Author Topic: Retirement ETF allocation  (Read 826 times)

Peacefulwarrior

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Retirement ETF allocation
« on: November 30, 2018, 01:57:52 PM »
At the danish stock broker I use for my retirement accounts I have put my investing on monthly auto pilot for the last few years. By doing this there is no commission buying every month (I just put 1/12 of the yearly maximum in every month), just the yearly costs to the ETF's. Attached is the ETF's I can choose from. The list is longer but they're sorted from least expensive in yearly costs. So far I have put almost 100% into the iShares Core S&P 500 UCITS ETF. I wonder if I should diversify more. Would you guys recommend other ETF's from the attached list?

Besides those I can actually buy into 4 scandinavian indexes (Denmark, Sweden, Norway and Finland) with 0% fee's. So far I have just put any leftovers into those split evenly.

Any recommendations to optimize this?

flipboard

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Re: Retirement ETF allocation
« Reply #1 on: November 30, 2018, 02:18:08 PM »
My main concern with your current allocation is the home-bias. It's normal for people to do this, but it's generally risky. There are a few countries in the world where home bias has worked out historically, and the Nordics are certainly stable countries - but personally I'd still consider it risky.

The "easy" way to diversify while sticking with your current broker is to just buy world index ETF's. It looks like the "Xtrackers MSCI World" one near the top of the list is probably the cheapest world ETF, note that it's developed world only so adding some emerging markets (approx 10% of overall allocation) might be something to consider if you go down that route.

That ETF also appears to be Ireland domiciled (can't definitively confirm just based on the name though), which is optimal for a total world fund for dividend withholding tax reaons (outside of US domiciled ETF's which aren't available in the EU at this time).

I wouldn't recommend buying just an S&P 500 ETF. Going for single-foreign-country-bias is even riskier than going for home bias. But given that the US is approx 50% of total-world market cap (actually closer to 60% right now, but that's likely to move about), you could just go 50% S&P 500, and 50% rest of the world. But it's hard to assemble a rest-of-the-world portion with the ETF's you have available (you'd have to mix the right proportions of Europe, Pacific, Emerging - which is doable, but only if you're keen for playing with a complicated spreadsheet every time you rebalance). Hence, total-world is easier.

// Edit: I misread your post, and thought you were only buying denmark/sweden/norway/finland. Buying only US is really risky, as I explained above. Definitely diversify, try to at least match a total world index.
« Last Edit: November 30, 2018, 02:20:32 PM by flipboard »

Andy R

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Re: Retirement ETF allocation
« Reply #2 on: November 30, 2018, 07:38:25 PM »
Agree with flipboard, 100% US large caps is unusual for a non-american and carries some unnecessary currency risk especially as you move towards retirement. I would go for an all-world cap-weighted index.

For diversification I stick with global cap weighted. For currency exposure as you get closer to retirement, you would by then want maybe 50% in home currency. By retirement I would expect you to have a more conservative allocation with maybe 30-40% in fixed income which will be in your home currency, and for someone living on Euros, I would expect the 10-20% needed to make up 50% in home currency would already be in the all-world portfolio, so that would take care of both diversification and currency upside and downside risk without any need for either home country equities or currency hedging.

MustacheAndaHalf

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Re: Retirement ETF allocation
« Reply #3 on: November 30, 2018, 08:23:01 PM »
I'd suggest starting with a "world" allocation, and then tilting towards Europe.  Although the names are truncated, it looks like there's an iShares MSCI World UCITS in the list.

Although there's currency risk, try and ignore it.  In general over very long time periods currency fluctuations tend to cancel out.  A currency hedged fund generally just increases expenses without a long-term benefit.

Andy R

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Re: Retirement ETF allocation
« Reply #4 on: November 30, 2018, 09:03:04 PM »
Although there's currency risk, try and ignore it.  In general over very long time periods currency fluctuations tend to cancel out.  A currency hedged fund generally just increases expenses without a long-term benefit.

In draw-down for a specific individual, it doesn't help that in the long term fluctuations cancel out.
You are drawing down when the currency has moved and you now have an added sequence of currency risk of similar magnitude added on top of market based sequence of return risk.
The Australian dollar vs the USD more than doubled from 2000 to 2011 and now almost 2 decades later is still 1.5x. The fact that currency fluctuations even out over long periods is not going to help an individual that has drawn down 8% instead of 4% over many years, or 16% if both market and currency risks eventuate at the same time.
Having said that, unless you are nearing retirement I think it has little to no importance or relevance.

Peacefulwarrior

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Re: Retirement ETF allocation
« Reply #5 on: December 01, 2018, 12:31:23 PM »
Thanks a lot everyone for helping me out. I just did the calculations and currently it's 92% S&P500 and 8% Scandinavian indexes. Added together the Scandinavian indexes is made up of 140 companies, so they are small indexes. I looked into the world index  on the list as many of you suggested.

The cheapest world index is called Xtrackers MSCI World UCITS ETF (MSCI Total Return Net World Index) with 0,19% expense rate. The second cheapest option is called iShares Core MSCI World UCITS ETF (MSCI World Index) with a 0,20% expense rate. They are both based in Ireland. Which one would you choose?

By the way I'm "only" 32, and can not access the retirement accounts until I'm 68, so there's plenty of time for my money to grow in a more ideal scenario.
« Last Edit: December 01, 2018, 12:34:14 PM by Peacefulwarrior »

Andy R

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Re: Retirement ETF allocation
« Reply #6 on: December 01, 2018, 06:39:19 PM »
Think of the entire investable market as

Developed countries - large, mid, small
Emerging countries - large, mid, small

Both the ones you mentioned appear to be MSCI developed large & mid cap companies.

You might consider adding in emerging markets and/or developed small caps.
That is the entire worlds invest able markets and if you include both by market cap proportions it would be this
75% developed large/mid cap
15% developed small cap
10% emerging

It doesn't really make a huge amount of difference to leave out one, but I might try avoid leaving out both because of diversification plus your long time horizon, but even if you leave out both, it's not terrible or anything.