If you had to pick just one core investment what would that be?
Over the years of investing I’ve accumulated many types of assets – stocks, bonds, ETFs, cryptocurrencies, etc. Conventional wisdom recommends diversification and having an asset allocation plan.
However, not everyone has the time, knowledge, or willingness to manage multiple investments on a regular basis. Most of us have better things to do (I hope!), like having a life.
In fact, if you perceive investing to be overly complex because of the many options out there, you’re not wrong. But that should not stop you from putting your money to work. Sometimes it feels like the finance industry overcomplicates investing to convince us to pay them to manage our money (and take a cut for it).
One of my financial goals this year is to simplify my investing strategy. The aim is to reduce complexity and reduce time spent on managing my investments.
The goal of this exercise is to find a simple, low-maintenance, low-fee investment that still provides a decent return. Sounds like a dream?
Personally, my own portfolio looks overly complex. I plan to write another post on my asset allocation and portfolio structure later on so do subscribe if you would like to be notified whenever I post.
Today however, I wanted to share my thoughts on which one of my investments I consider my absolute core holding. If I went to the extreme of simplifying my portfolio to just one holding, this would be it.
Table of Contents
An ETF That Owns The World
That investment is none other than the Vanguard Total World Stock ETF (Ticker: VT). VT essentially invests in shares of any listed company in the world. The world is your oyster. VT tracks the FTSE Global All Cap Index, which is a market-capitalization weighted index holding more than 9,000 stocks globally.
Note that ~60% of the ETF is invested in North America (mainly U.S.) and 8 of the top 10 constituents are American companies, so ETF performance is largely tied to the performance of U.S. stocks.
That said, investing in VT for the long-term means that you don’t have to worry about whether American companies will continue to dominate in the future.
For example, if China overtakes the U.S. and Chinese companies market caps grow bigger than their American counterparts, the index will automatically be adjusted to gain more exposure to those Chinese companies and reduce exposure accordingly to American ones. All this is done for you by the index provider and replicated by the ETF manager, with no action required on your part. That’s the beauty of an ETF that tracks a broad-market index.
Interestingly, if you study historical data on the largest companies by market cap over the years, American companies only started truly dominating the rankings not too long ago. In fact, Chinese companies briefly took over some top spots during the 2009 financial crisis as shown in this visual by Visual Capitalist (extract below).
At the moment, there’s a lot of uncertainty and negative sentiment around Chinese stocks and positive sentiment around U.S. stocks but that may not continue to be the case in the future.
In addition, VT is extremely diversified with more than 9,000 stocks globally and top 10 constituents only making up 13% of ETF holdings, so that helps to reduce risk versus holding individual stocks. Even the #1 holding Apple (AAPL) only takes up a 2.8% weight, so VT won’t decline massively should any single stock implode. An overall market decline though, is a different story.
Steady As She Goes
The greatest benefit to investors from broad diversification is lower volatility, and generally lower risk than owning individual stocks. If any one of constituent stocks in the ETF experiences a large decline, the overall ETF value declines much less according to that particular stock’s weight.
Taking Apple (Ticker: AAPL) stock for example, AAPL has provided spectacular returns in excess of 1,200% at CAGR of 28% over the past decade. But AAPL also had massive drawdowns, some instances being a -40% drawdown in June 2013, a -30% drawdown in December 2018, and -27% drawdown in April 2016.
In comparison, the max drawdown for VT was only -22% drawdown in January 2020. On the flipside, VT returned a much lower 300% over the same period.
So although returns might be much lower than owning individual stocks, the journey over the long term is smoother with smaller drawdowns along the ride. No one likes to see their portfolio down -20% and might even start reaching for the sell button by then. However by selling during large drawdowns, investors might be selling at huge losses at or close to the market bottom.
One underappreciated benefit of diversification through broad-market ETFs is also the potential clarity of mind and emotional stability it can offer investors especially when the market inevitably has its bouts of insanity and everyone is losing their heads.
How Much Return is Enough?
Great, so VT can provide diversification and stability benefits, but can it provide adequate returns? Well, that depends on your personal goals and is unique to every individual.
Based on results from the Backtest Portfolio function in Portfolio Visualizer, the rolling annualized return over a 10-year rolling period for VT ranges from 6-13% and averages around 9%.
