Building a simple portfolio

The gap between a sensible portfolio and an elaborate one is generally cost and complexity rather than outcome.

The minimum viable portfolio

What it needs to do.

Provide exposure to global company ownership for growth.

Provide some stability appropriate to the horizon and tolerance.

Be diversified across companies, sectors, countries and currencies.

Be cheap.

Be simple enough to maintain and to understand.

And be something you will hold through a substantial decline.

Two funds — a global equity index fund and a high-quality bond fund — achieve all of this.

One fund — a global multi-asset fund at an appropriate risk level — achieves it with less to do.

The one-fund version

Which is defensible.

A global multi-asset fund holding a fixed allocation, rebalanced internally.

The investor chooses the equity percentage and holds nothing else.

Costs slightly more than the components and removes the rebalancing decision entirely.

For anyone who would not rebalance or would be tempted to interfere, this is frequently a better outcome than a self-managed alternative.

The two-fund version

The most common recommendation.

A global all-cap equity index fund, covering developed and emerging markets across company sizes.

A high-quality bond fund, currency-hedged, at a duration appropriate to the horizon.

Held in the proportion determined by circumstances, rebalanced periodically or with contributions.

Which provides broad diversification at very low cost with two decisions: the split, and the rebalancing rule.

The three-fund version

A common variation.

Domestic equities, international equities and bonds — which allows a deliberate home tilt.

Or global equities, bonds and a small allocation to something else such as property or inflation-linked bonds.

The additional complexity is modest and the benefit depends on whether the third holding serves a purpose you can articulate.

Where complexity creeps in

And rarely helps.

Adding a fund for each region, which duplicates what a global fund already does while requiring maintenance of the weights.

Adding sector and thematic funds, which introduce concentration and are frequently added after strong performance.

Adding factor funds without a clear rationale and a willingness to hold through long periods of underperformance.

Adding active funds alongside index funds, which frequently produces an expensive approximation of the index.

And adding holdings because they were recommended rather than because they fill a gap.

A portfolio of fifteen funds is generally an expensive index fund with extra steps.

Asset location

Where complexity is justified.

Holding different assets in different tax wrappers can improve after-tax returns, depending on the jurisdiction.

The general principle is to hold the most heavily taxed assets in the most tax-advantaged accounts.

Which requires viewing all accounts as a single portfolio rather than replicating the same allocation in each.

This is one of the few genuine reasons for a more complex arrangement, and it applies mainly to people with substantial taxable holdings.

Implementing it

The practical steps.

Decide the allocation based on horizon and capacity for loss.

Choose a platform appropriate to the portfolio size.

Select the cheapest broad funds available that implement the allocation.

Set up automatic monthly contributions.

Set a rebalancing rule and diarise the check.

Write down what you hold and why.

And then leave it alone.

The written policy

Worth producing.

A page stating: the objective and horizon; the target allocation and why; the funds used; the rebalancing rule; the contribution plan; and what would cause a change.

Written when calm and referred to when not.

Which converts future decisions into a comparison against an existing plan rather than a fresh judgement under stress.

This is the single most useful document a self-directed investor can produce and almost nobody does.

Reviewing it

Annually and briefly.

Has the allocation drifted beyond the threshold?

Have costs changed, or has a cheaper equivalent become available?

Have circumstances changed — horizon, income, dependants, capacity for loss?

Is the contribution rate still appropriate?

And is the platform still the right one for the current portfolio size?

Anything else generally does not require a decision, which is the point.

General information only, not investment advice. Investments can fall in value and past performance does not indicate future returns. Consult a regulated financial adviser.