My new core investment portfolio: Sharing my thought process curating it

In my earlier article, I mentioned that I have closed my 4-year old portfolio with AutoWealth with the intention to create a new portfolio on my own. After months of conceptualising and research, I’ve finally narrowed down my selection of low-cost ETFs and the allocations for each of them.

I don’t think my new portfolio is anything mind blowing but I want to caveat readers to absolutely not follow what I have constructed because this portfolio is purely based on my view of the global economy and I’m just another regular retail investor like most of you out there.

But what I want to share in this article, is my thought process in how I ended with the ETFs that I have selected.

How I think of the economy today

Most investors would divide the economy between the developed and developing countries. Developed countries are more industralised and have higher per capita income level while developing countries are typically less industralised and have lower per capita income. China is quite industralised (by my standards) but still considered a developing country because of its low per capita income.

Let’s talk about developed countries

If you examine popular low-cost ETFs like the Vanguard FTSE All-World UCITS ETF USD Acc (VWRA) and iShares Core MSCI World UCITS ETF USD Acc (IWDA), a big chunk of the portfolio allocation is given to the US since is the largest economy across the globe. The rest of the portfolio that is allocated to developed countries is pretty much equally divided the rest of the developed countries across the world.

In my opinion, US would continue to drive the returns (and losses) for developed countries and it makes little difference to your investment returns over the past few years, whether you invested in the rest of the developed countries or not.

But for diversification sake, I have opted to stay invested in other developed countries instead of betting solely on the US to avoid having concentration risk on a single country in my portfolio.

What about developing countries?

Low-cost ETFs that invest in developing countries exhibit the same problem that I have mentioned above about developed countries. If you look at the more popular ETFs like iShares Core MSCI EM IMI UCITS ETF (EIMI), they have a significant allocation to China who has been driving bulk of the growth for these ETFs.

I feel that many of the developing countries are actually dragging the performance of the ETF for different reasons, e.g. political instability, corruption, etc.

Personally, I am less interested in many developing countries such as Russia, Brazil and South Africa because I think they have bigger problems to solve before their countries could progress on the global stage, and that could take many years before growth can be reflected in the stock market.

Therefore I am willing to drop all the developing countries but I am confident in China’s ability to overcome the challenges (both internally and externally) that it faces today.

Do I need bonds in my portfolio?

I have my reservations about bonds. In the current period where low interest rates reign, the bond allocation of my portfolio hasn’t been yielding enough dividends to compensate for inflation and its poor market performance.

With rumours about the Fed raising interest rates, bonds can become even more challenging as older, low-yielding bonds become less attactive and that gets reflected in their market prices.

Bonds are important to an investment portfolio as they can:

1. Reduce the overall volatility of an investment portfolio as they have low correlation to equities
2. Contribute returns to the portfolio through capital appreciation and income distribution

As I am not convinced about holding bonds in my portfolio but am keen to have the benefits that bonds could provide to my portfolio, I am exploring the potential of having bond alternatives in my portfolio that can fulfil some or all of the benefits that bonds bring, but with a better capital/yiekd performance.

My view of the economy shapes my portfolio choices

If everything above sound draggy and boring, here’s the TLDR; version of where we are at in deciding what goes into my portfolio.

What I want in my portfolio	What I am okay to keep in my portfolio	What I don’t want in my portfolio
Equities exposure to United States as they will continue to drive portfolio growth in the next few years Equities exposure to China as I believe they will eventually recover	Equities exposure to Asia Pacific countries, just for diversification purposes Equities exposure to European countries Bond alternatives that have low correlation to equities and have good capital appreciation or income yield	Equities exposure to developing countries like Russia, Brazil and South Africa Traditional bonds that provide low yields and little capital appreciation

What are the ETFs that made it into my portfolio?

Let’s get down to the specifics on what eventually went into my portfolio after so much writing (and research).

For developed countries, the answer was super simple.

One of the more popular ETFs promoted in Hardwarezone and Seedly is iShares Core MSCI World UCITS ETF USD Acc (IWDA) and it fits the bill perfectly since it was able to suit my ‘wants’ and ‘okays’ for equities exposure for developed countries. So that’s sorted for developed countries.

Now when I looked into developing countries, I faced quite a bit of difficulties here where the usual ETFs like iShares Core MSCI EM IMI UCITS ETF (EIMI) as the ETF invests in countries like Brazil and Russia that are in my ‘don’t want’ list. I encountered the same problem with all-encompassing ETFs like FTSE All-World UCITS ETF USD Acc (VWRA) as well.

In order to get what I wanted, I would have to invest in a few ETFs just for exposure into Asia Pacific and China. After thinking about this and weighing the pros and cons, I decided to forgo equities exposure into Asia Pacific and just go focus on China for now. If I come across an ETF that fits the bill in future, I’ll tweak my portfolio then.

As for China, we all know the issues that are happening in the market now and there are risks that the Chinese government may force China companies listed in the US to delist. I also did not want to own American Depositary Receipt (ADR) listed Chinese companies because while the US stock price tracks closely to the price of a company’s domestic shares, it does not grant me ownership rights like a common stock.

I eventually came to the conclusion that the safest way to own China equities is to buy ETFs that hold China A-Shares (public listed companies on Chinese stock exchanges such as the Shenzhen and Shanghai Stock Exchange) and China H-Shares (public listed companies on Hong Kong Stock Exchange).

I decided to hold 2 China ETFs, namely the iShares FTSE China A50 ETF (2823) and iShares Hang Seng Tech ETF (3067).

The iShares FTSE China A50 ETF gives me exposure to the 50 largest companies in mainland China, which forms a decent representation of China’s domestic market while the iShares Hang Seng Tech ETF gives me exposure to 30 Hong Kong listed companies in the technology sector.

In my opinion, both ETFs would be able to cover the China market adequately as a start. As I learn more about the Chinese market, I could tweak my portfolio from there.

For bonds, I decided not to add any of them into my portfolio for now due to the reasons I have mentioned earlier, and to spend more time researching about bond alternatives that suit my needs to taper the volatility of my portfolio later on.

Breaking down my portfolio allocation

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Description	Target Allocation
iShares Core MSCI World UCITS ETF USD Acc (IWDA)	80%
iShares FTSE China A50 ETF (2823)	5%
iShares Hang Seng Tech ETF	5%
Bond Alternatives (To be determined later)	10%