Living off an international portfolio

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Living off an international portfolio

Postby boggler » Sun Sep 01, 2013 3:58 pm

Let's say you wanted to retire in another country, say, India. What should your portfolio look like to minimize risk, given that your fate and cost of living is tied to one country? For example, in the US people often recommend a "home bias" in a portfolio, meaning an overweight to US stocks, partially because your cost of living is tied to the US. Should you do the same if you retire in India, by putting most of your money in something like the Vanguard Total World Stock and Total Bond + Total International Bond, but with an additional tilt towards Indian index funds?

The situation to avoid here is that you could retire in India expecting a certain amount of purchasing power, but then the exchange rate could change substantially and you could find yourself unable to maintain your lifestyle. I'm wondering how you should hedge this risk in a low-cost, diversified way.
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Re: Living off an international portfolio

Postby rob » Sun Sep 01, 2013 4:04 pm

I would maintain a higher than normal exposure to the currency if you're remotely close to retirement. I know that's not the diehards approach.... but if you're sure you will retire in India then locking in some of that purchasing power makes sense to me. At least so you have your lower level income estimates in rupees (floor if you like).
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Re: Living off an international portfolio

Postby grabiner » Sun Sep 01, 2013 5:00 pm

rob wrote:I would maintain a higher than normal exposure to the currency if you're remotely close to retirement. I know that's not the diehards approach.... but if you're sure you will retire in India then locking in some of that purchasing power makes sense to me.


It makes the same sense as holding more US stocks and bonds than the world weight if you live in the US, which is standard advice. The US stock market is about half the world stock markets, but 20-30% is the usual recommendation for foreign stock holdings, because there is the extra currency risk for foreign stocks held by US investors.
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Re: Living off an international portfolio

Postby nedsaid » Sun Sep 01, 2013 6:49 pm

A good way to keep your purchasing power is to make sure that the bulk of your investments are denominated in strong currencies: the Dollar, the Euro, the Pound, the Yen, etc. So if you had stock and bond investments denominated in those currencies, you would be A-OK.

So if you lived in India and the rupee crashed, your International portfolio would help you. The capital gains and income denominated in strong currencies would turn into more rupees than normal.

What you are guarding is not dollars, pounds, or rupees. What you are guarding is the purchasing power of your portfolio.
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Re: Living off an international portfolio

Postby marcos123 » Sun Sep 01, 2013 8:07 pm

I Early-Retired to Brazil a decade ago. Once obtaining a Residency Visa, I have consistently maintained half of my portfolio investments in country, denominated in the local currency (the Real), and the other half overseas in US Dollars (I am a US citizen). Although I did not "market time" my retirement, it happened that the local currency, local fixed income instruments, equities, the country's commodities, and real estate were undervalued at the time. I have always religiously rebalanced so that my overall country exposure ceiling (excluding principal residence) never exceeded 50%. Nominal and Inflation-linked bonds have always been a mainstay given certain peculiarities of Brazil's markets but I have actively invested in a variety of market segments. I should mention that since I had previously worked in Emerging Markets Finance including in country, I was comfortable with this allocation from the get-go.

Managing one's finances as a retired expat is in no small part art rather than science. For example, when the real was way overvalued a few years ago, I favored the locally-issued credit card to pay for overseas trips. Now that real is approaching reasonable valuations, i.e. depreciating, I have opportunistically brought in dollars to make new investments, particularly in fixed income, since the risk premiums have become appealing. After hitting my exposure ceiling, then I will maintain it by harvesting some dollar-denominated overseas investments to pay for local expenses and for traveling (favoring US-issued credit cards).

Research tax issues carefully prior to retirement, as well as residency requirements, real estate law for foreigners, health care, the cost of living, and the usual laundry list for expats. Before definitively moving to your chosen country, give it a test run for at least six months by renting out a place there. That is what I did prior to the definitive move and first real estate purchase, although I had previously worked in country on various international assignments, so I had a fairly clear idea of what I was getting myself into.
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Re: Living off an international portfolio

Postby kramer » Mon Sep 02, 2013 5:07 am

Interesting posts here. I think a lot depends on the size of the country's market, its currency history, its laws, and one's long term commitment to living there.

