Should I tilt to Country of Birth in asset allocation?

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Agni
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Should I tilt to Country of Birth in asset allocation?

Postby Agni » Wed Apr 19, 2017 7:20 am

Hi,
I have a roughly 60-40 portfolio with international exposure (e.g. Vanguard Retirement 2025). However, in the future (say 10-15 years) I intend to spend some time of the year (3-4 months) in the country of my birth. So expenses e.g. upkeep of ancestral home, travel in that country etc. will be in that currency and maybe I need to consider keeping up with the inflation there. Would the boglehead sages advise allocating a portion to that country or is existing international exposure good enough? Country specific ETFs are available with ER of around 0.85. If yes, what % would you invest?
Thanks as always!

The Wizard
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Re: Should I tilt to Country of Birth in asset allocation?

Postby The Wizard » Wed Apr 19, 2017 7:28 am

Sure, why not?
Put 10-15% of your total in a broad based ETF from that country...
Attempted new signature...

harvestbook
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Re: Should I tilt to Country of Birth in asset allocation?

Postby harvestbook » Wed Apr 19, 2017 7:50 am

If you want to pay a premium for emotions, then that's cool--I don't think there's a logical math case to be made for it, though. Otherwise a widely diversified portfolio is going to balance out all the world's currency risks.

goingup
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Re: Should I tilt to Country of Birth in asset allocation?

Postby goingup » Wed Apr 19, 2017 8:36 am

Can't imagine it would be anything more than a sentimental choice. Mixing sentiment with investing hasn't worked for me.

I had the hardest time unloading individual stocks from my home country--Michigan. I owned GM and Detroit Edison. :wink:

I especially wouldn't want to own a fund with a .85 ER. That's too expensive.

an_asker
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Re: Should I tilt to Country of Birth in asset allocation?

Postby an_asker » Wed Apr 19, 2017 8:45 am

harvestbook wrote:If you want to pay a premium for emotions, then that's cool--I don't think there's a logical math case to be made for it, though. Otherwise a widely diversified portfolio is going to balance out all the world's currency risks.

My educated guess being that it is the same country as my motherland, it might be a good idea to tilt (though I am following generic boglehead advice), especially as OP is fortunate to be able to split his/her time across the two countries (best of both worlds).

Notwithstanding his vested interests, my old buddy who's a big cheese mutual fund manager there has been pressuring all of his US buddies (such as me) that the sky is falling in the USA, and we should invest much more back there.

NiceUnparticularMan
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Re: Should I tilt to Country of Birth in asset allocation?

Postby NiceUnparticularMan » Wed Apr 19, 2017 9:05 am

Potentially yes. If you are planning to do a lot of your consumption in one particular currency, a holistic approach to financial planning will likely lead to the conclusion you want to "overweight" assets denominated in that currency in order to decrease the amount of uncompensated currency risk you would otherwise be taking on.

However, you might want to start with non-equities first, meaning bonds and such denominated in that currency. That will depend on what is actually available to you. Then you might also want to add some equities, and maybe real estate if you invest in that separately. And when doing all this, you probably want to be thinking about whether inflationary or deflationary scenarios are most concerning to you, and you might want to hedge against both.

NiceUnparticularMan
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Re: Should I tilt to Country of Birth in asset allocation?

Postby NiceUnparticularMan » Wed Apr 19, 2017 9:10 am

harvestbook wrote:Otherwise a widely diversified portfolio is going to balance out all the world's currency risks.


Conceptually, the problem is that if most of your consumption is denominated in one currency, then that balanced investment portfolio combined with that unbalanced consumption profile is likely going to result in an unbalanced overall financial situation.

To put it another way, the hypothetical global portfolio has been created collectively by investors all over the world who are also consumers all over the world. So their consumption is diversified in much the same way their investments are diversified.

These days, it is possible for an individual investor to step into the collective shoes of those global investors/consumers on the investment side (or at least a rough approximation), but it is not so easy to step into their collective shoes on the consumption side.

halfnine
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Re: Should I tilt to Country of Birth in asset allocation?

