Desired asset allocation for temporary US person?

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greg219
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Desired asset allocation for temporary US person?

Post by greg219 » Sat May 16, 2015 11:26 am

Dear Bogleheads,

Background
28 y/o. Permanent US resident, but not citizen. I am likely to move back to my Scandinavian home country within a few years. Because of FATCA and similar new regulations introduced recently, investing abroad (e.g., in my home country) is tricky for me while being a US person. After a lot of reading, talking to tax lawyers etc I've decided to do my investing in USD at a US institution while living in the US.

I do have enough money saved up for buying a house/apartment when I move back, all in a savings account denominated in my home country's currency. I have a US 401k that recently made it to the 6 digits. After maxing out my 401k, I'm able to put away a lot of my income for investing. My questions relate to how to allocate those investments. The main purpose is retirement investing.

I want to follow a lazy 3 fund portfolio and implement it through Vanguard. Current thinking of desired asset allocation:
- 20 % US bonds
- 56 % US stocks
- 24 % intl stocks
(i.e.: 80/20 stocks/bonds; 70/30 domestic/intl)

When moving back, the current plan is:
- Take the penalty and withdraw entire 401k (why? to avoid complications with cross-border pensions -- see other thread)
- Move Vanguard investments to a Schwab account and keep them without liquidating as an intl customer (Vanguard disallows intl customers)

Questions
This allocation is pretty standard and unsurprising for US citizens, but my situation as per above is different (different home bias mainly).
A: Should I tilt more towards intl because I don't have a US home bias? What ranges are reasonable? I've heard 20-40 % but that's mostly for US investors.
B: Is it strange to use US bonds for the bond part? Is there some intl version that would make more sense? Why?
C: Anything else that comes to mind?

Thank you.

greg219
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Re: Desired asset allocation for temporary US person?

Post by greg219 » Mon May 18, 2015 11:36 pm

Any thoughts from anyone on this? Thanks again.

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Epsilon Delta
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Re: Desired asset allocation for temporary US person?

Post by Epsilon Delta » Tue May 19, 2015 12:50 am

Why are you contributing to a 401(k) when you plan to withdraw it in a few years? Between the large withdrawal forcing you into a higher tax bracket and the early withdrawal penalty it may be best to forgo the 401(k) except possibly to claim an employer match.

You might be better investing in a diversified portfolio of individual stocks rather than funds of some sort. They have fewer unpleasant interactions with multi-country taxation. Not sure what would be involved in moving an account from a US broker to an international one, but you might be able to do so without selling.

Why the 76% allocation to the US? If I were planning to retire in Sweden I would invest like a Swede. Which probably means global weightings, or a slight European bias.

greg219
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Re: Desired asset allocation for temporary US person?

Post by greg219 » Tue May 19, 2015 11:18 pm

Why are you contributing to a 401(k) when you plan to withdraw it in a few years? Between the large withdrawal forcing you into a higher tax bracket and the early withdrawal penalty it may be best to forgo the 401(k) except possibly to claim an employer match.

Yep, I have a 50 % employer match (i.e., $9k in 2015 since I max out).

You might be better investing in a diversified portfolio of individual stocks rather than funds of some sort. They have fewer unpleasant interactions with multi-country taxation.

Do you have any particular resources on this? I'm expecting to sell sometime in the far future when I live in Scandinavia and am not a US person, so I'd assume that the local tax rules apply.

Not sure what would be involved in moving an account from a US broker to an international one, but you might be able to do so without selling.

At least for the mutual funds I'm considering I've verified that this can be done from, e.g., Vanguard to Schwab without selling.

Why the 76% allocation to the US? If I were planning to retire in Sweden I would invest like a Swede. Which probably means global weightings, or a slight European bias.

This is the core of what I'd like to discuss. I'm biased towards US allocations not necessarily because I should be, but probably because:
- most good literature you can find is directed at US citizens and thus has a strong US bias
- it's simple implementation-wise as a US person (cheap, many choices, etc)

I think we can discuss bonds and stocks separately (I believe the 80/20 split is reasonable as is), so:

A: Stocks: Is a 50/50 US/intl split more reasonable? I believe US equities still represent ~50 % of the world's equities. (And yes, when saying 'intl' here I really mean the world minus the US.)

