In part 1 of my Investing in ETFs guide, I did my best to explain the gist of index funds, ETFs, and which types to choose.
Now comes the more practical part – how much to invest in which product, where to invest, and which index funds to buy.
How to Choose Funds Allocation
We know that we want to invest in 3 funds – US stocks, international stocks, and US bonds. The next question becomes, how much should we invest in each one of them.
Stock Funds vs Bond Funds
Here we use the “110 minus your age” rule. With this approach, you hold a percentage of bonds equal to 110-[your age]. So for a 30 years old person, he would own 110 – 30 = 80% in stocks (US and international) and 20% in bonds (bond fund).
Example of funds allocation for 30 y/o person.
This rule means the older you are, the higher percentage the bonds take in your portfolio. This protects you from events like market crashes, since stocks lose a lot of value, while bonds not so much. And we don’t want to lose the majority of our yields to market crash right before we are ready to retire.
US Stock Funds vs International Funds
The most reasonable approach is 80% in US stocks and 20% in international stocks. Some people suggest going up to 40% in international stocks, but it’s not necessary at all and in my opinion, a waste of time (assuming you don’t have millions to invest).
Where to Buy Funds
Here I have to split the article into 2 paths. If you are from the USA, read on. If you are from Europe, skip the next part. If you are neither American nor European, I don’t have a solution for you. Please use Google to search for a solution. Something like “how to buy ETFs in [your country]” should lead you on your journey.
I am American!
Americans have it easy regarding 3 Fund Portfolio. Choose which company you want to invest, create an account on their website and buy their funds.
- Charles Schwab
I am European!
We, Europeans can’t invest in American funds thanks to policy rules. Therefore, it is a bit more complicated.
First, we have to choose our broker, where we can buy ETFs. Cheapest and most used brokers at the moment are Degiro, Interactive Brokers, eToro, and Trading212. To help you decide, here are the links to reviews: Degiro, Interactive Brokers, eToro, Trading212. This guide is meant to be a quick guide on investing in ETFs, so I won’t review all of the mentioned brokers. My recommendation is Degiro, or, If you’re not from the country that they support, use Trading212 (like me).
Next, we have to find out which ETFs are listed at our chosen broker. We do this by going to the broker’s website and find a list of ETFs. We have to find one ETF that invests in US stocks, one ETF that invests in international stocks and one ETF that invests in bonds. For Degiro, follow this guide. For Trading212, I will write ETFs I invest in below.
When we find which ETFs we want to invest in, all we have to do is start buying them. Each month, when you get your paycheck, transfer 10% or 20% of it to your chosen broker and buy chosen ETFs. This will take max 15 min of your time per month. 30 if you are slowpoke.
My investment procedure
Here is a super quick guide, if you feel overwhelmed or just don’t want to deal with all this knowledge. It’s also what I do.
- Create account on Trading212.
- Log in
- Use search bar at the top and look for “VWCE“. Add it to watchlist.
- Use search bar at the top and look for “EUNA“. Add it to watchlist.
- Buy both of them every month. How much, depends on your allocation.
VWCE is ETF that invests in the whole stock market, so US stocks and International stocks are included. This means you now only have 2 Funds Portfolio. Easier to manage, fewer fees, win-win. EUNA is a fund that invests in bonds.
Investing in ETFs – Summary
This is it for my Investing in ETFs guide. I tried to make it short. There is more stuff to cover, but for start, it is more than enough. I explained what funds are, how we divide them, and where to buy them. I will leave you with these resources, so you can learn more:
- A blog post about 3 Fund Portfolio – The first time I read about 3 Fund Portfolio was here.
- Bogleheads wiki – Bogleheads is basically a different name for 3 Fund Portfolio. Lots and lots of information.
- Index Fund (European) Investor – Lots of stuff for Europeans. Check out all titles of articles and read the ones you are interested in.