If we plug this 9% average return into any calculator (I used this one from investor.gov), we can potentially achieve $1 million in 25 years by investing $1,000 into VT every month. Of course this is just a simple calculator and outcomes will vary, but it is mathematically possible.
The question is of course is this sufficient return for you. If it’s not, are you willing to take on more risk for the potential of higher returns? If you’ve been investing for some time now, have you been able to achieve similar returns consistently? No one can answer those question except yourself.
What VT can provide is average market returns, at somewhat manageable risk in my personal opinion. If you’re not even invested in the stock market yet and keeping your investable cash in low-interest yielding bank accounts, VT could be a good option. If you’re currently invested in high risk individual stocks and want to manage your risk, adding VT could be a possibility as well.
Similar ETFs
ACWI
The iShares MSCI ACWI ETF (Ticker: ACWI) is very similar to VT in that it aims to provide access to the global stock market in one fund. ACWI tracks the MSCI ACWI index instead of the FTSE Global All Cap index that VT tracks. The top 10 holdings are the same, maybe with different weights. Intent and purpose is the same. Performance is also almost identical (see chart below). I don’t usually get caught up in comparisons, but you’re welcome to dig further if that’s your thing. I just happened to pick VT.
SPY/VOO/QQQ
The SPDR S&P 500 ETF (Ticker: SPY) and Vanguard S&P 500 ETF (Ticker: VOO) are basically the ETFs tracking the same index, the S&P 500. The Invesco QQQ ETF (Ticker: QQQ) tracks the Nasdaq 100 index. If you prefer to just track the U.S. stock markets, these might be the ETFs for you. Both have outperformed VT over the past 5 years (see chart below).
VT’s underperformance is likely attributed to markets in the rest of the world lagging the U.S. stock market. Also in the charts is the Vanguard FTSE Europe ETF (Ticker: VGK) which has underperformed the S&P 500 significantly. As I mentioned previously, investing in VT frees you from having to rebalance into markets outside the U.S. if U.S. stocks eventually start to lag the rest of the world.
Final Thoughts
For newer investors who are just starting out or investors who just want to earn higher long term returns vs bank account interest rates but do not want to spend much time actively trading stocks, VT could be a great fit at least as a start.
VT offers decent returns and lower volatility than owning individual stocks through broad global diversification. This could be the difference that keeps investors in the market instead of panic-selling during market crashes or corrections.
I’m not fully invested in VT of course, I’m too much of an amateur investor to just be in one investment. However, after tracking how my portfolio has been doing over the past few years, I’ve come to the conclusion that I need to first at least match the average market returns.
Our Family Portfolio has sadly only achieved a CAGR of 3% to date, mainly because of just a handful of bad investments that have wiped out all my realized gains from previous years, and substantial exposure to Singapore stocks which have been stagnant over the long term.
Currently VT only accounts for 10% of our portfolio, but I intend to increase that to as much as 20%. Other ETFs I’m also adding exposure to Invesco QQQ Trust (QQQ) and ARK Innovation ETF (ARKK) to increase my exposure to U.S. tech stocks which I’m bullish on for the long-term. Concurrently, I’ve been reducing exposure to the Singapore STI ETF (SGX:G3B).
My strategy has been to use broad-market ETFs as core holdings taking up the bulk of the portfolio to achieve average returns, and to supplement the portfolio with themed ETFs, individual stocks or alternative assets to provide some potential alpha or outperformance.
Greater exposure to broad-market ETFs like VT also fits into my goal of reducing the time spent in managing my investments, since it is a pretty passive investment vehicle.
What is your absolute core holding? What do you think about VT?
References
- 4 ETFs that own the world – MarketWatch
- VT – Vanguard Total World Stock ETF | Vanguard
- iShares MSCI ACWI ETF | ACWI
- SPY: SPDR® S&P 500® ETF Trust (ssga.com)
- VOO – Vanguard S&P 500 ETF | Vanguard
- Invesco QQQ ETF
Disclosure: I’m long VT, QQQ, ARKK, and SGX:G3B
Disclaimer: This is not financial advice. I am not professional financial advisor nor do I work in the finance industry. Anything I write here is purely my personal opinion. Please do your own research and due diligence before investing into anything. All investments come with associated risks. Best to consult a financial advisor if you’re still unsure.
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