2018 has come to an end, and I am very excited for 2019, now that I am beginning to implement my All Seasons Portfolio from scratch. During January, I have made my first investment, and can also share one lesson of this experience which teaches the value of diversification and investing in index funds. Let’s also take a moment to think about how to invest if you can only spare small sums each month. But more on that further down in this article. Let’s begin with my first investment.
When starting to implement a portfolio strategy containing several assets, it may appear a challenge to decide where to begin – i.e. which asset to buy first. When making additional purchases down the road when the portfolio is up and running is more straight forward, but how to make that first purchase?
So, I am looking to have portfolio split into the pie chart here below, containing intermediate-term and long-term government bonds, stocks, corporate bonds, gold and commodities. In the long run, it will not matter where to begin, as the most important part of investing is getting started.
I chose to start off my portfolio by adding to the gray field above – long-term government bonds. I made this decision based on two main aspects, one of which taught me a very valuable lesson. Nevertheless, I went with an ETF investing in long-term American Treasury Bonds, namely iShares $ Treasury Bond 7-10yr UCITS ETF USD (Dist) (EUR), in which I managed to invest approximately € 335.
By end of January, I therefore had the below portfolio, which I will continue to develop month-by-month.
|Asset||Value end of month|
|iShares $ Treasury Bond 7-10yr UCITS ETF USD (Dist) (EUR)||€ 335.53|
Choice of Investment
But why did I choose the long-term government bonds for my first investment? The main driver in my decision was that I previously hold certain amounts invested in stock, and my overall assets are therefore quite heavily exposed to the stock market. All though my All Seasons Portfolio will be living a separate life from my other assets, I deemed it wise to diversify by starting off with bonds.
The second reason, was also the lesson learned of investing – it is impossible to predict the future development of the stock market. One aspect in my decision making was how the stock market had developed in December 2018 and the outlook for the first quarter of 2019. To be honest, I was tempted to start off my portfolio by investing in a stock ETF, but with a lot of uncertainty by end of 2018, I chose otherwise. I mean, both Brexit and potential trade war between Trump and China were making headlines in December and January, which quite frankly put me off from investing in stocks that had been slumping in the end of the year.
As I am writing this post in arrears at a later date, I now have seen the fears were wrong – the stock markets have seen one of its best first quarters in many many years – the S&P 500, was up 13.1% and European stocks were up more than 10%. By making this investment decision, I therefore missed that bull market (ouch), but investing in hindsight back in time is always easy when you know the outcome.
I maintain it was a wise decision back in January to avoid the stock market, as it would have added more risk to my portfolio. It is impossible to know what direction the stock market will develop, and which individual stocks will perform well. A balanced and diversified portfolio and investing in index-tracking ETFs will be the main driver of value.
How much should I invest each month?
One important question is how much to invest each time and how much to allocate to each ETF?
A good rule of thumb, is to invest about 10% of one’s monthly income. I know, it is not always possible, and if you could only spare about 3-5%, that is fine too. The important thing is to keep setting off some money every month and to have it as a habit. For me, my aim is to add about €300 to my portfolio every month.
But how to use the funds every month and how to fill up on each part of the portfolio? Should you always add up on all bonds, stocks, gold and commodities every time, or invest in one of them each month? Here you need to take transaction costs into account when making the decision.
I will be buying one ETF each month for my €300, instead of splitting the same amount on e.g. 5 ETFs. The reason is that my transaction fees are currently €2 per transaction, which means that I now only pay €2 each month instead of €10 (0.67% vs. 3.33% of the capital) – a huge difference if you repeat the same method every month.
Therefore, I will be adding into one ETF each month, trying to fill up assets as needed to try to achieve the asset split shown in the pie chart further up.
What if you can only invest for example €50 per month?
You should always keep a close eye to transaction fees, and minimize these as much as possible. Internet brokers have really democratized investing my lowering the costs involved and making smaller investments possible, but it is not always good to invest too small amounts.
Depending on your broker, you may want to accumulate some money to your investment account before you buy an ETF if the transaction costs would be substantial in percentage. My broker has a €2 transaction fee, meaning that an investment of €50 means the value would need to increase 8% before I am break-even net of costs (2 * €2 / 50) (remember the same fee applies to selling as well, not only when buying). In such case – consider setting aside €50 per month into your investment account to be held in cash, but only making a purchase every other month to counter the impact of fees. By waiting one month extra, you would half your fees from 8% to 4% before you are break-even, way better.
All in all, I think this summarizes my thoughts with this first investment. It feels good to have gotten started, and I am looking forward to next month to keep adding to my portfolio. See you again in February for the next monthly update. I will try to have these updates posted within a week after the end of each month. In the meantime, please feel free to add a comment here below.
Want to find inspiration for your All Seasons Portfolio? Head over to the ETF Portfolio Suggestions page to find suggested ETF’s to begin with.