B: Bonds: Maybe a world bond fund is more reasonable? For example, there's VTABX which seems good. Or maybe a 50/50 split between world bond fund and US bond fund (assuming that I do a 50/50 US/intl stock allocation).

Looking forward to hear your thoughts!

daffyd
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Re: Desired asset allocation for temporary US person?

Post by daffyd » Tue May 19, 2015 11:33 pm

I am pondering spending a few years in the US and what I would do with investments. Do you know if there is a tax treaty with your expected future home? If not, the estate tax treatment for sums above $60,000USD may be punitive. For Australia (me) this is less problematic due to our tax treaty.

With a match, particularly, the 401k is probably worthwhile.

I planned to focus my investments on stocks and use cash/CDs (both US and 'home') as my fixed-interest allocation until I return home. Cash in my home currency avoids eventual foreign exchange risks, assuming I planned to retire at home. Having a fixed allocation to USD bonds introduces such risks, and bonds funds like VTABX are typically hedged back to USD.

For the stock portion 50/50 US/Intl is entirely appropriate. But in a 'taxable' account I'd use ETFs not mutual funds as US mutual funds aren't designed to be foreign held.

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Epsilon Delta
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Re: Desired asset allocation for temporary US person?

Post by Epsilon Delta » Wed May 20, 2015 3:27 pm

greg219 wrote:
You might be better investing in a diversified portfolio of individual stocks rather than funds of some sort. They have fewer unpleasant interactions with multi-country taxation.

Do you have any particular resources on this? I'm expecting to sell sometime in the far future when I live in Scandinavia and am not a US person, so I'd assume that the local tax rules apply.
Sorry I can't help much here. Just give general warnings. The rules are specific to the pair of countries involved and I'm not familiar with Swedish laws nor US-Sweden treaties.

First, If you invest in a fund that is domiciled in the US the fund is subject to US law. Depending on the US-Sweden treaty this may mean that payments to you are subject to US withholding tax. This may mean a higher tax rate than you would pay on a Swedish fund investing in the same things.

Second, many countries limit certain tax treatments to funds that follow certain rules, particularly registration and reporting. If you own "foreign" funds that don't follow those rules the tax treatment is worse. Examples include PFIC (passive foreign investment company) rules in the US, non-reporting funds in the UK and something that I can not spell, pronounce or understand in Japan. If Sweden has a similar rule, most US mutual funds would probably fall afoul of it.

asset_chaos
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Re: Desired asset allocation for temporary US person?

Post by asset_chaos » Thu May 21, 2015 12:21 am

As a Scandinavian person who's going back to live in Scandinavia in a few years, as you say, I think your stock investments should be close to, if not at, global market weight. In your position there is no reason to overweight the US. I'd even say that anything other than a slight overweight to your home country is taking on extra risk that you don't need to take. And for bonds in a long term investment, why would you hold bonds denominated in US$? When you're home in a few years, the risk for you of bonds denominated in US$ will be dominated by currency fluctuations. To my mind, that's not what you want for the safe part of your long term investment portfolio. If I were you, for the next couple of years, I'd put that bond money into the home currency savings account. Then, when I moved home, I'd look for an appropriate home country bond investment. As someone who's seen many of the pitfalls of multi-jurisdictional investments, best wishes.
Regards, | | Guy

greg219
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Re: Desired asset allocation for temporary US person?

Post by greg219 » Thu May 21, 2015 10:15 pm

daffyd wrote:Do you know if there is a tax treaty with your expected future home? If not, the estate tax treatment for sums above $60,000USD may be punitive.

I don't, it's something I'll have to understand better.

I planned to focus my investments on stocks and use cash/CDs (both US and 'home') as my fixed-interest allocation until I return home. Cash in my home currency avoids eventual foreign exchange risks, assuming I planned to retire at home. Having a fixed allocation to USD bonds introduces such risks, and bonds funds like VTABX are typically hedged back to USD.

How interesting; asset_chaos seems to be suggesting something similar.

Are you saying you'd keep cash in USD too? If so, I'm not following as that gives you a currency risk too, right? If you only mean keeping the fixed-interest allocation in AUD, then AFAIU you're basically saying you'd rather give up the *likely* additional return that USD bonds would give you compared to CDs than be exposed to the currency risk. Correct? That call is not obvious to me, and I'd be interested in hearing your reasoning.

