Investment: This is how an ETF portfolio is created that requires little work

Munich. Nikolas Kreuz dispels a myth that, in his words, has become entrenched among many people who are not financial professionals: “Anything that brings returns must also be complicated.” The head of the Hamburg asset management company Invios believes the opposite is true.

“A simple, easy-care depot is not a solution for dummies and certainly not a solution for convenience,” says Kreuz. It is the investor's most effective protection against his own impulses. This means that anyone who lets the broad market “just do its thing” will not be tempted to try to get more returns from individual investments.

Handelsblatt asked asset managers, experts from ETF houses and a financial planner which ETFs belong in a simple and long-term portfolio. The experts also explain how risk-taking, balanced and security-conscious investors can position themselves. The result is a four-step guide for anyone who has long been concerned about their money or wants to tidy up their portfolio.

Step 1: What investment type am I?

Before setting up a portfolio, investors should answer three questions. According to Frederick Fischer from the Invesco fund house, they are: How long can the money stay invested? How does the portfolio fit into the overall financial situation? And: How much loss are you willing to bear in difficult market phases? This results in three keywords.

The investment horizon: If the capital can remain invested for decades, shares are the first choice, according to Fischer. With a shorter investment horizon, the share of stocks should be lower. Andreas Beck from the investment consultancy Index Capital advises that if you have an investment horizon of less than seven years, you should practically avoid stocks entirely and instead invest in bonds. For a few years or even months, investors should choose fixed-term deposits or current account accounts.

The overall financial picture: If the portfolio is part of the total assets alongside a well-filled fixed-term deposit account, the expectation of a high company pension, rental income or a self-used debt-free property, shares can have a high weight in the portfolio. The prerequisite is a sufficient investment horizon.

Risk tolerance: “It's no use putting too many shares in the portfolio of a person who doesn't sleep well when the portfolio is 30 percent in the red,” says Marcel Reyers from the financial planners' association FPSB. In his experience, however, a quarter to a third of shares belong in every long-term portfolio. Finally, stock returns can beat inflation over the long run.

The answers to these questions essentially determine whether the portfolio can be set up as risk-taking, balanced or security-oriented. Offensive investors can rely entirely or almost entirely on stocks. According to experts, people who want to combine stocks with the security of bonds should hold 60 percent stocks and 40 percent bonds. People who are more security-conscious should combine 30 percent stocks with 70 percent bonds.

Step 2: Why less is more

“A depot for people who want to worry about as little as possible when investing works like an old diesel engine: few parts, hardly any maintenance, and yet it runs 400,000 kilometers,” says Roland Schmack from the Münster-based asset management My Values. To build such a “diesel engine”, ETFs are Schmack’s first choice – but only very few.

According to Kreuz, several different ETFs simply create more effort to keep an eye on the portfolio. There is also a risk of cluster risks, for example with thematic ETFs. These products often only come onto the market when trends such as investments in armaments or hydrogen have already become established. Investors with a defense ETF and an ETF on the Dax have more Rheinmetall in their portfolio than they would like.

Step 3: Which ETFs are the right ones

Daniel Kanzler from the asset management company Gerd Kommer Invest advises: The broader you invest, the better. Specifically, this means choosing an ETF that tracks the global stock market. Such world ETFs are the first choice for the share of stocks in a portfolio. From the experts' perspective, these are the most important world ETFs:

Unlike the MSCI World, which only contains stocks from industrialized countries, the MSCI ACWI also reflects emerging markets. The weighting of the total of around 2,400 stocks is based on market capitalization. This ensures that US stocks make up 64 percent of the index. The five largest stocks – Nvidia, Apple, Microsoft, Amazon and Alphabet – account for 18 percent of the index. For comparison: 73 percent of the stocks in the MSCI World are US, and the top five account for a good 20 percent.

The FTSE All-World is the counterpart to the MSCI ACWI. It is even broader with 4,000 stocks from industrialized and emerging countries. However, the weight of US stocks and the five largest companies in the index is comparable.

