How to Build a Diversified Global Portfolio

In this article, we will look at how an average investor can build a global portfolio using low-cost globally traded exchange-traded funds (ETFs), along with some automated tools that will do this on their behalf.

Investment Specification

The first step in building a global portfolio is to determine the investor’s risk tolerance and the optimal asset allocation. Depending on the investor’s risk tolerance, they can adjust their exposure to certain categories of stocks and bonds that may be more or less risky than others.

Investors with high risk tolerance may prefer to build a portfolio mainly consisting of stocks and a few bonds, whereas risk-averse investors may want to increase the percentage allocated to bonds. In terms of asset classes, risk-tolerant investors might consider small-cap stocks, emerging markets, and corporate bonds, while risk-averse investors might prefer large-cap stocks, developed markets, and government bonds.

There are several different types of risks to consider. Beta coefficient is a common way to measure the level of asset volatility, or how much its price fluctuates over time. Generally, higher beta values indicate that investments may be riskier than lower values. Investors should also consider qualitative risk factors, such as geopolitical risks and bond ratings, in addition to quantitative risk metrics.

Choosing Global Exchange-Traded Funds

The second step in building a global portfolio is to identify the best globally traded ETFs to gain exposure to these assets. While the cost ratio of an index fund is important, there are a number of other factors that should not be overlooked.

Key considerations include:

• Cost Ratio: Lower cost ratios are preferable, as they automatically increase the potential long-term returns by reducing costs. Generally, Vanguard and Charles Schwab are considered leaders in low-cost index funds.
• Assets/Liquidity: Some index funds do not trade frequently, making it difficult to buy and sell them at a good price. This means that investors should ensure that the funds they purchase have sufficient trading volume each day.
• Portfolios: Different index funds are subject to different rules governing the stocks or bonds they hold, along with rules for hedging against currencies or distributions, which can significantly impact trading rates and net profits.
• Asset Class: Look for index funds for each asset class in the desired asset allocation. For example, U.S. large-cap index funds, small-cap stock index funds, or emerging market index funds. This will help the investor filter the available universe of index funds down to a manageable size for investment decision-making.

Investors can find all this information by visiting the publishing firms’ websites and reading the investment prospectuses. For example, Vanguard’s index funds are detailed on their website, and iShares index funds are presented on their website. It is essential to read these publications carefully to ensure you have all the information you need to make an informed decision.

Building and Rebalancing

The third step in building a global portfolio is to calculate the number of shares to be purchased to achieve the correct asset allocation, ensure there is enough capital to reduce commission costs, and perform the actual purchases to build the portfolio.

Investors should start by multiplying the initial capital by the percentage of each allocation, then dividing the figure by the stock price to determine the number of shares to be purchased in each index fund. In most cases, investors should try to limit the number of funds they own to between eight and fifteen to reduce the costs associated with buying and selling, and to keep their strategy simple rather than overcomplicate matters.

After
Creating a portfolio, investors may also find it necessary to periodically rebalance portfolio shares to maintain the same asset allocation. For example, emerging markets may outperform over several months and occupy a significant position in the portfolio, increasing the portfolio’s risks. Investors may want to sell some of these assets and invest in developed markets to reduce risk.

Source: https://www.thebalancemoney.com/how-to-build-a-diversified-global-portfolio-1978847