Spaniard Urko Masse enjoys salsa dancing, soccer, and spending time with his wife and kids. What the 42‐year‐old resident of Bali doesn't enjoy is giving a pound of flesh to the financial services industry. So he opened a brokerage account with Saxo Capital Markets and built a portfolio of low‐cost index funds.

Urko, like plenty of other European‐born expats, will likely retire in Europe. For that reason, he should build a portfolio that reflects his home‐country currency. After all, when Urko retires, he'll likely be paying most of his future bills in euros. By including a bias toward the European market, and the euro itself, he reduces currency risk.

Table 17.1 lists portfolio options for Europeans. This is, perhaps, the most hassle‐free portfolio for Europeans. It starts with the iShares MSCI Europe ETF. As with each of the other exchange‐traded funds (ETFs) in Table 17.1, it reinvests dividends automatically into new shares. It's also listed in euros, which eliminates currency conversion charges for Europeans once they start to sell parts of their portfolio during retirement.

The iShares MSCI Europe ETF contains about 450 stocks. The geographic regions of such stocks are weighted based on market capitalization. For example, the United Kingdom is the region's largest market. That's why it has about a 27 percent weighting in the index. Other top countries in descending order of exposure include France, Germany, Switzerland, the Netherlands, Spain, Sweden, Italy, Denmark, Belgium, and Finland.

The next index in the portfolio is the iShares Core MSCI World ETF. It contains about 1,660 stocks. They represent different regions based on market capitalization. For example, the United States makes up approximately 55 percent of the world's stock market value. To reflect that exposure, about 55 percent of this index is composed of US stocks. The rest of the index is made up of European, Japanese, South American, Asian, Middle Eastern, and African shares.

If you've read some of the previous chapters, you'll notice that the model portfolios in Table 17.1 appear to have lower “home‐region” exposure compared to the model portfolios that preceded it. But that's a mirage.

Take the balanced portfolio in Table 17.1. It appears to have just 20 percent exposure to European stocks. But because European shares are the second most heavily weighted component in the iShares Core MSCI World ETF, each of the portfolios below have about half of their stock market exposure in European stocks.

To round out the portfolio, I selected the iShares € Gov't Bond 1–3 yr Euro ETF. It includes short‐term bonds that mature within one to three years. Yes, you will find bond ETFs with better historical returns. Long‐term bond market ETFs include bonds with longer‐term maturities. But bonds aren't meant to be big money makers. A short‐term bond market index will beat inflation over time. It's main purpose, however, is to stabilize the portfolio. No matter what happens to bond prices or interest rates, it should beat inflation. It also provides dry powder for the rebalancing process when stocks hit the skids.

That said, you could also select an intermediate bond market index instead of a short‐term index. An intermediate‐term bond market index, such as iShares € Gov't Bond 3–7 yr Euro ETF (CBE7), will probably earn better returns than the short‐term bond market index. But it will also be more volatile. Whatever you do, don't let historical returns seduce you into buying a long‐term bond market index. When inflation rears its head and when bond prices fall, such an index could lose (when measured against inflation) for many years in a row. Each of the bond market indexes in Table 17.1 would be suitable selections. Each of them also reinvests interest payments into new shares for an added level of convenience.

The European Cheapskate Couch Potato Portfolio

European investors could pay even less with different ETFs. Table 17.2 lists portfolio samples. Overall, the internal holdings and geographic percentages are the same as with the samples in Table 17.1. But the portfolios below are cheaper.

For example, Vanguard's FTSE Developed Europe ETF (VEUR) costs just 0.12 percent per year. Instead of choosing a global stock market index, we can break down its components into different ETFs. For example, we could add Vanguard's S&P 500 Index ETF (VUSA). It costs just 0.07 percent per year. To include emerging‐market exposure (which is part of the global index) we could add Vanguard's FTSE Emerging Market Index ETF (VFEM). It costs 0.25 percent.

We could cap it off with a lower‐cost bond ETF. Vanguard's EUR Eurozone Gov't Bond ETF (VETY) is an intermediate bond market index. It costs just 0.12 percent per year.

But here are the downsides to the portfolios in Table 17.2. None of these ETFs automatically reinvest dividends. As a result, they're slightly less convenient. Dividends get paid into the cash portion of the brokerage account. From there, investors can invest such cash into new shares (along with monthly or quarterly cash deposits that are added from investors' salaries).

The portfolios in Table 17.2 are also listed in British pounds (GBP) instead of euros. That doesn't mean these are investments in GBP. For example, the European index is invested in euros. The US stock index is invested in US dollars. They are simply priced in euros. (See Chapter 10 for a further explanation.)

