Chapter 12


Products and implementation

To implement the rational portfolio:

  • We need to find the best products that give us exposure to geographically broadly diversified equity markets, minimal risk government bonds and potentially other government and corporate bonds.
  • We want to do this in a way that is tax optimal.
  • We need to combine the securities in a way that reflects our risk preference.

The past decades have seen an explosion in the number of products available to the index-seeking investor, and this development continues unabated. As new products come to market there is a risk that the information outlined here grows stale quickly and I would strongly encourage the reader to survey the market for new and better products before making investments. With the large growth of index funds and exchange traded funds (ETF) investing over the past decades, the abundance of different product offerings leave even professional investors confused; it’s no wonder that many investors say ‘forget it’ and revert to doing what they have always done.

The two main ways to gain index-type exposure is through ETFs and index funds (this term covers a few different structures). The main difference between the two is that an ETF is traded like any stock while index funds are more akin to mutual funds or unit trusts in their structures.

If you can find a product provided by Vanguard, iShares, State Street or one of their major competitors that meets your needs from an exposure and tax perspective, this is probably a very good way to gain your exposure. These are clearly among the cheapest and largest providers of index exposure in the world; sort of the Ikea/Ryanair/Walmart of finance – no frills, but you are very likely to get the best price in town. Until recently Vanguard’s presence outside the US was limited, but that is rapidly changing. iShares recently lowered the prices of a number of its products as it was losing market share to Vanguard because of higher prices. The iShares CEO quite tellingly said that its overall margins (i.e. your costs) would still be good as there were lots of ETFs other than the major flagship ones where there was lower pricing pressure. (In comparison Vanguard is a mutual so owned by the investors and thus perhaps less inclined to charge higher fees.) You should not buy these specialised and expensive products even if they are called ‘index XYZ’ and sold as an ETF. Investors who buy an ETF that tracks EU insurance companies, Canadian mining companies, etc. essentially claim an edge by their selective exposure to the market, just like those buying Microsoft shares do.

Index-tracking products outside the US have historically been more expensive than in the US, but thankfully that is changing and in the future I would expect to see close to cost parity. Investors will be left better off as a result.

Total expense ratio tells you the cost of owning the product

When comparing different suitable products look at the total expense ratio (TER). The TER tells you the annual cost of owning the products including fees, custody, administration, etc. Additional costs not included in the TER mainly consist of trading costs (bid/offer, commissions, market impact, etc.) although these are small for index-tracking products because of the portfolio’s low churn.

TER (per year)    Comment
< 0.3% Very good and increasingly the norm in the large and liquid products.
0.3%–0.6% Still OK if the product you are after is not straightforward.
> 0.6% Be sure you need to pay this much. Don’t forget trading costs come on top!

So if iShares has a TER of 0.3% for a product when Vanguard has a very similar one for 0.2% then that difference should be the deciding factor (disregarding tax and liquidity differences).

Investors can save quite a bit of money by looking at different products and selecting the index-replicating product with the lowest cost. I recently went to speak at a conference on ETF and index investing. At the conference all the product providers had large stands with gadgets and toys to lure investors. That was all fine. But what was also clear to me is how much some of the people that work for these providers get paid. Much like some of their peers in the investment banking divisions of the big banks, someone who works at a big ETF provider is no stranger to generous pay packages. When you add a culture of being paid like a banker to the large marketing budgets, licence fees to the index provider, administration and corporate profit margin, it’s no wonder that many of the ETFs or index products are not as cheap as they could be. Like any other for-profit business you can’t blame the providers for trying to create the most profitable product portfolio they can, but you may find equally good products at a cheaper price. And it is certainly worth our while looking for them. So while you have got 90% of the way there by picking an index-tracking product like an ETF for your rational portfolio you could do even better by picking the best and cheapest of those products.

It used to be that investment books suggested that people refrained from investing abroad (abroad to the US in most cases) because the costs were deemed prohibitive. Thankfully this is no longer a real issue as the easy movement of capital and investing in various domestic markets has increased significantly over the past decades. There are clearly some countries where trading is expensive or transaction taxes are an issue, but far fewer than in the past. However, also keep in mind that if you buy the broad world equity markets, over 80% of your money will be invested in the US, Canada, Western Europe, Japan and Australia, which all have cheap access. So if you found yourself paying 0.25% TER for access to these countries and 0.5% for an all-world product you would effectively be paying 1% TER for access to the rest of the world, which is too expensive.

