The World’s Simplest Investment Portfolio for Australians – VAS + VGS + Cash

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Investing in the stock market can often feel overwhelming and complex. Many people spend countless hours researching different stocks and trying to predict market trends, only to find that they are not beating the market. In fact, a recent report found that almost 80 percent of active fund managers are falling behind major indexes in terms of performance. But what if there was a simple and effective way to invest that didn’t require extensive research or complicated strategies?

In this article, we will explore the world’s simplest investment portfolio for Australians. This portfolio consists of just three investments – VAS, VGS, and cash. By combining these assets, you can create a portfolio that is easy to manage, well-diversified, and has the potential for long-term growth.

The Basics of the World’s Simplest Investment Portfolio

The first component of this portfolio is VAS, which stands for Vanguard’s Australian shares index. VAS is an index-tracking ETF that provides exposure to the Australian stock market. This investment will be one of the main engines for growth in your portfolio over the long term.

The second component is VGS, which stands for Vanguard’s international shares ETF. VGS is another index-tracking ETF, but this one focuses on international markets. By investing in VGS, you can gain exposure to major developed markets around the world, excluding Australia.

Finally, cash is the third asset in this portfolio. While cash may not generate significant returns, it provides numerous benefits that are often overlooked. Cash can act as a safety net during emergencies, allow you to take advantage of opportunities, and provide peace of mind.

Why VAS and VGS?

The rationale behind choosing VAS and VGS is simple – they offer low maintenance and low fees while providing exposure to a broad range of companies. It is impossible to predict which companies will outperform the market, so investing in broad index-tracking ETFs like VAS and VGS ensures that you are investing in the largest companies from around the world.

VAS, with a market cap of $12.5 billion, is the largest ETF on the Australian stock exchange. This means that the fund is highly liquid, and you won’t face any issues when you decide to sell your shares. Additionally, VAS has a management fee of just 0.1 percent per annum, making it a cost-effective choice.

VGS, with a market cap of $5.3 billion, is the third-largest ETF on the Australian stock market. While it has a slightly higher management fee at 0.18 percent per annum, it provides exposure to over 1,500 different companies from around the world. By excluding Australian companies, VGS complements VAS perfectly and ensures diversification across the global market.

The Importance of Cash in Your Portfolio

Cash often gets overlooked as an investment asset, but it plays a crucial role in this portfolio. Holding cash provides additional benefits beyond just paying for bills. It acts as a safety net during emergencies, gives you the ability to take advantage of opportunities, and provides peace of mind.

Having enough cash in your bank account to cover a year of expenses can significantly reduce financial stress. This cushion allows you to make rational decisions during market downturns and prevents you from making impulsive choices that could harm your financial position. Cash provides balance and support to your portfolio, ensuring its stability.

Benefits of the World’s Simplest Investment Portfolio

There are several key benefits to adopting the world’s simplest investment portfolio. Firstly, it is incredibly simple to follow. By investing in just two ETFs – VAS and VGS – you gain exposure to over 1,800 different companies, making it easy to diversify your investments. Simplicity is crucial because the easier something is, the more likely you are to follow through with it.

Secondly, this portfolio offers excellent diversification. Warren Buffett once said, “Diversification is a protection against ignorance.” By investing in broad index-tracking ETFs, you protect yourself from the risk of individual stock picking and focus on overall market performance.

Finally, this portfolio has extremely low costs. The average expense ratio between VAS and VGS is only 0.14 percent, which means that for every $10,000 invested, you would only pay $14 in fees each year. Fees can have a significant impact on your overall investment returns, and minimizing them is crucial for long-term success.

Portfolio Allocations for Different Life Stages

The allocation of your portfolio will depend on your personal circumstances and life stage. Here are some rough guidelines based on different phases of life:

  1. Wealth Accumulation Phase (20s-30s): During this phase, it is recommended to have around 30 percent invested in VAS and 70 percent in VGS. While this allocation is considered aggressive, your 20s and 30s are the perfect time to take on more risk and benefit from long-term market growth.

  2. Transition Phase (40s-50s): In this phase, you should start increasing your cash allocation to about 5-10 percent. This transition prepares you for the wealth preservation phase and helps balance your portfolio.

  3. Wealth Preservation Phase (Retirement): Once you reach retirement and have built up your nest egg, it is essential to focus on maintaining your wealth. You can increase your cash allocation to 25-30 percent or even higher based on your risk tolerance. Additionally, you may consider adding bonds to your portfolio for further stability.

Exploring Alternatives to VAS and VGS

While VAS and VGS are excellent choices for a simple investment portfolio, it’s worth exploring some alternatives. A good alternative to VAS is A200, an ETF from BetaShares. A200 provides exposure to the top 200 companies in the Australian stock market and has a low expense ratio of 0.07 percent.

If you are looking to optimize your portfolio and minimize fees, A200 could be a suitable alternative to VAS. However, it’s important to note that A200 offers slightly less diversification compared to VAS, which includes exposure to the top 300 companies in the Australian stock market.

Conclusion

Investing doesn’t have to be complicated or overwhelming. By adopting the world’s simplest investment portfolio – consisting of VAS, VGS, and cash – Australians can achieve a well-diversified, low-cost, and easy-to-manage portfolio. The key is to focus on simplicity, diversification, and minimizing fees.

Remember, investing is a long-term game, and following a simple and effective strategy can help you achieve your financial goals. By investing in broad index-tracking ETFs and holding cash as part of your portfolio, you can build a solid foundation for long-term wealth and financial independence.