Asset Allocation for European Investors

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On this blog I’ve written a lot about investing in Europe, and how some things are different than in the US. Regulations and taxes, for example, are different over here. What I haven’t written about a lot is the asset allocation for European investors.

What is an Asset Allocation Again?

Asset allocation is simply the way in which you divide your invested euros. Since there are lots of different asset classes to invest in, you have to make a decision in what you want to invest. Most people decide up-front what they’re going to invest in.

The main asset types used by investors going after financial independence are stocks and bonds. You can add real estate to that list as well, and most recently peer to peer lending or crowdlending is becoming really popular.

I’ve written about how stock investing with index funds works here.

In your investment strategy, you will define your asset allocation by writing down how much (in terms of percentages) you will invest in each and every asset class. Some investors take it even further, and specify allocations of individuals funds within a single asset type.

Why is this Different for European Investors?

If you search for asset allocation examples you will find many blogs and forums focused on the American situation. I believe we should look at the asset allocation for European investors through a slightly different lens.

Of course, the differences are not that big, but there are some nuances to consider. For example, a lot of American investors only invest in stocks from their own country. For a lot of them, this makes sense. The US economy makes up slightly more than half the world’s economy. Next, they only invest in USD and have no currency risk by doing so.

For us in Europe, this all works slightly different. We can’t just invest in our home countries and call it a day. Or well, we could of course, but it will probably not generate the results we’re looking for. The problem is that our individual countries’ economies are simply too small to be relevant on their own. T

ake my country, for instance, our stock market, the AEX 25, lists the 25 largest Dutch companies, has a market cap of about 500 billion euros. The worldwide stock markets have a market cap of about 70 trillion dollars or about 62 trillion euros.

The numbers aren’t accurate, but you get the point. A small European country is insignificant in the grand scheme of things.

So we have to look at other ways to invest, and I’ll explain how to do that.

How to Create an Asset Allocation for European Investors

For me, creating an asset allocation for European Investors is all about creating that diversification while still limiting your exposure to currency risks.

That means that for the stock part of my portfolio, I’ll be looking at a worldwide diversified index fund, ideally with a low total expense ratio and one that is very liquid. I invest in stocks via DeGiro, I’ve written about how to set up an ETF portfolio with DeGiro here.

For the bond part of my portfolio (I don’t invest in bonds at the moment) I would be looking at a fund denominated in euros for Eurozone investors or maybe pounds or francs if your expenses are in those currencies. The reason to invest in bonds is to lower the volatility of your portfolio, which implies you also want to ban the currency exchange risks.

Real estate investing works approximately the same in Europe as in the US, from an asset allocation point of view. The same is true for crowdlending.

What is left now is to determine the percentages of each asset type you want to invest in. There’s probably not much difference here between EU and US investors. A very common portfolio could be 80% stocks and 20% bonds.

Other people I know opt for a bond glide path, where the bond allocation increases as you get older. You could use your age in bonds, or your age minus 10 in bonds if you’re more aggressive in your investing.

Of course, if you want to add other asset types such as real estate and crowdlending to your portfolio, you have to adjust accordingly.

My Asset Allocation in Practice

My investment strategy speaks of an asset allocation that’s 50% stocks and 50% real estate. Now the problem is, I don’t own any investment real estate yet. That means that I’m currently 50/50 in stocks and cash. The cash part is to save up for a property down payment.

Because of the cash drag induced by this asset allocation, I’m currently in the process of adding peer to peer lending to my portfolio so that I can at least earn some interest on my short term cash savings. I invest at Mintos and Grupeer in crowdlending, by clicking on them, you can sign up and receive a free bonus!

I’ve taken the first steps to invest about 5% of my portfolio in some peer to peer lending platforms. That means that currently, my asset allocation is 50/45/5 in stocks, cash, peer to peer lending. Over time, I’m planning to reallocate parts of my cash holdings to the peer to peer lending investments.