But here's when it matters. Earlier in this chapter, I introduced you to Urko Masse. Assume that Urko decides to retire in Spain. Let's assume that his portfolio grows to the equivalent of €1 million by the time he retires. If he chooses to live off 4 percent of his portfolio, he'll need to sell €40,000 per year.

First, he'll need to figure out how much €40,000 is in GBP. Then he'll need to convert that money into euros. When he does so, he might lose between 1 and 1.5 percent on the currency spread. Instead of getting €40,000, he would get about €39,400 (if he paid a currency spread of 1.5 percent).

But Urko might prefer that. Overall, the cheapskate portfolio would cost an average of about 0.10 percent less per year. Let's assume that he builds the portfolio over 20 years. Let's also assume that it earns a gross annual return (before fees) of 8 percent per year.

The portfolio in Table 17.1 would earn about 7.8 percent per year after fees. The cheapskate portfolio in Table 17.2 would earn about 7.9 percent per year after fees.

If €20,000 were invested annually over 20 years, it would grow to €965,040 at 7.8 percent per year. If it earned 7.9 percent per year, it would grow to €976,672. There's a 1.2 percent difference between those end values. In this example, it would come close to covering a 1.5 percent currency spread cost.

But there's more. Urko wouldn't sell his entire portfolio the day he retires. He would sell parts of it each year. The majority of his money would continue to be invested. If it could be invested for an additional 20 years (depending on how long Urko lives) the lower‐cost portfolio could win out in the end.

Either way, fee differences of 0.10 percent per year don't make a lot of difference. In addition, the ETFs in both of these portfolios will likely lower their costs over time. The portfolios in Table 17.1 are also very convenient, considering that they are listed in euros. Dividends are also reinvested automatically into new shares.

The overall choice is yours.

Some Europeans say, “I don't know where I'm going to retire. But I won't retire in Europe.” Such investors might prefer a Global Nomad's portfolio. It doesn't provide a home‐region bias. Instead, it's allocated based on global market capitalization. That means it's diversified across all global markets. It's weighted most heavily toward US stocks because American stocks make up slightly more than half of the world's stock market's total value. The Global Nomad's portfolio also includes exposure to Europe, Asia, and emerging‐market economies. Table 17.3 shows some examples.

You might notice that the ETFs are listed in US dollars. But please remember, this doesn't mean it's an investment in US dollars. It's an investment in every global currency. The listed currency means little. Please see Chapter 10 for a further explanation.

Socially Responsible Investing for Europeans

If you want your investments to reflect environmental stewardship, while avoiding gambling, alcohol, tobacco, weapons, and adult entertainment industries, you might prefer a portfolio of socially responsible investments (SRIs). I introduced such funds in Chapter 10. They cost a bit more. But if they align with your values, they might be worth the extra cost.

Table 17.4 shows portfolio models comprising SRI funds.

The portfolio in Table 17.4 includes ETFs that are priced in different currencies. This can make rebalancing a bit more difficult. In Chapter 13, I showed how to do it using a pen and calculator.

Muslim investors who want a Shariah‐compliant fund (see Chapter 10) could replace the iShares Dow Jones Global Sustainability ETF with the iShares MSCI World Islam ETF. It trades in US dollars and costs 0.60 percent per year, but it doesn't automatically reinvest dividends.

Don't Get Suckered by the Sirens

This chapter's portfolios will beat 90 percent of investment professionals after fees on an equal risk‐adjusted basis. That means the balanced portfolios I listed, for example, will beat most professional investors who choose 60 percent stocks and 40 percent bonds. The aggressive portfolios I listed will beat about 90 percent of professional investors who choose 90 percent stocks and 10 percent bonds.

Just remember Odysseus and the Sirens. The mythological Greek hero knew that the Sirens would tempt Odysseus and his crew to sail their ship into the rocks. Their enchanting music and voices ruined plenty of ships and sailors. That's why he instructed his crew to stuff wax in their ears.

Investors in a portfolio of index funds need to do the same. At times, you'll be tempted by a “better‐performing” strategy. You might select a different ETF based on its posted superior past performance. But don't take the bait. Doing so is more likely to crash your boat upon the rocks. This tendency to seek perfection (and to gamble) afflicts men more than women. That's why single women's portfolios outperform single men's portfolios. Married men's portfolios outperform single men's portfolios, but married men don't outperform the portfolios of single women.¹

Male hormones appear to be an expensive liability. If you believe you can time the market or you think you can find someone who can, you're deluding yourself. In such a case, don't build your own portfolio. Instead, go back to Chapter 8. Select a financial advisor who will build you a portfolio of low‐cost index funds. You'll make a lot more money if someone can harness your emotions.