For instance, if I lived in a tiny economy like Israel where most things are imported and the biggest trading partner and deepest relationship is with the USA, I would be thinking internationally diversified portfolio with a bias toward dollars. If I lived in China, where far fewer of my consumption items would be imported and the currency is not convertible, I would be worried that the loose currency pinning to the dollar would change and I would be worried about things like the ability to get money back out of the country if I changed my mind about living there.
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Re: Living off an international portfolio

Postby kramer » Mon Sep 02, 2013 5:11 am

Case Study: I am living in the Philippines. The main risks here are probably standard of living inflation (rapidly growing economy, fastest in Asia recently) and a long term appreciating currency (Peso).

A great way to lower future cost of living risk is to own property locally. But a foreigner can't own property here, not even a permanent resident like me. There are workarounds (corporations, find a trustworthy wife, etc) but way beyond my personal risk tolerance -- you are trading one risk (standard of living) for a host of other risks that also make you less mobile.

I would like to invest more in the local currency via locally available CDs. But only 5 year Peso CDs are (locally) tax-free and the PDIC protection (FDIC equivalent) is only about $7000 per bank. And it is difficult to even find banks offering CDs with a term as long as 5 years. When I asked about this at my bank they looked at me like I was some kind of space alien -- the longest they offer is one year.

The currency is historically closely tied to the dollar and the dollar is effectively the second currency in the country. The Peso is non-convertible which means you cannot bring or leave with more than a couple hundred dollars worth of Pesos. So this gives an American retiree a big currency advantage over someone from, say, a Euro country.

So my only real solution has been to invest in the ishares Philippines equity ETF with money in my USA brokerage. I think the Philippines is about 0.4% of world GDP, but I have about 4% of my net worth in the ETF. In addition to lowering my long term currency risk, I am hoping that the stock market would rise if the standard of living went up in the Philippines also reducing another risk. But this is just a couple of years worth of local spending for me, so how much will it really help? If I was absolutely committed to living here the rest of my life, I would definitely increase that amount. What I would really like to do is invest in a low cost Philippines bond ETF, purely for currency reasons, but there are none available. I have not yet solved the OP's problem to my satisfaction.
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Re: Living off an international portfolio

Postby kramer » Mon Sep 02, 2013 5:20 am

To show how relevant this is, take Colombia as a case study. I lived in Colombia for awhile a few years ago.

From the period 2000-2010 (roughly), Colombia's currency and stock market were the best performing in the entire world. If a retiree was living off just dollars, his standard of living would have dropped precipitously. In fact, by 2010, most local things seemed more expensive than the USA to me (in other words, the currency seemed overvalued to me). A Country ETF only became available in recent years so investing in the local economy via bonds or stocks would probably have been non-trivial.

However, owning property there is entirely legal for a foreigner (and safe). So had he owned property, he would have seen a large appreciation on that investment (and no rent payments due in local currency). I had a local American friend who did exactly this and his finances were much better than they otherwise would have been.
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Re: Living off an international portfolio

Postby boggler » Mon Sep 02, 2013 7:08 pm

Interesting - so it sounds like the ideal thing really is to hedge your risk. Would the best way to do this be via currency futures/options/swaps? I hate the idea of using derivatives, but I suppose this is what they were made for in the first place - hedging risk.
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Re: Living off an international portfolio

Postby Valuethinker » Wed Sep 04, 2013 7:28 am

boggler wrote:Interesting - so it sounds like the ideal thing really is to hedge your risk. Would the best way to do this be via currency futures/options/swaps? I hate the idea of using derivatives, but I suppose this is what they were made for in the first place - hedging risk.


The cost of hedging particularly for less well traded currencies in EM, is likely to be prohibitive. Plus there are currency controls.

Buy a property in the country in which you intend to retire, if that's legal. Have a local bank account and have 1-3 years expenses in it. Keep the rest of your investments globally diversified. Local stock markets are usually too thin, not representative of the country as a whole, so offer little hedging (although they are probably positively correlated with a rising currency). Local bonds, if they can be trusted, are a better hedge (but consider histories of default, and look at the 'current account deficit' countries right now: India, Thailand, Indonesia, Turkey (there's one other) and remember that 'Black Swans' are always a risk.

Your US SS is in USD so that might argue for a switching away from USD assets in your portfolio to some extent.

That's about all I can suggest.
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