How To Put Together An Almost Unbeatable Etf Portfolio

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The optimal ETF portfolio only exists in theory – unfortunately. But with a simple diversification rule, portfolios can be constructed that come very close to the unattainable ideal. A passive portfolio of exchange-traded index funds (ETF) is typically the safest choice for private investors who wish to handle their assets on their own. It is easy to manage such an ETF portfolio and delivers reasonably high potential returns because the costs are low. With only a few ETFs that map various asset groups, strong diversification can be accomplished. This encourages investors with little resources to take advantage of the benefits of diversifying risk. For example, with only 6,000 dollars you can construct a portfolio of four ETFs that is economical on the one hand and minimizes fluctuations in value on the other. But before you start putting together your personal ETF portfolio, you first have to decide what risk you want to take. The question is how much of your capital you want to divide into safe and riskier investments. With a passive portfolio, this is crucial for the return. The Asset Allocation guide explains how to find the right balance. You should then find out about the individual asset classes that are suitable for your portfolio.

Small positions have little impact on an ETF portfolio

In addition to the transaction costs, there are other reasons why an ETF portfolio should not consist of too many positions: The lower the weight of an individual ETF, the lower the impact on the overall result. In the following table you can see the percentage by which an investment with a certain portfolio share must increase in order for it to move the entire portfolio significantly.

How should investors weight their ETF portfolio?

After you have decided on the asset classes that you want to include in your ETF portfolio, the question of the best weighting arises, which torments many investors throughout their lives. Should some positions be larger and others smaller, and if so, which ones?

In theory, there is no such thing as THE best ETF portfolio, but a large number. What is efficient for an individual investor depends on their preferences. If an investor wants a return of 8 percent annually, the portfolio is the best from his point of view that delivers this return with the lowest risk. Another investor could choose a maximum fluctuation range that should not be exceeded. The portfolio with the chosen volatility that brings the highest return would be optimal for him. The composition of optimal portfolios changes with the investment universe from which investors can assemble their portfolio. For example, very wealthy investors can include asset classes to which small investors have no access. This includes private equity, for example . Anyone who wants to invest in such funds must deposit at least 250,000 dollars If the portfolio share is to be a maximum of 20 percent, assets of at least 1.25 million dollars  would be necessary to raise a private equity fund.

Efficient portfolios only exist in theory

Unfortunately, efficient portfolios only exist in theory. In practice, they are out of reach. It is possible to calculate in retrospect which portfolios would have been optimal. But it is not possible to determine with certainty which ETF portfolios will be efficient in the future. In order to calculate efficient portfolios, the returns, the volatilities and the correlations of the individual components must be known. But nobody knows in advance exactly how individual stock, bond and commodity markets will develop. That is why experts value these key figures. But most of the time these expectations do not materialize. The estimation errors in turn lead to portfolio compositions that are anything but optimal and sometimes deliver poor returns.

How much maintenance does an ETF portfolio need?

After you have decided on a suitable portfolio mix, you need to select ETFs on the corresponding indices. You don’t have to go with the indexes we suggested. There are usually several indices from competing providers for each asset class. Although they differ in detail, they largely serve the same purpose. You can read about how you should proceed when selecting ETFs in our article on ETF comparison. But you can also follow our ETF recommendations. We have selected the best ETFs for seven of the asset classes used here. Once you have set up your equally weighted ETF portfolio with your custodian bank, you can sit back and relax. A passive buy-and-hold portfolio will provide a good return over the long term as long as the world doesn’t end, and it’s little work. You can just let it go. Because the prices of the individual components will develop differently, you should regularly reset your portfolio to the starting weighting. Once a year is enough.In the case of small depots, however, it is hardly worthwhile to restore the equal weighting with reallocations even with inexpensive online brokers. Because for that you would have to carry out many small transactions. This causes disproportionately high costs. In such cases, only rebalance when adding to your portfolio. This keeps costs down and you do not have to pay taxes on realized profits as with reallocations.

Hello, I have been working as an investment consultant and author for more than 20 years. I love what I do and I have enriched everyone around me. A lot of money is not important, the main thing is how you use the money.

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