While the TER is an important component in selecting an index-tracking product it is not the whole story. Some ETFs that track less liquid benchmarks could incur significant trading costs and impair returns as a result, just like you incur costs to trade the ETF (commission, etc.). Likewise you may incur costs like exit and up-front fees (you should avoid these except if they are very small and only relate to the costs the fund incurs in trading your additional money in the fund), or costs from advice or platform charges.

The best ETFs: liquid, tax efficient and low cost

The main difference between an index fund and an ETF is that the ETF is a traded product. You buy and sell the ETF like you would any stock. In the case of ETFs tracking world equities, the ETF will try to replicate the performance of that index by buying the individual stocks represented in the index. As a holder of the ETF you should then end up with the performance of that index, subject to a few things that we will return to later.

Advantages to owning ETFs

These are as follows:

  • They are easily traded like any stock (you should avoid trading your portfolio, but it’s nice to have the option). Even during the most volatile and distressing days of 2008 and 2009 there was liquidity in the markets for the biggest ETFs and the bid/offer spreads did not widen materially.
  • They almost always trade very close to the value of the underlying holdings.
  • ETFs are relatively easy to create; there is a huge array of product offering and far in excess of that of index funds, even if many of them are irrelevant to the rational portfolio.
  • The right ETF is a very low-cost vehicle.
  • In the UK ETFs don’t pay stamp duty.
  • Fee-chasing advisers and banks sometimes neglect to push them to you (there aren’t enough fees for them to get a cut), suggesting that they are definitely worth looking at!

ETFs have grown massively in prominence over the past couple of decades. In the mid-1990s they were still a fairly limited asset class, but in the early part of the following decade they exploded in number and size. There is today over $2 trillion invested in ETFs, mainly in equity-related products, but increasingly in fixed-income funds. The assets are spread among literally thousands of different ETFs and you can use them to buy exposures to anything from the various standard indices, to volatility indices, gold bars, oil sectors and more. This array of offerings is a good thing for the wider investor. It used to be practically very difficult for most investors to buy direct exposure to something like gold or oil without buying a gold-mining or oil company stock. Now they can. However, this does not mean that these products are suitable for you: stick to the simple rational portfolio.

iShares is the largest ETF provider, although as the sector has grown a large number of competitors have entered the space. Table 12.1 shows the leading providers (Vanguard was a late entrant to ETFs but has since made up for lost time with impressive growth rates).

You need to peruse the websites of the market leaders outlined above for products that suit your needs (tax, regulatory, domicile, liquidity, cost, etc.).

Below are examples of products I would consider suitable for the generic rational investor (assuming you have no restrictions, which is obviously unrealistic), although other providers also have competitive and good alternatives. The ETFs listed here are probably good options at the time of writing, but there are many more products available so look around. As you do your own research on which ETFs best suit your needs, here is a list of things to consider:

  • Does the ETF track the right index for your portfolio?
  • Is the TER very low (< 0.25% a year)?
  • Is the ETF and underlying index liquid? Are there many assets in the ETF and is it frequently traded (look at the bid/offer spread and how much is traded daily compared to other ETFs)?

Table 12.1 Assets under management and market share by provider

  Assets  
  (US$ bn) Share
Blackrock/iShares    997 38%
Vanguard    622 24%
State Street    513 20%
PowerShares    110   4%
Charles Schwarb      61   3%
First Trust      41   2%
Wisdom Tree      40   2%
Others    210   8%
  2,598  

Based on data from ETF.com, January 2017

  • Is the ETF tax efficient for you?
  • Is the ETF in the right currency and jurisdiction for you?
  • Is it a physical or synthetic ETF. Does it matter? Today most ETFs are physical which should be fine for you (see Appendix for discussion of difference between physical and synthetic ETFs).
  • Does the ETF have a history of performing very differently from the index it is tracking (tracking error)? Why?
  • Can you execute the ETF easily and cheaply?
Exposure

Just like new product launches occur frequently in the index space, the fees of the various products can change continuously. Particularly the bond ETFs leave a lot to be desired and this is an area where a cheap and broad active fund with the perfect profile may make sense (if it exists), but this is a growth area for the ETF sector so hopefully there will soon be suitable index-tracking products available.

