For Swiss investors, considering the Vanguard model portfolio may be a good starting point to build a solid portfolio.
Vanguard Approch on Asset Allocation
Given today’s uncertain environment, it is crucial for investors to remain disciplined and avoid panic-driven decisions. Vanguard’s Model Portfolio provides a framework for long-term investment allocation, offering different risk profiles based on equity exposure:
- Conservative: 10%–30% equities
- Balanced: 40%–60% equities
- Growth: 70%–100% equities
Vanguard emphasizes a strategic rather than tactical investment approach, advocating for disciplined, quarterly rebalancing to prevent portfolio drift. The model portfolio follows a global market-capitalization methodology, ensuring international diversification without home bias. Investments are allocated across low-cost ETFs and index funds, ensuring liquidity and transparency.
Thoughts on Asset Allocation
The investment landscape for 2025 presents a growing tension in risk assets between momentum-driven growth and concerns over overvaluation. Assets with the strongest fundamentals currently exhibit the most stretched relative valuations, leading to a key dilemma for investors. The balance between economic conditions and policy risks in the coming year will likely determine whether momentum continues to dominate investment returns or if valuations impose constraints on future gains.
Vanguard acknowledges that while US equity valuations are elevated, they may not be as extreme as some traditional valuation metrics suggest. A critical lesson from past market cycles is that being too early in avoiding overvalued markets can be just as costly as being wrong altogether. An example of this is Marc Faber’s long-standing bearish stance on US equities, which led him to miss out on prolonged bull market gains that any retail investor could have benefited from. This underscores the importance of diversification and hedging as core investment principles rather than making extreme directional bets.
The outlook for US equity returns over the next decade remains subdued, projected at -1.2% to 0.8% in Swiss franc terms. While this may appear overly cautious, global equity markets are expected to provide slightly better opportunities, with returns estimated at 0.2% to 2.2%. A more detailed breakdown from Vanguard’s Model Portfolio (March 3, 2025) suggests that valuations outside the US are significantly more attractive. Over the next decade, developed markets ex-US equities are expected to return between 2.9% and 4.9%, while emerging market equities are projected to yield returns of 1.2% to 3.2%, all from the perspective of a Swiss franc investor.
One of the key factors influencing these forecasts is China’s role within emerging markets. Vanguard views China as the primary reason why emerging market valuations are currently below fair value. While developed markets outside the US should remain the primary focus of an individual investor’s asset allocation, emerging market equities—particularly China—offer additional return potential, provided that no catastrophic event disrupts their trajectory.
However, it is important to note that markets have already priced in optimistic economic scenarios. For investors to achieve truly exceptional returns, economic outcomes must exceed these already high expectations. This aligns with Bridgewater’s analysis in How We Would Allocate Capital in 2025, which stresses that markets are currently discounting positive developments, making outstanding performance more challenging to achieve. Similarly, Vanguard expects a traditional 60/40 portfolio to generate only modest returns of 0.4% to 2.4% per year over the next decade.
A final remark pertains to Bitcoin and its broader implications for financial markets. Regardless of its merits as an asset, Bitcoin’s price has exhibited extreme volatility over the past two years. Vanguard distinguishes between two primary impacts of distributed ledger technology (DLT): the speculative aspect associated with cryptocurrencies and the infrastructural impact on financial systems. While the first is exciting, it may not prove to be lasting. The second, however, is more likely to become commoditized, making it difficult to invest in directly. This perspective suggests that while cryptocurrencies may continue to attract speculative interest, the broader technological shift will likely be absorbed into existing financial infrastructures.
Individual Asset Allocation for a Global Retail Investor
In the current environment, selecting the right asset mix is more critical than ever, as market conditions require a more nuanced approach to diversification. Bridgewater’s How We Would Allocate Capital in 2025 argues that a traditional market-cap-weighted portfolio may not be the most effective approach for many investors. Instead, adjustments should be made to align with valuation levels, regional opportunities, and macroeconomic conditions.
Beyond traditional pension schemes, this analysis focuses on equity allocation as part of a broader diversified asset base, which may also include real estate and fixed-income investments. Following the philosophy of Berkshire Hathaway, substantial equity investments remain essential. However, unlike Berkshire’s traditionally US-heavy approach, investors should consider diversifying beyond American equities, even though many large US companies maintain significant international operations.
Ray Dalio and Warren Buffett have both expressed concerns about fixed-coupon bonds, arguing that they offer little protection against currency depreciation, particularly in the face of uncertain US fiscal policies. This perspective reinforces the need for a globally diversified equity portfolio that mitigates country-specific risks.
For a 100% equity portfolio, Vanguard’s recommended geographical allocation for 2025 is as follows:
- North America: 69%
- Europe: 13.7%
- Asia Pacific (Ex-Japan): 2.4%
- Japan: 4.9%
- Emerging Markets: 10.1%
A progressive ramp-up strategy over the past few years has allowed investors to gain exposure to these regions, with a preference for overweighting Japan and emerging markets while maintaining a relative underweight in US equities due to concerns over valuation and currency risk. This approach is best implemented through a combination of low-cost regional ETFs and a broad global ETF such as VT.
Developed markets outside the US are covered by key regions such as Europe, Japan, and Asia Pacific (excluding Japan). The primary weights within these developed markets are as follows:
- Japan: 19.22%
- United Kingdom: 13.33%
- Canada: 11.18%
- France: 10.19%
- Switzerland: 8.86%
- Germany: 8.70%
- Australia: 6.05%
While Japan, the UK, Europe, and Switzerland have been adequately covered in most investment vehicles, Canada and Australia have had relatively lower representation. Canada, in particular, lacks sufficient exposure within the VT ETF, meaning investors may need to supplement their allocation with a dedicated Canada ETF, such as the Vanguard FTSE Canada All Cap Index ETF. While this addition improves geographical balance, it does slightly reduce portfolio simplicity. A North America ETF could also be an option, but its heavy US weighting (over 96%) would counteract the goal of diversification.
For Asia Pacific (ex-Japan), an appropriate allocation can be achieved through the FTSE Developed Asia Pacific ex Japan UCITS ETF (VAPU), which has a low total expense ratio (TER) of 0.15%. The fund’s composition is as follows:
- Australia: 49.07%
- South Korea: 26.89%
- Hong Kong: 13.02%
- Singapore: 9.14%
While there is some overlap with South Korea’s weighting in broader emerging market ETFs, the fund’s low cost and strong exposure to Australia make it a valuable addition to balance the overall portfolio.
Given the broader investment landscape, the recommendation remains to seek higher potential returns outside the US, with a focus on accessing regional ETFs through platforms such as Interactive Brokers. However, investors should be cautious not to underweight US exposure too aggressively. To maintain balanced exposure, it is advisable to continue favoring a low-cost US value ETF, such as VTV, which provides a defensive allocation while avoiding excessive concentration in high-momentum tech stocks. The so-called “Magnificent Seven” are already well represented in VT and MSCI World ETFs, making additional exposure unnecessary for a well-diversified global portfolio.
By carefully selecting asset allocations (see our toolbox) across different regions, investors can optimize returns while mitigating risks associated with overvaluation and currency fluctuations, ensuring a well-balanced and resilient investment strategy for 2025 and beyond.
Sources:
Vanguard Model Portfolio 2025, March 3, 2025
Vanguard Economic and Market Outlook for 2025
Guide Finances 