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9 lazy ETF portfolios for UK investors

Posted By The Investor On In Investing | Comments Disabled

Update: We have a much newer and shinier and up-to-date version of this article on lazy portfolios for UK investors [1]. Click the link to read it!

Most investors — even those who pick shares [2] and should know better — would do well to get their stock market exposure via cheap index trackers [3].

Invest via an exchange-traded fund (ETF) – which are basically index trackers you can buy and sell on the stock market – and you’ll also benefit from lower annual charges and the freedom to sell in an instant.

Buy a few ETFs to cover several asset classes [4] and you can create a diversified ETF portfolio [5] in less than 15 minutes!

With dealing costs of under £100 and no stamp duty to pay on ETFs, creating your ETF portfolio will cost you a tiny fraction of what a private wealth manager or full service broker would charge, and the chances are you’ll do just as well over time — likely better, considering the ETF portfolio’s low costs.

If you rebalance your holdings annually [6] – cheap and easy with ETF portfolios — then you’ll manage your state-of-the-art portfolio in less time than it takes to eat your Christmas turkey.

The big decision is what to hold in your ETF portfolio.

Understand there is no perfect portfolio [7]. Complex asset allocation strategies aren’t proven to be more effective than rough-and-ready ones.

Instead, numerous writers have offered their own version of the lazy ETF portfolio. Each claims to deliver most of the diversification benefits that ETFs can offer [8] for minimal time, effort, and/or cost.

In this post I’ll outline nine such ETF portfolios for UK investors.

I’m even lazier though, and I’m basing this article on one the Oblivious Investor blog first ran that used US ETFs [9]. The author, Mike Piper, has kindly allowed me to riff off his piece (I think he’s relieved to see me not raving about banks [10] again!)

If you’re a North American investor you should definitely check out Mike’s article [9] for the US originals.

Some notes on creating a UK ETF portfolio

Using investment trusts definitely increases risk, due to how investment trusts can trade at a discount, and how they can diverge from market returns. My other options were to go for Euro- or Dollar-denominated ETFs, introducing more currency risk [13], to suggest managed funds and higher fees, or to change the portfolios.

I like investment trusts, especially those I’ve picked, but I accept their use isn’t ideal here. (Don’t blame me: Write to iShares!)

1. Allan Roth’s Second Grader ETF Portfolio [14]

With 90% in stocks, this is an ETF portfolio for younger investors. Roth likes ETFs because they’re simple and cheap. He thinks adults over-complicate things.

The US version uses just one bond ETF that tracks the whole market. The only iShares equivalent is Euro-denominated, so I’ve split the holding across two Sterling ETFs to do the full job.

(If you’re a purist, split the corporate bond holding again between ISXF and SLXX to get the financials in the latter).

2. David Swensen’s [15] Ivy League ETF Portfolio

I’ve previously posted an Ivy League ETF portfolio [16] in detail.

This time I’ve split the 30% weighting to domestic shares between the FTSE 100 and the UK mid-caps. You could do the same for the Roth portfolio above if you like.

Note the absence of corporate bonds; Swensen doesn’t like them.

3. Rick Ferri’s Core Four ETF Portfolio [17]

Ferri says you only need a few asset classes before you get diminishing returns. I’ve had to add a fifth Beatle to his core four to cover the UK bond market.

4. Bill Schultheis’ Coffeehouse ETF Portfolio [18]

I love the clean 10% breaks in this ETF portfolio.

Schultheis’ believes it’s more fun to loaf about drinking coffee than worry about the markets. For most people he’s probably right.

Note the use of investment trusts in my version of his ETF portfolio.

I’ve chosen the Edinburgh Investment Trust to substitute for a Value-based ETF; iShares has a Euro-based value one, but no Sterling one. EDIN is run by renowned manager Neil Woodford and pays around 6% a year. It does have a tiny bit of debt though. I’m confident it fills the gap.

The two small cap trusts are riskier. The BlackRock trust is a general small cap picker, the Aberforth Trust has a distinct value-ish tilt.

These trusts will increase the volatility of your ETF portfolio, and the potential for market out- or under-performance.

Finally, there’s the usual drill of splitting bonds across the two UK ETFs.

5. Larry Swedroe’s Big Rocks ETF Portfolio [19]

This ETF portfolio seemed fussy in the US version; the UK one is a dog’s dinner.

You should know that I’ve taken extra liberties, due to the lack of ex-UK global dividend or small cap value options.

I think my choices get across what Swedroe is looking for in terms of adding some international diversity and focusing on dividends and smaller companies, but it’s not a great match-up with the all-ETF equivalent.

6. Harry Browne’s Permanent ETF Portfolio [20]

Browne’s Permanent Portfolio is getting a lot of attention these days, doubtless due to the huge rise in the price of gold; I don’t remember hearing about it between 1985 and 2000, when gold was in a bear market!

My cynicism aside, there’s no denying this is a simple and diversified ETF portfolio, with gold adding something extra if you fear for paper currencies (in which case you should probably hold gold in your cellar).

I’ve used a non-iShares ETF; PHGP is backed by bullion, rather than just contracts.

7. William Bernstein’s [21] No Brainer ETF Portfolio

Another one for risk-taking investors in their 20s, 30s and young-at-heart 40s, though I’d probably ditch the corporate bond holding and go for 25% government bonds myself.

8. Harry Markowitz’s [22] ‘In Real Life’ ETF Portfolio

For fun, Mike included this ETF portfolio in honour of the Nobel prize winning father of Modern Portfolio Theory.

When once asked how he invested, Markowitz said: “I should have computed the historical co-variances of the asset classes and drawn an efficient frontier…Instead, I split my contributions 50/50 between bonds and equities.”

Further proof, if you need it, that complex allocation is for the classroom, not the real world.

9. Ben Graham’s [23] ‘Mr Market’ beating ETF portfolio

Note: The allocations can only add up to 100%! (E.g. 30% ISF and 70% IGLT).

As the ultimate Oblivious Investor [24], Mike couldn’t include a Benjamin Graham ETF portfolio, since the latter believed it might be profitable to vary your equity/bond holdings depending on the market’s bull or bear moodswings [25].

Graham didn’t say it was easy, mind.

The danger is you increase equity exposure at exactly the wrong time – when investing feels safe and the market has risen for years. In Graham’s world, that’s the time to move towards bonds.

Because he knew it was difficult, Graham urged readers never to go below 25% for either asset class. In practice, simply rebalancing  between the two once a year would be hard to beat.

Note that Graham passed away before ETFs were invented, but this ETF portfolio gets across the spirit of his fabulous book The Intelligent Investor.