How To Invest Like The Nobel Foundation With ETFs

by on November 8, 2012 | Updated July 9, 2014

Individual investors and an ever-increasing number of professional money managers have embraced ETFs as viable “building blocks” for executing a cost-efficient strategy. With more than 1,600 ETPs on the market, investors have no shortage of options at their fingers; although previously hard-to-reach asset classes are now readily accessible, investors’ success over the long-haul is still very much dependent on prudent portfolio management strategies [see How To Pick The Right ETF Every Time].

We often stumble upon priceless lessons in the most unlikely of places and, when it comes to finance, portfolio management tips from Alfred Nobel is as strange as they come. Better known as the inventor of dynamite, Alfred Nobel left behind a legacy that would forever change scientific advancement. What’s less known is that upon his death, Nobel instructed that his fortune be invested in “safe securities,” which quickly turned out to be a financial disaster for the Nobel Foundation [see Simple Safe Haven ETFdb Portfolio].

Originally worth $1.2 million in today’s money, inflation plagued the Nobel Foundation’s bond investments, prompting the changing of some rules that had been more or less blindly followed since its establishment in 1901. Now worth $430 million, the Nobel Foundation stands to offer some valuable lessons that have stood the test of time.

Bond Are Good, But Not Great

Bonds are often times regarded as “safe haven” must-haves, however, history shows us that fixed-income securities actually boast a rather dismal track record when it comes to beating inflation. The current ultra low-rate environment reflects how Treasuries are poised to offer lackluster protection against inflation over the long haul as the Fed will inevitably raise rates, thereby negatively impacting the already puny returns offered through these debt notes. The Nobel Foundation allocates barely over 20% of its assets to fixed-income investments; besides stocks, the rest of its portfolio is well-diversified across several asset classes, including:

Keep An Eye On Taxes and Management Costs

The Nobel Foundation is tax-exempt, but what’s an individual investor supposed to do? First, investors should strive to maximize their holdings in tax-deferred accounts, including 401(k)s and IRAs. Second, it’s important to minimize current income generated from investments outside of those tax shelters. Last, cutting down on your management fees, even if just by a few basis points, adds up big time over the long-haul [see High-Tax Bracket ETFdb Portfolio].

ETFs are by nature tax-efficient vehicles and, as such, can be used to execute a number of tax-loss harvesting strategies, which can help to lower your tax liabilities. Furthermore, passive exchange-traded funds are very cost-efficient, thereby serving as viable “building blocks” in long-term, buy-and-hold portfolios. Cost competition among issuers is only expected to increase, which ultimately benefits cost-conscious investors who have embraced the exchange-traded product structure as part of their strategy.

Think Outside the Border

For most investors, shedding their home country bias is a major challenge. The Nobel Foundation invests close to two-thirds of its assets outside of Sweden, showcasing its commitment to casting a wide net outside its home country’s borders. One of the foundation’s advisors, Kent Janér, highlights how U.S. investors maintain a heavy home country bias given the sheer size of the domestic market. He warns, however, that the next century may hold a number of unforeseen events that could make such a geographically-concentrated strategy less than ideal [see Ex-U.S. ETFdb Portfolio].

Luckily, the ETF universe is vast and investors have options when it comes to tapping into foreign markets. Whether you’re looking to diversify into a developed or emerging market, there’s more than likely several ETFs at your disposal. The free ETF Country Exposure Tool is a great place to start; simply click on a country from the map and take your pick from the various ETPs which offer exposure to that market.

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Disclosure: No positions at time of writing.