A road trip to financial freedom

How to DIY asset allocation and build your own ETF portfolio

By Lizelle Steyn

20 January 2021

Photo credit: Ivan Samkov

Some of us prefer to drive an automatic; some can’t imagine not being in control of those gears. If you’re looking for a well diversified (balanced) multi asset fund, you’re spoilt for choice in the unit trust space, but there are very few of these ‘automatic’ asset allocation funds around in the ETF world. On some platforms, if you don’t like the one or two multi asset funds available, you have little choice but to DIY your asset allocation and choose your own ETFs for each asset class.

My past two posts covered asset allocation and how to choose your own funds if you’re looking for an ‘off the shelf’ multi asset solution. I recommend that you read these posts if you are either not 100% sure what asset allocation is or don’t know how to figure out your risk profile. The rest of this post will assume that you are familiar with these terms and how they apply to your portfolio.

Why would you DIY asset allocation?

You would prefer to build your own portfolio made up of an ETF for each asset class instead of buying a ready-made multi-asset ETF if:

Step 1: Set your strategic asset allocation targets

Each risk profile will have a different capacity for the more risky assets like equity and property. Below is one example of what the recommended asset allocation bands (what % in each asset class) could look like for each profile.

Risk profile Equity allocation Property allocation Bond allocation Cash allocation
Aggressive 80-100% 0-20% 0-10% 0-10%
Moderate aggressive 60-75% 0-25% 0-15% 0-10%
Moderate 40-60% 0-25% 10-20% 10-20%
Cautious 10-40% 0-25% 20-40% 10-30%
Conservative 0-10% 0-10% 30-70% 30-50%

For someone with a moderately aggressive risk profile, for example, the following could be your long-term, strategic asset allocation targets:

To emphasise, the above is an example of the long-term targets that you set for yourself. But over the short term you may be tempted to make a call on certain asset classes. Take SA property as an example. You may hold a view that it’s trading too low and therefore may want to take your local property allocation up to 10% instead of the 5% long-term target. That’s called tactical asset allocation. Getting tactical asset allocation right is a wonderful skill, but the truth is very few people possess it; for most their asset class predictions turn out to be wrong more often than right. As John Kenneth Galbraith pointed out:

‘We have two classes of forecasters: Those who don't know - and those who don't know they don't know.’

Therefore it’s best to simply stick to your long-term strategic asset allocation targets, which form part of your greater investment strategy. No regrets. Just stay diversified in the way you planned and try and keep fear and greed out of your system. (Easier said than done.)

Step 2: Build your own ETF portfolio

Once you’ve fixed your strategic asset allocation targets, you can start shopping for the right ETF to match each asset class and systematically build your own ETF portfolio.

Examples of ETFs on the market that represent each asset class:

Asset class Representative ETF examples
Local equity Satrix 40; Ashburton Top40
Global equity Satrix MSCI World; Ashburton Global 1200
Local property Satrix Property; 1nvest SA Property
Global property Sygnia Itrix Global Prop
Local bonds Satrix ILBI; Satrix SA Bond; 1nvest SA Bond
Global bonds Satrix Global Aggregate Bond; 1nvest Global Government Bond; Ashburton World Government Bond
Local cash Either keep the cash component of your portfolio in your online trade account, or in a money market fund or short-term deposit if it offers a better rate.

After you’ve picked your preferred ETFs, this is what an ETF portfolio for the moderately aggressive investor (who we used as an example earlier) may look like. You will notice the ETF type matches the moderately aggressive investor's target allocation to each asset class.

Example of a DIY portfolio for the moderately aggressive investor:

Asset class Allocation Representative ETF chosen
Local equity 35% Satrix 40
Global equity 35% Ashburton Global 1200
Local property 5% 1nvest SA Property
Global property 5% Sygnia Itrix Global Prop
Local bonds 10% Half to the Satrix ILBI; half to the Satrix SA Bond ETF
Global bonds 5% Satrix Global Aggregate Bond
Local cash 5% TymeBank Goal Saver account (not an ETF)

Someone with a less aggressive profile will have more in cash and bond ETFs, and less in equity and property ETFs, and also less allocation to global ETFs.

That’s it. Once you’ve made your choice for each asset class and matched the % space it takes in your portfolio with your strategic asset allocation targets, you have built yourself a DIY multi asset ETF portfolio.

Step 3: Regularly rebalance to your strategic asset allocation targets

Unlike off-the-shelf multi asset ETFs, you can’t just buy the ETF and not look at your account for the next 10 years, leaving all the rebalancing to a fund manager. You may need to rebalance your ETF portfolio at least once a year in case one of your asset classes – due to rapid growth or severe lack thereof – have started becoming much bigger or smaller than your target %. An example would have been the property asset class that was annihilated during 2020 and most owners of property ETFs would have seen their property allocation just about halve in size during the year. If any asset class allocation becomes too small relative to your targets, buy some more. But not too aggressively as the asset class may partly recover on its own from its lows. Most of the time just a modest ‘top-up’ is needed, bringing you closer to your long-term strategic asset allocation targets.

Like learning to drive a car with a manual gearbox, it will take some practice to DIY your asset allocation and stay close to your long-term strategic targets. But once you’ve had a taste of building your own ETF portfolio and know the exact difference between one ETF and another, you might never want to hand over the driving to someone else again.

To read more on how to build your own ETF portfolio from other bloggers, check out Feedspot’s curated list of the Top 15 South African Investment Blogs.