Across this website, I’ve urged people to use diversification in their asset allocations, explained why diversification is a free lunch, and why you should have international diversification. But fortunately, there’s a few really easy ways to get all the diversification you could need in your investment portfolio as there’s a few funds that make this extremely easy and simple to do.
The goal with diversification is simply to get better risk adjusted returns without losing out on the market’s gain. Global diversification does this. And it’s why I typically recommend going with a global index fund like Vanguard Total World Stock Index Fund (VT). If you need bonds in your portfolio you can also opt to have the Vanguard Total World Bond ETF (BNDW) in your portfolio. This is what I recommended in choosing between a two or three fund portfolio. But broad diversification can also be bought into easily with a few other funds.
In my prior example those are among the lowest cost and easiest funds to use for global diversification. However, on the stock front you also could combine the Vanguard Total Stock Market Index ETF (VTI) and the Vanguard Total International Stock Index Fund ETF (VXUS) in proportions similar to the market capitalization of America vs the International market or in your own desired proportions. Currently, if you want a global market cap weighted index fund made out of VTI and VXUS, you should hold around 55% of VTI and 45% VXUS. If this is the route you choose, you’ll see a slightly lower expense ratio as VT has an expense ratio of 0.08 while VTI has one of 0.03 and VXUS has an expense ratio of 0.08. However, if you like simplicity, I’d go with VT over. I personally love the simplicity that VT provides and urge people to opt for that one. Further, one more consideration is that VXUS, if possible, should be put into a taxable account. VXUS has a foreign tax credit that can be beneficial to receive. Again, it’s not really that big of a deal, but if you’re attempting to optimize for tax reasons, that’s a consideration.
Some other recommendations for global diversification
If, for some reason, you don’t want either VT or VXUS/VTI, here are some other options.
The iShares MSCI World ETF (URTH), owns roughly 1,225 companies and allocates 65% of its holdings to U.S. companies and the remainder to global equities.
The iShares MSCI ACWI ETF (ACWI) owns roughly 2,300 large- and mid-cap equities in developed markets along with emerging markets. Along with broad diversification, investors also enjoy a recent 1.7% yield.
The bond portion of the two-fund portfolio also offers an array of options.
The iShares Core US Aggregate Bond ETF (AGG) is one of the most popular diversified bond funds. AGG owns 8,244 distinct bonds and includes 69% AAA rated bonds.
Those interested in higher global bond yields might consider the Vanguard Total International Bond ETF (BNDX). Investors should note that BNDX only allocates 3.4% to the U.S. bond market.
When choosing the specific funds, there are several factors to consider. Typically, there’s an inverse relationship between expenses and returns. This means investors should consider index funds with lower expense ratios. Personal preference may come into play when allocating percentages of U.S. versus global assets.
After choosing the two best funds for your needs, consider your preferred asset allocation.
There’s a lot of global stock index funds out there if you’re wishing to get a broader, and more diversified portfolio. I’d urge people to diversify into both index funds and into global market index funds as being under diversified is often costly to most investors . All of the funds mentioned above can be accessed using m1 finance (you’ll get an extra $10 dollars with the referral link) it’s a great platform for long term investing. And finally, if you’re looking for further ways to enhance returns check out our high risk and ultra-high risk newsletter.
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