Part 6 - Complete portfolio

The full monty

This post is part of an 8-post series on the construction of my portfolio.

In the previous posts of this series, I set a strategic asset allocation designed to deliver a 6% nominal return during the first 10 years of my retirement. Following that, I selected individual equity, bond, and cash building blocks. Let’s now look at how the entire portfolio stands when fully constructed. This compiles the choices described in the last three posts.

As mentioned before, I go for a granular design with a large number of ETFs. This gives me a lot of control to fulfil the objectives outlined in the first post of this series.

If that is not for you, this post has a simplified version of my portfolio based on the same principles. That portfolio is simpler but very comparable in its characteristics.

Euro exposure

Testing the portfolio, I did not like the Euro exposure (more on that in the next post). I need 40%, and even with optimistic calculations, I could not get close to that. So I decided to sacrifice my almost perfect regional allocation. I added:

Table: Selected ETF

The 2.5% weight in the total portfolio comes at the expense of VanEck Morningstar Developed Markets Dividend Leaders UCITS. This change adds 2.5% to my direct EUR exposure.

I then moved 0.50% from Xtrackers MSCI World ex USA UCITS to State Street® SPDR® S&P® 500 UCITS, to bring the US allocation back up a bit after it had drifted slightly low in the 75% equity sleeve.

Finally, I did some rounding to get to nicer numbers.

Portfolio blueprint

The table below outlines the selected products and absolute weights in my retirement portfolio.

Table: Final portfolio allocation

It is perfectly acceptable to do some rounding if you don’t like decimals and want to keep it simple.

What does it cost?

When relying on a steady 4% withdrawal rate while trying to shield capital from inflation, fees eat directly into retirement income. Every basis point saved stays in the pot. I first asked Gemini to calculate the TER (Total Expense Ratio):

Running the math across the 14 underlying allocations, the weighted average TER for this complete portfolio sits at an acceptable 0.20% per year.

Of course, I also set up a spreadsheet and calculated it myself as well. For a diversified portfolio with specialised assets like physical gold, emerging market debt and some hedging, 20bps is fine.

The costs comes down to balancing two things:

• Cheap core index blocks pull the average down. The SPDR S&P 500 ETF costs just 0.03%, and my broad European exposure via Xtrackers Stoxx Europe 600 is 0.07%.
• Active and targeted dividend strategies cost more. My dividend bucket sits at a blended 0.30%, and the EUR-hedged EM sovereign bond allocation runs 0.50%.

Keeping costs down to that 0.20% baseline matters over a 20-year retirement. BTW, on a €500 000 portfolio, the gap between 0.20% and the 1% a bank might charge is €4 000 a year. Money that stays invested instead of leaving the pot.

My real Euro exposure

In part 1, I set a target: at least 40% EUR or EUR-hedged. Here’s my adjusted portfolio for EUR:

• Xtrackers Physical Gold EUR Hedged ETC (2.50%) - hedges the USD-priced gold back to EUR.
• Xtrackers Stoxx Europe 600 (3.00%) - unhedged European equities.
• Fixed income & cash (17.50%) - Eurozone corporate credit (5%), hedged EM bonds (2.5%), short-term Euro cash (10%).
• Xtrackers Euro Stoxx Quality Dividend UCITS (2.50%) - all Euro exposure.

Direct EUR exposure comes to 25.50%. That doesn’t count the European companies sitting inside my other, non-European funds, which pushes it well over 30%. Not the 40% I wanted, but I will have to live with it for now.

The only way to get more EUR at this stage is hedging, and that’s simply too costly.

Does it tick the boxes?

Does this setup satisfy my retirement rules? Let’s check:

• Return potential: 75% of the portfolio sits in value equities, dividend payers and core market trackers, which should get me more than my 6% nominal return target.
• The remaining 25% - corporate credit (5%), EM sovereign bonds (5%), gold (5%), ultra-short cash (10%) - is there to help if stocks don’t deliver and times are tough.
• Underweight US: by choosing regional blocks and global value strategies tilted away from the US, I’ve kept US exposure well below the market-cap-weighted indices, while getting decent exposure in my two other regions.
• As mentioned, EUR coverage is still a weak point. I might revisit this.

An important note. The 25% invested in other asset classes than stocks should not be seen as a true defensive bucket. The 10% sitting in corporate credit and EM sovereign debt is positively correlated with the stock market. In a real sell-off, credit spreads widen, and EM debt tends to drop right along with equities. Over the long run these assets are more stable than stocks, but they are still risky assets, not a safe harbour.

What is next?

Putting my portfolio together on paper is a good step, but keeping the machine running smoothly through all sorts of different market circumstances is where the real work begins.

But first I need to take a closer look at the predicted performance of my portfolio in part 7. Am I getting my 6% return with a reasonable risk?