23rd Feb

Hi Paul

I feel that 5 is a good number to hold and monitor, more can get tricky in my opinion.

But of course those 5 should not be too similar…

edmund

I think that might be trying to finesse things a bit too much, Colin.

I am a big fan of keeping things really simple where possible.

Paul Walton

Early days as I'm shifting the SIPP over gradually and will have alot more to invest in the coming months/years but over the last month has done 7% in a Europe fund. R squared and Adjusted Slope is calculated in a spreadsheet plus I have a nice little routine in the spreadsheet so I can choose the max etf's I get for each theme or sector

WTT

Thanks Paul

The Phoenix

Great article Edmund two questions if you have time to reply could you recommend a sterling money market ETF and could you (or anyone who knows the answer) explain the optimum time to buy US Tips as my understanding was that you want to be in this asset class when you think inflation has peaked, equally aren't inflation linked bonds the most volatile type of bond ?

Regards

Andy

Agreed if you are dealing in large (ish) amounts the 0.5% on investment trusts is a drag same as you I am moving more into ETF'S.

pka

24th Feb

Hi WTT, you also wrote: "It seems counterintuitive that such a simple approach does so well. But I can believe it and seems far less stress than stocks." I found that my 5-ETF notional Stockopedia folio performed relatively smoothly over the past 16 months with volatility that's much lower than that of a typical all-stock portfolio, and also significantly lower than the volatility of a typical portfolio of investment trusts, so I've found that it's a low stress approach. This is partly because the 30 ETFs that I selected as candidates for my portfolio all have 1-year volatilities (as calculated by the JustETF website) of less than 20%.

eggbaconandbubble

What is an Anamoly??????

BnB

What is an Anamoly?

It’s when something just doesn’t feel rghit

Isn't that an Anomaly!!! ;-)

Look again and see if you get it the second time round

Well, I've Googled Anamoly and no such word exists!

You’re looking at the wrnog word

I was looking up Anamoly as per the text above.

I know what Anomaly means.

You still haven’t got it even with another clue. Would you liek one more?

Yes plaese!!!

:-)

Simon O'dowd

I have SPEP (invest engine) and S5SD (iweb). Both ESG screened. These out perform the S&P 500. They are the same, with the latter providing an income stream. I have these across 3 providers. One provider I use as a topping source, topping with small amounts when the market drops in increasing amounts as the percentage below the all time high increases.

Cun I hvae anohter cule ?

lol!

or is it olo???

Mark Carter

25th Feb

I'd like to add a couple of points that people might find useful.

In order for investors to get the past 14.8% pa for the past decade, they will have to believe that earnings growth will be at least as good and that valuation multiples attached to them must double again. Quite a tall order.

I think America has done many things right in terms of capitalism versus, say, Europe and UK. So America has deserved its success.

But on the other hand, we must remember that "American exceptionalism" is a narrative, and narratives can change. There have been periods of pessimism for America. Countries like China and Japan were once hailed as the future financial global rulers. Even Russia at one point. Imagine that!

I hear questions being asked about American valuations increasingly. Clearly people are perceiving the problem with the Mag 7. It hasn't yet translated much in the way of reratings. Not yet, anyway. I think there's a risk that when the rerating comes, it will be savage. Caveat emptor.

I did hear an interesting opinion on NVDA. Rob Arnott said that NVDA had big margins, which he thought would shrink. So you could see a situation where NVDA's revenues increase handsomely, but margin shrinkage will effectively wipe out those gains.

He might be missing something, though. NVDA design rather than make chips. It's rather like Arm in that respect. So comparing NVDA's margins with say INTC is likely to lead to erroneous conclusions.

Market Musings 220225: A simple diversified ETF portfolio

Market Musings 220225:
A simple ETF portfolio

Podcast this week:
Is American exceptionalism here to stay? (click link to listen)

What should a model ETF portfolio look like?

Unlock the rest of this article with a 14 day trial

About the Author

Edmund Shing

40 comments

Unlock the metrics for all these stocks and more...

Unlock the metrics for all these stocks and more...

Market Musings 220225: A simple diversified ETF portfolio

Market Musings 220225:A simple ETF portfolio

Podcast this week: Is American exceptionalism here to stay? (click link to listen)

What should a model ETF portfolio look like?

Unlock the rest of this article with a 14 day trial

About the Author

Edmund Shing

40 comments

Unlock the metrics for all these stocks and more...

Unlock the metrics for all these stocks and more...

Market Musings 220225:
A simple ETF portfolio

Podcast this week:
Is American exceptionalism here to stay? (click link to listen)