Traditionally, there have not been as many world equity or bond (government or corporate) ETFs available, but this is a fast-growing area of the indexing space (the best known index – the MSCI World – was not even created until 1970, much less followed by an array of product alternatives). Index exposure was more tied to the national markets where the products were offered, such as the DAX in Germany or the S&P 500 in the US. (The world’s largest ETF tracks the S&P 500 with around $200 billion in assets under management.)

Index-tracking funds

The index funds work like a regular mutual fund or unit trust, even the terminology and exact fund structure vary slightly between jurisdictions (in the UK, for example, they are often called unit trusts or OEICs – open-ended investment companies). In the case of the index funds, the simplest way to think about these is that you give them £1,000 to invest and they then take that £1,000 and buy the underlying securities that make up the index exposure. If you want to redeem or sell your index investment that same index fund will then sell shares in proportion to your index investment and give you back the proceeds from those sales.

The index fund sector is more local. Unlike the ETFs that you can buy from any location in the world, like you would a stock, index-tracking funds are typically local financial institutions and the major player in the US is thus not the same as that in Germany, the UK or elsewhere. What this means in reality is that in some countries the choice of index funds is still far more limited than it is in major financial centres, to the detriment of the local investor.

In the US, the index space is dominated by Vanguard, but Fidelity, Blackrock, PIMCO (for bonds) and American Funds all have assets in excess of $100 billion (not all index tracking), and Dimensional Fund Advisors and State Street are potentially also worth a look. In the UK the leading players are Legal & General, Blackrock, State Street, HSBC and increasingly Vanguard.

If you are outside these two jurisdictions search the internet and look at the offerings from four or five asset managers or banks in your country, using the ETF checklist above as a rough guide. Keep in mind that if you call these companies and ask if they have some cheap index-tracking funds they may try to sell you a more expensive alternative, like an active fund or a structured product. Please don’t give up so easily.

The problem as I see it with the index trackers is that there is not as broad a range of products. Even a strong leader in its sector, like Legal & General in the UK, does not have a broadly diversified world portfolio. It has an index fund of the top 100 blue-chip companies, but this is quite different from any kind of world equity index. Also, that product comes at an annual charge of 1% plus extra expenses of 0.15%. John Bogle, the founder of Vanguard, would be aghast at those kinds of fees. So if you wanted to gain access to a world equity portfolio through Legal & General you would be forced to put a portfolio of index funds together yourself, instead of having a one-stop product like a world equity product.

Generally speaking, some index products can be incredibly expensive and best avoided. The Virgin FTSE All-Share Tracker fund charges 1% a year in fees while the Vanguard FTSE All-Share index charges 0.15% in ongoing fees.1 Why people would pay six times as much for the same product unless their circumstances did not let them invest in the cheap one is beyond me. Add to this that some index-tracking funds have up-front fees and the cost differential for what is essentially the same product becomes eye watering.

So with index funds, like ETFs, on top of the checks you need to make to ensure that you get a product that is suitable for your specific needs, make sure you get proper diversification and that you are not being overcharged by the product provider.

A few issues with index replication through ETFs or index funds

As I’m suggesting that we should be investing through broad-based and cheap investment products I want to flag a few things that some people could see as issues with these products. In no particular order, they are as follows.

Different indices on the same market will perform differently?

Index providers have different rules on things like free float (the fraction of shares that freely trade as opposed to being owned by controlling shareholders or management), liquidity, rebalancing, etc. and as a result will perform differently even if they follow the same market. So one index provider might lower Facebook’s weighting by 50% because of its low fee float while another reduces it by 66%. Who is right or wrong is open to debate, but the index returns will be different as a result of the different weightings. While this is correct and leads to slight differences in performance there is no reason to expect one index to consistently outperform another. The index providers are trying to do the same thing: provide a good representation of that market and while their interpretations differ slightly you can expect different indices on the same markets to act very similarly. Most of the securities in the index are the same and in roughly the same proportions.

(Related to first one) Index-tracking funds and ETFs have a tracking error

Correct. Practically speaking, product providers can’t match the index 100% all the time. Sometimes the rebalancing is done slightly differently or perhaps providers have slightly different proportions of the less-liquid constituents. Indices typically rebalance quarterly. Imagine that because of a reweighting you have to include Facebook in your index-tracking product with a 5% weighting as of the 1st of next month. Theoretically you would buy all those shares at the closing price on the day prior to the 1st, but that is not practically possible. Instead you have to decide how you scale into the stock. Perhaps some traders buy the stock five days before and after the 1st while others do it all 10 days before the 1st. As a result, their performances will be different and one will track the index less closely than the other. If an index tracker/ETF consistently underperforms other products on the same index it may point to problems in its implementation (or hidden fees) and it may be worthwhile looking for alternative products.

