What is in My Daughter Portfolio?

In the last post, we discussed how I invest for my daughter’s education fee using a portfolio of investments. If you have not read it, you want to go back and read it first so that this post will make sense to you. Here it is.

When deciding how to invest for Laura, I took a different approach from my own portfolio. My own portfolio is actively managed because my approach is to identify strong businesses and invest in them. I also combined some technical analysis on it to generate higher returns (if possible).

Type of Investing

For Laura, I want her portfolio to be passive as I will not have time to manage it actively and because she has such a long time horizon, her portfolio does not need 10-20% return each year. I think passive approach will work out well for her, generating 7-9%. 

What to Invest In?

Since it is passive, the most logical asset will be Exchange Traded Funds. Exchange Traded Funds (ETF) are a thing of wonder. They allow retail investors like me and you to invest in the whole stock market at very little cost. 

In the past, you can only achieve this through those “expensive” mutual funds or unit trust, which would easily charge you 3-4% of management fee (I honestly don’t know why are people still buying those and why are people still allowed to sell them). While 3% may seem like a small fee, it can erode your returns significantly when your investment are achieving 7-9% return each year. That’s about 30% of your total return! While ETF generally charges less than 1% management fee, some even as low as 0.05%! 

For Laura, the approach will be simple. 

Invest in several ETFs that tracks the major markets which I believe will grow significantly in the future. 

For convenience sake, I split her portfolio into 5 portions, and invest it 5 major countries/continents globally.

1. USA. USA will continue to be a dominant force in the world, and its economic growth is still going strong. 
2. China. While China’s growth has slowed down significantly in recent years, it still remains a developing nation. If it were to grow to the economic level of the current USA, the returns will be pretty good.
3. India. This is a pretty brainless investment in my view. India has the second largest population and its economic growth has been one of the best. With its current situation, it has tremendous room to grow.
4. Russia. Russia is a wild card but I think with a consolidated political situation and being one of the largest oil and gas producers, Russia will have more room to grow, the moment it opens up its economy.
5. Africa. Finally, Africa! I am the most positive about this investment. Africa is the most under-developed continent among the others. This means it also has the most room to grow. It is totally possible for Africa to grow at 20% for the next 5 years and it will still be behind USA or China economically. I love it when I have all the upside and little downside.

Which ETF to Invest In?

1. S&P500 ETF (ticker: SPY). This ETF tracks the S&P500 index in the USA which is a good indicator of the economy. The expense ratio is 0.09%. 
2. S&P China ETF (ticker: GXC). This ETF tracks the China stock market as a whole, it consists of big and small companies. I want to capture some of the upside by the small companies too! The expense ratio is 0.5%. More expensive but still reasonable. 
3. iShares India ETF (ticker: INDA). This ETF is a replicated of SPY for India stock market. It tracks the largest 85% companies of the India Stock Market. The expense ratio is 0.6%.
4. VanEck Vectors Russia ETF (ticker: RSX). There are very few ETFs that tracks Russia stock market so I went with the largest one I can find. The expense ratio is 0.6%
5. VanEck Vectors Africa ETF (ticker: AFK). This one was a bit tricky as there is only one Africa ETF, which there are other ETF that tracks individual African countries. I went with this for now, but if the volume is too low, I might switch eventually. The expense ratio is 0.7%

Bonus Returns

Another bonus feature of these ETFs is that they all pay dividends, ranging from 2% to 4%! To make it even more passive for me, I have decided to auto-reinvest the dividend. This means the system will automatically buy more shares of these ETFs with their dividends. This will likely increase the overall returns due to the compounding effect. We shall see.

Alright that’s it. Laura’s portfolio is all set up and running now, without the need of any supervision from me. I think give it a long runway, it will do quite nicely and pay for Laura’s education. I will look at it annually just to rebalance if needed.

I shall focus on coaching and helping others to generate their investment returns. I will be launching an online course in August to help more people understand how to invest better. Stay tuned!