The FTSE Global All Cap Index represents around 10,000 stocks. It also includes smaller companies from all over the world. Only six out of ten stocks in this world index come from the USA. The world's five largest companies by market capitalization make up 15 percent of the index.

In the words of Frederick Fischer, investors should not be guided by the sheer number of stocks in an index. From his point of view, it is important to have emerging markets in the portfolio alongside the industrialized countries. In recent years, the indices that also include emerging markets have performed somewhat worse than the MSCI World. In the long term, however, according to Fischer, it was more worthwhile to invest in industrialized and emerging countries.

When it comes to bonds, experts are a little more cautious when it comes to the number of bonds in the ETF. What matters here is the creditworthiness of the debtor. With bonds from many industrialized countries, the risk that investors will not see their money again is considered to be lower than with most emerging markets.

Experts' opinions differ when it comes to corporate bonds. Thomas Kruse from Europe's largest ETF house Amundi now prefers bonds from large, successful companies to those of many countries.

When it comes to bond ETFs, financial planner Reyers generally recommends making sure that the ETF is issued in euros. Then there are no currency fluctuations in the depot. These can sometimes ensure that an ETF gains perhaps 20 percent, but only makes a profit of ten percent due to an unfavorable exchange rate between the euro and the dollar.

Many ETFs that are quoted in dollars are now also available with a “Euro hedge”. In this case, to put it simply, the foreign currency risk is excluded through derivatives, which makes the ETF somewhat more expensive.

Most stock and bond ETFs cost around 0.3 percent of the invested amount, sometimes even less. The competition is enormous, says Reyers.

In addition to stock and bond ETFs, there are also ETFs that combine both asset classes. iShares, the ETF subsidiary of the world's largest asset manager Blackrock, offers model portfolios. The ETF house Vanguard also has ETFs that combine both asset classes.

There are also products that represent an entire portfolio including raw materials in an ETF. This includes the “Arero”, which was created by the now emeritus finance professor Martin Weber.

Step 4: Maintain the portfolio - buying and holding is important, but...

“Buy stocks and go to sleep.” People who heed this motto from stock market veteran André Kostolany avoid a big mistake: They don't sell when there is bad news, even though they actually wanted to stay invested for years or even decades.

But only a few investors can actually afford to stubbornly buy and hold. This also applies to people whose portfolio consists 100 percent of stocks. Because they run the risk that an index in which they invest becomes too “top-heavy”.

This is also one of the reasons why the experts surveyed do not recommend the MSCI World. The global industrialized countries index contains the shares of a good 1,400 companies. But five of them alone account for around 25 percent of the market value, and all five come from the same industry.

In the case of broader ETFs such as those on the FTSE All World, the five largest stock companies also have a relatively high weight. According to the experts, this is still within limits.

According to financial planner Reyers, only people who have more than two decades left before they need the money can afford to buy and hold on. Because over the years, even heavily “clumped” indices balanced each other out. Until the 1990s, Japanese stocks made up almost 40 percent of the MSCI World, but today they only make up eight percent of the index.

According to Roland Schmack, if a portfolio consists of stocks and bonds, it is mandatory to check them regularly. He refers to a portfolio that consists of 60 percent stocks and 40 percent bonds. “If stocks rise by 20 percent annually for three years and bonds by two percent, the equity quota grows from 60 to a good 70 percent – ​​without a single order.”

His tip: "Treat the weighting of your depot like the heating in the house. The thermostat doesn't react to every half degree, but only when it becomes noticeably too warm or too cold." This means that nothing happens between 55 and 65 percent equity quota. Only when the quota leaves this corridor should investors buy or sell.

In order to avoid cluster risks in the portfolio, Felix Rohse from the asset management company of the same name in Hamburg recommends paying attention to equally weighted variants for large ETFs. This means that companies that, like Nvidia, have a market value of several trillion euros have the same weight in the index as companies whose shares total “only” ten billion euros.