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If you are able to withstand losses close to 40% in a year, this is the diversified fund that is cheap for a long-term passive investment


Investing may seem like the most complicated thing in the world, but today we have a range of products wide enough to adequately respond to our risk profiles. Nevertheless, the asset that historically has shown the best long-term results is equities, owning a business.

This has an explanation. If we reflect, fixed income instruments tend to have less risk because on the side of sovereign fixed income issuance, countries can coercively determine the level of income to satisfy the payment of debt and, on the other hand, the financial expense is perfectly determined and is before the net profit of the company, so creditors have payment priority over shareholders.


For all this, historically, equities have reported an annualized return close to 10% (9.6%) and bonds almost 5% (4.9%). From what we could deduce that the shareholders would be receiving a risk premium of five percentage points.

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Once we see that equities are the best asset we can have in our portfolio, it is necessary to clarify its exposure. Assuming we do not have any capacity or time to identify the best companies, the best exposure is a global diversification. This is so for the simple reason that we will try to reduce, to its maximum expression, the specific risk linked to stocks, and, at the same time, the risks due to geographic and sector exposure.

With these characteristics, we find multiple stock indices. But the one that offers a global explosion more adjusted to the parameters of global market capitalization is the MSCI World Index because it includes the representation of large and mid-cap companies in 23 countries of developed markets. In total we would be talking about 1,583 components. The index would be covering approximately 85% of the market capitalization adjusted to the free float Of each country. Its annualized ten-year return is not bad at all, 10.84% ​​(based on euros).

In sectors, it includes all of them, being the most relevant: composed of technology (21.89%), financial (13.61%), health (12.54%), consumer discretionary (11.99%), industrial (10.51%). The most important value would be Apple with 3.98% of the portfolio.

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Due to geographical diversification, the role of the United States stands out, with a weight in the index of 66.11%. Then How can geographic diversification be considered when 2/3 of an index is concentrated in the same country?

Anu

First, let’s think about what type of companies are companies that receive their income in dollars (global dollar standard) but, in turn, are multinationals that operate in the main economic areas of the world and this offers a counterweight to country risk. Also, let’s not forget that in the midst of the technological revolution of the digital age, the United States is leading the race with big technology, while Europe has lagged behind.

Now we have to solve the other big question, how much will it cost to invest in a product with these characteristics? And is that the cost of the product will be detrimental to your profitability and, therefore, of the interests of the investor. The lower the cost of the product, the higher the profitability achieved and, in the long run, the better the long-term compound interest will pay off.

With these characteristics, we see several interesting index funds, focused on passive management, which would charge their products with current expenses of around 0.50% or less, while banks charge 2% or more for a global equity fund. . Among index funds that try to replicate the MSCI World Index we have the iShares World Equity Index Fund, Fidelity MSCI World Index Fund P-ACC-EUR, Amundi IS MSCI World AE-C, Vanguard Global Stock Index Fund Investor, the latter being the one that imputes the lowest current expenses, quantified at 0.18%.

But investing for the long term is not easy, crises and bear markets exist. In the case of the MSCI World Index, it has had to endure heavy losses. The worst year was 2008 with a loss of 37%, followed by the years 2002 and 1990 with losses of 32.5% and 29%. Hence the importance of focusing on a long-term vision.

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