The US market is overrepresented in many world equity products

True. In many products the US market represents around 50% of the total. That said, the largest US companies (like Apple, Google, Microsoft, Amazon, etc.) all have large non-US business exposure which alleviates the issue somewhat. Also, over time I expect this issue will somewhat correct itself as new large foreign listings dilute the US exposure and more countries become accessible to the index product providers. But for now it is an issue. You can correct this by putting together a portfolio of regional equity index products yourself to better match the world equity split (so US, Asia, Europe, etc.) instead of one world equity index tracker, but this will quickly become an administrative headache, particularly as you would have to do the rebalancing (the index tracker products do this for you automatically). So for now, I’d suggest you consider it an issue you are aware of, but reluctantly accept.2

Not all countries are in the world equity and bond indices

Correct. One day they probably will be, but not for now. Some countries don’t have functioning capital markets (try buying shares in North Korea). That said, the world equity indices represent countries that in aggregate constitute more than 95% of the world gross domestic product (GDP), in my view making it representative enough.

Most indices don’t represent all stocks or bonds in a country

Correct. Having all traded stocks or bonds represented in an index would make it extraordinarily tough and expensive to implement or increase tracking error as index trackers would often not include them in trading for practical reasons of liquidity and cost of trading. (Similarly, as discussed earlier, the stock or bond markets represent varying proportions of the domestic economies in different countries.) Besides, if we have an index that represents 95% of the total value of all stocks in a market then the last 5% outside the index would have to massively outperform before the omission is material.

Licence fees will eat into my returns

Index providers charge the product providers an annual licence fee. The size of the fee is mostly confidential, but 0.02–0.03% a year is probably a decent guess. This is what iShares pays to MSCI to call it the World MSCI index instead of just the World index. While I would personally be happy to save the 0.02–0.03% a year for a white-label index brand the product providers obviously think the association with the MSCI, S&P, FTSE, Stoxx, Russell, Dow, etc. is worth it. I would not be surprised if firms like Vanguard not only pay far lower fees, but also eventually consider its own brand strong enough so that it follows its own index creations or very cheap independent ones.

Your performance will only be average

Yes. Hopefully. The point is that we can’t outperform the market and as a result should buy broad market exposure in the cheapest and most tax-efficient way. Of course this means that we won’t only own the next Apple going up 500%, but nor will we have all our savings in the next Enron or Lehman.

Comparison sites

There is every chance that by the time you read this there will have been new product launches or changes in the fees of some of the products mentioned above. With that in mind, you need to do some of your own research on the best available products before investing. Here are a few comparison websites you may consider (there are many others):

I would caution you against taking the information on the websites as fully correct and complete. Before making any investments ensure you go to the product provider’s website and look at the fund facts in detail. Only there can you be sure that the information is up to date and correct.

If you have a financial adviser it would be a reasonable expectation that he or she has an educated view on how best to get similar information.

On the site you should be looking for the fund screeners. The categories are not always straightforward and sometimes the sites don’t allow you to screen for ‘index tracking’. A good way to get around that is to search for the funds/ETFs with lowest total expense ratios (TERs); perhaps even look for terms like ‘index’ in the names of the funds. Likewise you will find lots of different styles like ‘mid-cap value’ or ‘high yielding’, etc. but not the simple ‘global’ portfolios we are after. Also, in some cases certain products will simply be absent from the product offering section of some supermarkets so be sure to check a few. Have patience and keep trying – it’s worth your while. Failing that you can always revert to browsing through the ETF or index fund providers listed earlier. While many other product providers try to compete with them there is a reason that those listed are among the market leaders.

Some index fund providers charge a small trading fee to get into the fund, just like they do if you redeem from the fund. This charge just reflects the cost to the fund of investing your money in the underlying securities. If there were no charges and you were a long-term holder of the fund (like you hopefully will be) you would instead indirectly be paying the trading fees as other investors come in and out of the fund. While entry/exit fees are explicit in index funds, in ETFs those charges are implicit in the bid/offer spread, or in some cases if the ETFs trade at a premium or discount to the net asset value. (So there is a discount if the ETF trades at £99, but the aggregate value of the holdings is £100, etc.)