Postby halfnine » Thu Apr 20, 2017 3:40 pm

Globally weight equities. Then tilt to the other county in fixed income with bonds, CDs, or saving accounts accordingly. It's cheapest generally just to buy these locally but make sure that they are owned individually and not as an ETF or mutual fund to prevent PFIC isssues.

Valuethinker
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Re: Should I tilt to Country of Birth in asset allocation?

Postby Valuethinker » Thu Apr 20, 2017 4:04 pm

Agni wrote:Hi,
I have a roughly 60-40 portfolio with international exposure (e.g. Vanguard Retirement 2025). However, in the future (say 10-15 years) I intend to spend some time of the year (3-4 months) in the country of my birth. So expenses e.g. upkeep of ancestral home, travel in that country etc. will be in that currency and maybe I need to consider keeping up with the inflation there. Would the boglehead sages advise allocating a portion to that country or is existing international exposure good enough? Country specific ETFs are available with ER of around 0.85. If yes, what % would you invest?
Thanks as always!


It's very unlikely there will be a good correlation between the stock market of your home country, and your consumption in that country.

Let me give you an example. Canada. Stock market is c. 40% financials, 40% mining & natural resources/ energy. That has very little to do with the price of a restaurant meal in that country. It's true that if the resource sector is doing well the country does well, but right now resource prices are depressed, and Vancouver and Toronto have just crazy housing prices.

Most countries don't have stock markets that are heavily linked to the domestic economy of that country, enough to give you meaningful hedging, or to justify overweighting.

Bonds in that country may offer a hedge. Unfortunately there's considerable inflation risk, and few countries offer inflation linked bonds. And at least in Emerging Markets (plus places like Greece) banks are not risk free.

Owning real estate in that country offers some hedge, however it also means cost of maintenance, taxes, security etc. But it's a strategy.

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tractorguy
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Re: Should I tilt to Country of Birth in asset allocation?

Postby tractorguy » Thu Apr 20, 2017 5:12 pm

I'm going to be one of the few people who will tell you to not tilt to a particular country even though you've got an expected stay and expenses there 10-15 years from now. It was my experience, living in two different countries for 5 years each, that exchange rate fluctuations can swamp any investment advantage to be gained from investing in a particular country. I've overweighted my investment in the country that I'm retired in so as to take exchange rates fluctuations out of the picture as a risk factor for retirement. That's because I'm expecting to spend money primarily in my retirement country for a 30 or more year period.

In addition, if I was planning to spend 1-6 months in another country, and if inflation in that country wasn't an issue, then I would consider moving some of my emergency cash there any time in the 1-2 years ahead of that move if exchange rates looked like they were at a historically attractive position. This would depend on inflation rates. I took one trip to Turkey in about 2002 when we were counseled to not exchange money into Turkish lira until the day before we left and to not exchange any more than we thought we needed for the first week. The inflation rate was bad enough that expected we would get more lira for the same amount of English Pounds a week later.
Lorne

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grabiner
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Re: Should I tilt to Country of Birth in asset allocation?

Postby grabiner » Thu Apr 20, 2017 7:16 pm

You may have a currency issue which suggests a tilt towards the country in which you will be spending your money. Normally, the reason that US investors should overweight the US and underweight Japan is that their retirement expenses will be in US dollars; if the yen falls against the dollar, Japanese stocks will lose some of their US dollar value, which is an extra risk. But if you will be spending yen in your retirement, then you don't have this risk, and might hold more in Japanese stock (but still less than the market weight in European stock, as you do have risk if the pound or euro falls against the yen).
David Grabiner

asset_chaos
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Re: Should I tilt to Country of Birth in asset allocation?

Postby asset_chaos » Thu Apr 20, 2017 11:43 pm

Would it make much difference to modestly overweight one's birth country stock market---or for that matter to modestly underweight it, as it appears you're doing now? The stock markets of all countries outside the US range from small (Japan, UK, circa 8% of global total) to tiny to infintesimal. So I don't think it matters much whether you do or don't get a country specific etf. In fact, it probably matters more how much you continue to save between now and when you want to split time between countries.
Regards, | | Guy


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