For the stock portion 50/50 US/Intl is entirely appropriate. But in a 'taxable' account I'd use ETFs not mutual funds as US mutual funds aren't designed to be foreign held.

Can you elaborate in what way mutual funds weren't designed to be foreign held? I'm using Vanguard, and have read that their unique fund structure lets their mutual funds be as tax efficient as their ETFs (reference). They don't mention anything related to foreign ownership; are there perhaps more wrinkles to this that I should be aware of? (Otherwise, the mutual funds seem fine.)

greg219
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Re: Desired asset allocation for temporary US person?

Post by greg219 » Thu May 21, 2015 10:22 pm

asset_chaos wrote:And for bonds in a long term investment, why would you hold bonds denominated in US$? When you're home in a few years, the risk for you of bonds denominated in US$ will be dominated by currency fluctuations. To my mind, that's not what you want for the safe part of your long term investment portfolio.

Thanks for your input!

If I'd include bonds in my portfolio as a US person, I'd probably have them in my 401k, which (per above) I'm anyway planning to sell off completely upon leaving the US. At that point, I can buy a more reasonable bond fund denominated in my home country's currency instead. Does that sound equally crazy? I'm not sure how I (should) feel about giving up that expected extra return that bonds would provide me compared to a savings account.

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Epsilon Delta
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Re: Desired asset allocation for temporary US person?

Post by Epsilon Delta » Thu May 21, 2015 11:06 pm

greg219 wrote:Can you elaborate in what way mutual funds weren't designed to be foreign held? I'm using Vanguard, and have read that their unique fund structure lets their mutual funds be as tax efficient as their ETFs (reference). They don't mention anything related to foreign ownership; are there perhaps more wrinkles to this that I should be aware of? (Otherwise, the mutual funds seem fine.)


In short: most countries require funds to register and satisfy country specific rules before they allow mutual funds to be sold. Doing this for multiple countries can be burdensome. The restriction is in the prospectus:

Total stock market index statutory prospectus wrote:Foreign investors. Vanguard funds offered for sale in the United States (Vanguard
U.S. funds), including the Funds offered in this prospectus, generally are not sold
outside the United States, except to certain qualified investors. Non-U.S. investors
should be aware that U.S. withholding and estate taxes and certain U.S. tax reporting
requirements may apply to any investments in Vanguard U.S. funds. Foreign investors
should visit the Non-U.S. Investors page on our website at vanguard.com for
information on Vanguard’s non-U.S. products.


You can also at https://advisors.vanguard.com/VGApp/iip ... cialNotice and follow the links.

Now most of this may not apply while you are a US resident, but once you leave the US Vanguard will encourage you to go elsewhere.

daffyd
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Re: Desired asset allocation for temporary US person?

Post by daffyd » Fri May 22, 2015 2:31 am

greg219 wrote:
daffyd wrote:I planned to focus my investments on stocks and use cash/CDs (both US and 'home') as my fixed-interest allocation until I return home. Cash in my home currency avoids eventual foreign exchange risks, assuming I planned to retire at home. Having a fixed allocation to USD bonds introduces such risks, and bonds funds like VTABX are typically hedged back to USD.

How interesting; asset_chaos seems to be suggesting something similar.

Are you saying you'd keep cash in USD too? If so, I'm not following as that gives you a currency risk too, right? If you only mean keeping the fixed-interest allocation in AUD, then AFAIU you're basically saying you'd rather give up the *likely* additional return that USD bonds would give you compared to CDs than be exposed to the currency risk. Correct? That call is not obvious to me, and I'd be interested in hearing your reasoning.


If I end up in the US for a few years my USD cash/CDs would be intended to provide transition/liquidity/emergency funds during my stay rather than being a permanent part of my asset allocation. USD bond returns as part of an asset allocation will be dominated by foreign currency returns/risk. So your expected return is still low (if we assume expected currency return is zero, a bit over 2% p.a.) but your volatility is high in terms of the currency you're planning to retire on. If I'm going to take those sort of risks I'd rather be rewarded, in expectation, e.g. with equities.