For all its growth, index-tracking products still only represent around 20% of investments in equities (more in the US, less in non-equity products, and a small fraction tracking world equities), and will not be pushed hard by the comparison sites. Keep in mind that index-tracking products like index funds or ETFs charge low fees and as a result far greater profits are to be had for the finance industry from flogging other products on the platform.

Execution

If you are at the point where you know what index fund or ETF you want to invest in, all that remains is to execute the investment and start reaping the benefits of index tracking.

Since buying an ETF is like buying a normal stock, you can use a normal online discount broker for this (like etrade.com, scottrade.com, tdameritrade.com, etc. in the US). The commission rates should be very small even if you buy via some of the more established banks, although in both cases be sure to avoid ‘hidden’ extras. You are a ‘bare-bones’ customer. The products we have discussed are all liquid so your order should not have a market impact, unless you have investment assets as large as those of the Emir of Qatar. For less-liquid ETFs study the daily volume and normal bid/offer spreads before making an order. If your order seems like it could move the market of that ETF you may want to reconsider if that is the best choice of investment product for you.

Buying an index fund is often best done via one of the fund supermarkets, or perhaps the fund provider (like vanguard.com). Make sure that you get ‘execution only’ and withstand the offers of expensive services. Because there are so few fees in the cheapest index-tracking funds some of the supermarkets charge a maintenance fee if you buy the tracker through them. (The supermarkets often get a cut of some funds’ fees so no wonder that they push …) While the fees at a couple of pounds a month may look small, make sure that your investment is of a size that this will not eat into your returns in a significant way. ($2 a month on a $10,000 investment is still 0.24% per year, so you are probably better off owning an ETF.)

Whatever your country if you are not familiar with the best vehicle to execute your trade a Google search for ‘top investment platform for US/UK/Germany etc.’ should give a good idea. You can also search for ‘investment supermarkets’ or ‘trading platforms’, etc. Or if you have an adviser, he/she should have a good idea of the most cost-effective platform for you. A few UK specific supermarkets are: bestinvest.com, hl.co.uk, cofunds.co.uk, fidelity.co.uk, alliancetrust.co.uk, and iii.co.uk. In the US the top choices are etrade.com, scottrade.com, schwab.com, fidelity.com, and also look at vanguard.com. In many other countries the traditional financial institutions still dominate the market for trading and custody, often at a higher cost. If your circumstances allow I would also encourage you to look at interactivebrokers.com and td.com (under investments), but there are many others.

In many countries, including the UK, you can buy government bonds directly from the treasury at little or no cost. While there is a small cost saving to doing so this means you are responsible for ensuring that the maturity profile of your bonds is in line with your target on average time to maturity as it naturally changes with time. For most people it is worth paying the cheap product providers’ small costs so that everything is taken care of for you.

Trading is expensive and pulling the trigger can be nerve wracking

Trading is expensive and one of the main reasons many investors underperform, but by changing allocations when you are trading securities you will be able to save money on transaction costs. Some product providers offer combined products with fixed weightings between bonds and equities. While they have the same issues outlined here they also have the huge advantage of large natural flows from customers and have lower costs as a result. If you find a product that suits your profile this added advantage is worth noting.

When rebalancing your portfolio also consider your ticket size. If you are trading a $10,000 position and split that into four ETFs or securities, even cheap commission charges will add up. If you pay $15 per trade you will have incurred a 0.6% ($60/$10,000) brokerage fee. Do consider if you really need all four securities this time around. Keep in mind that, for example, the equity portion of the rational portfolio can easily consist of only one security, which is an advantage when it comes to keeping down commission costs.

If you are just getting started on saving money up and building your portfolio from scratch it may be a bit daunting to pull the trigger and invest the money all at once. You would hate to buy into the market only to see markets drop 10% in the weeks after making the decision. All that hard-earned money up in smoke just because you were unlucky and picked the wrong week to invest.

While it may be harder emotionally you should put the money to use sooner rather than later, once you have made your plan, decided allocations and figured out the best products for you. We think markets will increase slowly over the long term, but also know they can go anywhere in the short term. Of course if you invest everything at the same time you increase the risk that you randomly picked a bad moment, but while you wait to implement your portfolio you are expecting at least the equity portion of it to go up at an annual rate of 4–5% equity risk premium. So unless you know something about the short-term direction of the markets and can pick a better moment to invest, there is no time like the present.

