Simple Portfolio for European Investors

Choosing an investment portfolio is overwhelming. There are so many “lazy” options out there: Three-fund Portfolio, Core-4 Portfolio, Coffeehouse Portfolio, Permanent Portfolio, Yale Endowment Portfolio, etc. Some of these options are more complex than their “lazy” name seems to suggest.

Moreover, many of these “lazy” portfolios feature US domiciled funds which are not available for many European investors (e.g. VTI, VOO, SPY).

In this post I will give a detailed overview of the simple portfolio suitable to European investors. I will cover:

  • the principles that guide the decisions of the portfolio
  • funds that implement this portfolio
  • expected returns
  • frequently asked questions about the portfolio

Guiding Principles

Embrace the returns of the whole market

I assume that your goal is to grow your savings at the handsome pace of the whole market. The whole market’s investment returns are enough to achieve your financial goals: financial independence, complementing retirement, etc.

I also assume it is unlikely someone can have investment returns consistently higher than the whole market – irrespectively of the additional risks they take.

Cheap Index Funds are the best tool to achieve whole market returns

Index Funds are designed to give you the performance of the whole market at low costs. Active funds don’t manage to achieve whole market returns in the long run due to their high costs and inconsistent performance.

Investing needs to be simple

An investment portfolio needs to be easy to explain, implement and maintain. Anyone should be able to implement this investment strategy.
Investing should be something that you set up once, spend a couple of hours a year and then get on with your life.

Components of the Portfolio

This Portfolio is very similar to the European Bogleheads’ Portfolio or to Krojer’s Rational Portfolio.

I’ve mentioned this Portfolio across multiple posts on this blog. I wanted a single page where I could explain all its details. This is that page. I will keep this page updated as my thoughts get more refined.

I don’t have a fancy name for this Portfolio. We could call it the Pareto Portfolio because you achieve so much with so little. Or maybe the Duo Portfolio because you only need two investments to implement it.

The Portfolio consists of two components:

  • World Equities – Investing in stocks of companies from the whole world. This is the risky part of our Portfolio which brings high returns.
  • Fixed Income – Investing in high quality bonds denominated in our currency. Or alternatively holding our money in a high yield savings account or certificate of deposit (CD). This is the low-risk part of our Portfolio which has low returns.

World Equities

We invest in World Equities because it is the broadest and most diversified equities market we can invest.

Through World Equities we are exposed to companies from different economies. Different economies may experience prosperity and crisis at different moments which minimizes our risk.

With a World Equities approach we invest in thousands of companies. This means that our returns are not significantly affected when a single company fails.

We invest in World Equities through a cap-weighted Index Fund. Through the fund we are exposed to each company according to their relative value in the World economy. That means that the most valuable companies (e.g. Microsoft) will take a bigger portion of our exposure than the least valuable companies (e.g. EasyJet).

We invest in the whole World because we don’t know which countries will prosper and when. Investing in the whole World has had good historical investment returns.

Investing in companies is risky. This means that the value of our investments may temporarily or permanently decrease. This additional risk is translated into additional returns which allow us to grow our savings.

Expected Returns

In this post I will only be mentioning real returns (not to be confused with nominal returns). That is: investment returns which are adjusted for inflation. I will also only be mentioning long term (30+ years) average annual real returns.

Another thing to keep in mind is that these are average returns. You won’t get them every year. The stock market value changes wildly every year but when you average it over a long period of time (e.g. 30 years) you will find these numbers.

Note that these are expectations made based on 100+ years of historical data. There is no guarantee that we’ll have these returns in the future.

Historically, according to Krojer and Credit Suisse, World Equities have had average annual real returns in the order of 5%. It is reasonable to expect we will have similar returns in the future.


My preferences are for ETFs because they are the most common throughout Europe. You can also implement it using index mutual funds too.