Although at present I'd be able to get similar or better rates on AUD cash/CDs than USD bonds which perhaps makes it easier to get my head around relative to Europe. And AUD/USD has been pretty volatile. But it looks like USD/SEK has fluctuated substantially over the past decade: http://www.xe.com/currencycharts/?from= ... K&view=10Y and a 2ish% p.a. local currency return doesn't appeal to me with the likelihood of regular 10% or even 20% or 30% falls.

But to reiterate, definitely look further into the tax treaty situation (google says there is a treaty which is promising but make sure you understand the impact it will have - for instance Australian residents seem to be OK with reasonable amounts in terms of estate tax but my limited understanding is New Zealand residents have more trouble). Also be careful to ensure the US no longer considers you a permanent resident before investing in any foreign-domiciled funds.

greg219
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Re: Desired asset allocation for temporary US person?

Post by greg219 » Sat May 23, 2015 9:27 am

daffyd wrote:If I end up in the US for a few years my USD cash/CDs would be intended to provide transition/liquidity/emergency funds during my stay rather than being a permanent part of my asset allocation. USD bond returns as part of an asset allocation will be dominated by foreign currency returns/risk. So your expected return is still low (if we assume expected currency return is zero, a bit over 2% p.a.) but your volatility is high in terms of the currency you're planning to retire on. If I'm going to take those sort of risks I'd rather be rewarded, in expectation, e.g. with equities.

Although at present I'd be able to get similar or better rates on AUD cash/CDs than USD bonds which perhaps makes it easier to get my head around relative to Europe. And AUD/USD has been pretty volatile. But it looks like USD/SEK has fluctuated substantially over the past decade: http://www.xe.com/currencycharts/?from= ... K&view=10Y and a 2ish% p.a. local currency return doesn't appeal to me with the likelihood of regular 10% or even 20% or 30% falls.

Thanks for the thorough explanation. This logic certainly makes sense to me and seems reasonable.

I certainly will have to do some research wrt cross country taxation. One thing that's not clear to me though, is why *estate* tax is being mentioned as particularly relevant here? AFAIU, this refers to taxation of a *deceased* person. Is that not correct? It may just be me misinterpreting the term -- perhaps it includes taxes on assets/dividends/whathaveyou for non-deceased persons too. Otherwise I can't see how it's that relevant at this point for me, but I'm sure there's something I'm missing.

TedSwippet
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Re: Desired asset allocation for temporary US person?

Post by TedSwippet » Sat May 23, 2015 12:51 pm

greg219 wrote:One thing that's not clear to me though, is why *estate* tax is being mentioned as particularly relevant here? AFAIU, this refers to taxation of a *deceased* person. Is that not correct? ... I can't see how it's that relevant ...

Yes, that's correct. It doesn't apply to you right now, but it may apply at some point. The goal is to have it not apply.

There are two ways to have it not apply. The first is to live forever, and so we'll discount that one for now.

The second is to avoid holding more than $60k in US ETFs, stocks, and so on in your Vanguard accounts after you stop being US resident. This $60k is worst-case. If your country has an estate tax treaty with the US it increases to the $5mm or so available to US citizens and residents.

So you probably don't need to worry about it until you have left the US. After that the level at which you're exposed to risk of estate taxes could drop precipitously depending on the country you move to, and making it enough of a worry that you should move your investments to avoid it.

greg219 wrote:When moving back, the current plan is:
...
- Move Vanguard investments to a Schwab account and keep them without liquidating as an intl customer (Vanguard disallows intl customers)

They do currently seem to be unwilling to open new accounts for NRAs, but as for retaining an account opened while in the US after you leave, in my experience they've been okay with that. I still have a taxable account, an IRA, and a 401k all at Vanguard, and left the US in 2008.

There may be some restrictions on what you can and cannot do with the accounts as an NRA. Canadians in particular have noted issue with being unable to purchase new units or transfer between funds, with only sales allowed. This seems to be the result of some sort of regulatory spat between the US and Canada, though, and so won't necessarily hold for other countries. I'm in the UK, and haven't seen any restrictions yet on what I can do. (But having said that, I don't attempt anything adventurous in my accounts.)

One final note -- be aware of the US expatration tax for departing long-term permanent residents. When you leave the US for good you'll need to surrender your green card, and having to pay yet more tax to the US for the privilege of doing that is not what you want to have happen.

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