If this ‘all at once’ allocation seems too risky you may consider splitting the allocations into chunks where you add a little at a time over a certain period, although don’t forget that you will pay more in commission that way. (Investors typically pay a fixed amount each time they trade.) If you are fine with the higher commissions and hassle of doing multiple trades you may consider strategies like dollar-cost averaging (where you buy more as markets are dropping) or value averaging (similar but subject to investing a fixed amount over a period of time).3 Personally I don’t subscribe to these methods as I think you are essentially saying the market follows a mean reversion pattern (and thus you claim an edge), but if it gives you greater comfort in getting started it may be a good idea.

Rebalancing your portfolio

Any investment book worth its salt will tell you that you need to think carefully about formulating a plan and sticking to it. Swapping in and out of securities will significantly reduce long-term returns, mainly because of the transaction costs and taxes you incur.

While market movements or changes in your personal circumstances may alter your risk/return perspectives, generally you want to set yourself up so that you have a fair bit of flexibility in your portfolio before those factors force you to trade securities. Suppose, for example, that your risk profile is such that you want a 60/40 bond/equity mix in your portfolio, but that strong equity markets made this ratio 55/45. Should you sell 5% of equity and buy bonds to get back to the 60/40 split?

How far you are willing for your portfolio mix to diverge from your ideal allocation is an individual choice and partly depends on how fixed your split was to start with. Obviously you want to avoid trading too narrow ranges: if you reallocated every time the allocations got more than 1 percentage point away from your ideal allocation (so 61/39 or 59/41) you would end up trading very frequently, which would be expensive and probably not necessary. One rule of thumb you might consider is to reallocate once a year if the allocations are more than 10% out of sync, or during the year if more than 15–20% out.

Keep in mind that just like you originally planned your allocations and came up with a 60/40 split, that split is not written in stone. Your circumstances may change, prompting a rethink, or development in the markets may change your desired allocations. If, for example, you started with £100,000 and a 60/40 bond/equity split, and equities rallied 50%, without rebalancing the split would have become 50/50 (£60,000 in bonds and £60,000 in equities). You might find that you don’t need more than £60,000 in bonds to be comfortable and you therefore could keep all the additional money in the higher risk/return equities (and not rebalance in that case). Note how rebalancing typically involves selling the better-performing asset and buying the underperformer, something which sits uncomfortably with many investors.

So a few thoughts on rebalancing your portfolio:

  • After you determine your initial mix of the portfolio, have an idea of what kind of bands you are happy to operate within before rebalancing. If you are more than 10% out of sync, that is probably a good time to rebalance.
  • Whenever you have money coming into or out of your portfolio use that as an opportunity to rebalance a little bit. So, if your ideal mix is 60/40 bonds/equities and you are currently at 62/38 and have money coming in, use that money to buy equities, not a 60/40 mix. In the long run this will save you money in rebalancing the portfolio as you save additional trading costs.
  • Perhaps consider an investment product that automatically rebalances your exposure. As an example in a 50%/50% government bond/world equity product the product provider rebalances to ensure the bond/equity ratio remains constant. Vanguard have some great products in this space that may suit you.
  • Periodically, and at least yearly, review the portfolio and make sure you are still happy with the mix. Have things in your life or asset levels changed so that 60/40 no longer is the best ratio? This could include the passage of time; as you get closer to retirement you should have fewer assets in equities and more in bonds.

Summary

Portfolio implementation is obviously incredibly important, but the choices you have are much better than they were only a couple of decades ago. Cheap and liquid index exposure is now commonplace and something most major financial firms offer.

The right product for you is really an individual choice dependent partly on your tax and currency situation. But the key facts are the same. Buy as broad an index tracker as you can and as cheaply as you can. If you do that, you are doing pretty well.

Have a look at Video 5 on Kroijer.com or the Lars Kroijer YouTube channel for more on some of the issues on implementation discussed in this chapter.

____________________

1 At the time of writing, in the UK the only way to buy the Vanguard funds below £100,000 is through Alliance Trust. Vanguard has been making noises about introducing easier and more direct options.

2 Efficient markets would suggest that the prices of US securities would have declined to reflect the concentration risk of large US exposure as a fraction of the world total, but in reality we have no real way of knowing if this has happened.

3 See The Intelligent Asset Allocator: How to Build Your Portfolio to Maximize Returns and Minimize Risk by William Bernstein (American Media International LLC, 2004).

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