Distributing ETFs:

Accumulating ETFs:

Alternatively to the options provided above, which invest in the whole world, you may also invest in the whole developed world. You still get 88% of the exposure to the whole World.

Make sure you buy funds with the appropriate dividend distribution policy for your tax situation.

Fixed Income

The goal of Fixed Income is to minimize risk. Fixed Income is about preserving our capital.

We minimize risk by investing in bonds of governments with a low likelihood of default (i.e. bankruptcy). Ideally, these bonds should be denominated in our own currency (e.g. EUR, GBP) to minimize currency risk.

Ideally you would buy a bond directly from a high credit quality government in your currency. For example, UK government bonds if your currency is GBP, any Eurozone country with a S&P credit rating higher than AA if your currency is EUR.

If your currency does not have high credit quality government bonds things get a bit trickier. You either choose to take currency risk by choosing a government bond from a different currency (e.g. USD, EUR, GBP). Or you take default risk (but higher returns) by choosing a government bond from your own currency.

Alternatively to bonds, we can hold our money in a savings account or certificate of deposit. These accounts are insured by the European Union up to 100,000 EUR which minimizes their risk.

Expected Returns

Short term high quality bonds are the lowest risk assets we can invest. Historically, according to Krojer, high quality short term bonds have had an average annual real return of 0.5%.

Adding bonds of different maturities, different types (e.g. corporate bonds) and different credit qualities will increase the expected annual returns because you will be taking higher risks.


The challenge with Eurozone government bonds is that some of them have negative yields. This situation won’t last forever though and eventually they will have reasonable yields.

My general preference while bonds have negative real yields, is to keep your money in the highest yield savings account or certificates of deposit you can find if you have less than 100 000 EUR. This is the amount covered by the EU wide Deposit Insurance Scheme.

Buying government bonds directly is often inconvenient and the process varies a lot between countries. The easiest way to get exposed to bonds is to buy a bond index fund.

Currently, only 5 European countries (Spain, UK, Germany, France, Italy) have bond ETFs which hold bonds of different maturities of that government. Alternatively you may consider bond funds which hold bonds of different maturities from different countries.

If you need to invest in bond funds I prefer either one of following funds. These bond funds hold bonds from different countries and maturities:

Equities/Fixed Income Split

Asset allocation is the process by which you adjust your portfolio to your risk profile.
You have to decide which percentage to allocate to World Equities and which percentage to allocate to Fixed Income. The lower percentage of World Equities you choose, the lower your risk and returns.

This post explains how to do your asset allocation and why it is important.

Frequently Asked Questions

What if I don’t have access to the specific funds you prefer?

This post covers the general principles and foundation of the portfolio besides its specific implementation.
The funds here presented are just examples. As long as you pick a cheap (TER lower than 0.25%) index fund tracking the appropriate index you will be fine.
justETF is a wonderful resource you can use to find any ETF that implements this strategy.

What if I want to lower my exposure to the US market?

The US market is the biggest financial market in the World. As a result it represents 50-60% of the holdings of equities index funds that track the whole World.

Why would we lower our allocation to the companies that are having a signifiant contribution to the growth of our savings? What informed and correct arguments do we have to justify that our own allocation is better than the allocation defined by the World index?

I don’t consider currency risk an issue whenever we are investing in equities. Equities are significantly more volatile than the fluctuations of currency exchange rates.

What if I want to increase my exposure to the European market?

The European market represents around 20% of the holdings of index funds that track the whole World.

This Portfolio assumes that the biggest returns we can get are by being exposed to the whole World.

Diverging from the allocations of this portfolio is a slippery slope: How do you decide the allocation to Europe? Is this actually going to increase your returns (likely not)? Is your opinion informed or is it more of a “gut feeling”?

Just because we live in Europe does not mean that we have to get additional exposure to it.

What if I want to increase my exposure to Emerging Markets in order to increase my risks and potentially my rewards?

A World index fund already values each region according to what the whole financial system believes is the fair value of each region. I don’t have any thorough insight regarding Emerging Markets being underpriced therefore, I can’t justify increasing exposure to them.

If you want to increase your returns, increase your allocation to World Equities while lowering your allocation to Fixed Income instead. That will have a higher and more predictable impact in your investment returns.

Additionally, increasing your savings rate will have a significantly higher impact to your investment returns than tinkering with fund allocations. Figuring out how to spend less or earn more is a better use of your time.

What about real estate funds?

The Core-4 Portfolio uses REITs as a separate asset class. I personally don’t think they are necessary.

You have pretty good returns with a World Tracker while using a single fund and not having to worry about anything else. That is priceless. The Portfolio outlined in this post is great. Additional tweaking may lead you to the perfect portfolio or may lead you to a worse portfolio. I can settle with great.

What about Gold?

I don’t get Gold. It does not protect against inflation or hyperinflation. It is as volatile as equities yet it has lower long-term returns. It does not pay dividends.

It feels like a lot of complexity without any benefit.

I also don’t believe that an investment Philosopher’s Stone exist which can allow you to have a set of investments which performs well in all situations (e.g. All Weather Portfolio, Permanent Portfolio).

What about small caps?

This is probably my most controversial choice. So let me take a moment to explain.

Fama and French found that historically value (i.e. cheap) stocks tend to outperform growth stocks and that small-cap stocks tend to outperform large-cap stocks in the long run. This lead to the growth of Factor Investing, where investors look at certain aspects of a company (e.g. value, size, momentum, profitability) in order to assess if it may have above market returns.

Investing in a small-caps index fund is a way through which investors can get exposed to small-caps in order to have these above average returns.

These higher returns come at a price of higher risks (like everything in investing). According to Bernstein, since 1926 small-caps have yielded negative returns for as long as 30 years (!).

You can mitigate the risk of small caps by only allocating a small percentage of your portfolio to them. Yet, generally I think small portfolio changes don’t matter.

Additionally, research has documented that the “size effect” is much lower than the effect of other factors (i.e. profitability, momentum, value). Moreover, small cap stocks do not have impressive performance when looking at the data. They only have impressive performance when small cap growth stocks with low profitability are removed. Very few small cap index funds remove small cap growth stocks with low profitability. DFA funds do, but they are not accessible to many investors.

So, given the options on the table, I prefer the simple Portfolio with a single fund and its (lower) ~5% real returns. I am not comfortable with the added risk of small-caps and I don’t see the point of only sprinkling only 5% of small-caps into a portfolio. I think my time is better spent increasing my contributions to my portfolio.

Yoran has written a great article on this topic.

What about the technology fund?

I’ve ranted about this at length in this post.


  • You can have a great investment portfolio by focusing on two investments: World Equities and Fixed Income
  • You can then decide how much to invest in each investment depending on your risk profile
  • You can get exposed to World Equities by holding an index fund/ETF that tracks the whole world. Examples of such funds include the Vanguard FTSE All World ETF, the iShares Core MSCI World ETF and the iShares Core Emerging Markets IMI ETF.
  • You can get exposed to Fixed Income by keeping your money in a savings account/CD or by buying a bond fund denominated in your currency. Examples of bond funds: iShares Global Aggregate Bond ETF (EUR Hedged), Xtrackers Global Sovereign ETF (EUR Hedged).
  • The funds suggested are just implementation details. What matters are the principles/strategy of this portfolio. If you have access or preference for other funds with a similar strategy you can use them.
  • I don’t think there is value in additional customization of your equity investments. I don’t think they will have a meaningful impact in increasing your returns. The best tools to increase your returns are: increasing your exposure to equities while decreasing your exposure to fixed income; increasing your savings rate.

Disclaimer: This information is for educational and entertainment purposes only. This does not represent, in any case, specific investment, legal nor tax advice nor recommendations to purchase a particular financial product. Learn more at