First timer looking for help [Estonia]

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BatChainPuller
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First timer looking for help [Estonia]

Post by BatChainPuller » Thu Jun 14, 2018 6:00 am

Hello everyone!
I'm new here and I'm planning to start saving for retirement.
I've been going through the Wiki and I have an idea of my saving strategy, but I could use some help from more knowledgeable investors.

Emergency fund: got it.
Debt: house loan, about 180€/month for the next 20 years.
Residence: Estonia.
Tax rate: 20% flat tax on income
Age: 30
Desired asset allocation: I like the three-fund portfolio and the "your age in bonds" rule, so 70% stocks/30% bonds.
Desired international allocation: 50%.

I can invest in the following ETFs through my bank (full list here )

MSCI EMU Value ETF; VAL; 0,40%
STOXX Europe 600; EXSA; 0,20%
iShares NASDAQ-100® UCITS ETF; EXXT; 0,31%
db x-trackers Russell 2000 ETF; XRS2; 0,30%
iShares Core S&P 500 ETF; SXR8; 0,07%
MSCI World Index UCITS ETF; XDWD; 0,19%
MSCI USA Index ETF; XD9U; 0,07%
SPDR S&P Euro Dividend Aristocrats ETF; SPYW; 0,30%
SPDR S&P U.S. Dividend Aristocrats ETF; SPYD; 0,35%
iShares $ Corp Bond UCITS ETF; IBCD; 0,20%
Global Corporate Bond ETF; IBCQ; 0,25%

Pension:
My employer provided pension money is going into this fund: it is an index fund which invests 73% in other stock funds that follow the MSCI ACWI index and 27% into a bond fund that follow the Bloomberg Barclays Global Aggregate index, with a total expense ratio of 0,47%. Once again this was the only index fund available, I can't control the payments amount on it and I can't withdraw any of the money invested in it before I turn 60. No tax benefit.

I can choose to invest as a 3rd pillar for my pension into this stock index fund: it's a passive stock index fund that invests in other index-following investment funds. I would have the advantage of getting back every year the income tax (20%) on the money invested in it, which I would then reinvest in my portfolio. This is the only index fund available for pension investing, and if I withdraw this money before I'm 55 years old I have to pay back the income tax that was deducted on it.


Based on all of the above, I'm considering the following portfolio composition:

70% stocks - 50% domestic: STOXX Europe 600; 50% international: 3rd pillar pension fund.
30% bonds - Global Corporate Bond ETF

I hope I didn't miss out anything. It's my first time, so I'm looking for some feedback on my portfolio composition and funds selection, since my funds choice is kinda limited. Specific tips are very welcome.
I'm especially concerned about how to rebalance my stocks funds: it seems to me that it would be inefficient to sell the quotes of my international stocks fund because of having to pay back the deducted income tax on it, so I would end up with an imbalance towards international stocks.
Moreover, when calculating the portfolio strategy and allocation, should I also consider my employer provided pension and adjust accordingly?

I tried to follow the portfolio questions template as close as possible and to include as many useful information as I could.
I hope I'm not asking for too much, and I thank in advance whoever managed to read up to here.

ExitStageLeft
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Re: First timer looking for help [Estonia]

Post by ExitStageLeft » Thu Jun 14, 2018 4:31 pm

Welcome to the forum! Your pension is what is referred to in the US as a Defined Contribution Plan. Typically when using the word pension we are referring to a Defined Benefit Plan. I raise the distinction in answer to your question about adjusting allocation. In my situation I have a defined benefit plan that will pay 30% of my final salary (average of highest three years). Because of this pension I am willing to take more risk with my retirement portfolio.

Your Tuleva pension fund appears have a 73/27 allocation, whereas the III Pillar fund is 100% equities. It seems to me that you should adjust your fund purchases in your taxable account to compensate for the all-stocks III Pillar. Suppose you have 10,000€ to invest, and you currently have 20,000€ in Teluva and 10,000€ in III Pillar. That is a portfolio total of 40,000€ and to maintain your desired allocation it should be:

8,5% STOXX Europe 600 (Stocks)
16,5% Global Corporate Bond ETF (Bonds)
37,5% Teluva (Stocks)
13,5% Teluva (Bonds)
25% III Pillar (Stocks)

That doesn't take into account how much of your stock portfolio is international. I'm sorry, I'm a US-centric newbie that wouldn't know where to start ferreting out that information. :confused

A simple way to balance out the account is to make sure that the amount of Global Corporate Bond ETF in your taxable account is 33% of the amount in euros of (III Pillar fund + taxable fund). That would keep you very close to 70/30 allocation.

Mors
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Re: First timer looking for help [Estonia]

Post by Mors » Thu Jun 14, 2018 6:23 pm

Two points:

1) 50% Europe is too much. Yes you lower currency risk, but you introduce massive tracking error. Lower it to something closer to global market cap. Use XDWD and IEMM to achieve it.

2) global Corp bonds is fine if it is hedged, but it is unsuitable if it is not. If it is not hedged go 100% stocks in your accounts and move your fixed income in high yield cash investments. Edit: It seems it is hedged.

silverex
Posts: 46
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Location: Vilnius, Lithuania

Re: First timer looking for help [Estonia]

Post by silverex » Fri Jun 15, 2018 7:38 am

Couple points more:

1) As an EU resident, you can use other EU countries brokers via passporting rights. For example, LHV is a reseller of Interactive Brokers and/or Saxo Bank platforms, but you can use Interactive Brokers themselves, or another reseller, say Lynx.

You can also use cheap broker like Degiro. They won't accept your Estonian account, but you can open N26, bunq or Monese EUR accounts for free just for this purpose.

2) In your portfolio, bonds act as a stabilizing part, so it would be best if you could use government or aggregate bond fund. Corporate bonds act way too much as stocks. Vanguard recommends EUR-hedged global bond fund for Euro area investors.

Since LHV don't appear to be offering such fund, it might be better to switch to another broker.

3) It's your personal choice whether to overweight Europe, but by default you should be considering whole world: XDWD (developed markets) plus maybe emerging markets, if those were available.

4) From the page you linked, LHV seems to be charging 1% for transactions and, what's more important, a whopping 0.60% yearly platform fee, that is really a lot these days, and will eat into your returns.

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BeBH65
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Re: First timer looking for help [Estonia]

Post by BeBH65 » Fri Jun 15, 2018 9:10 am

Hello BatChainPuller,


Welcome to the forum.

You have already received good advise.

It should be possible to build a personal portfolio taking into account your positions in your "pension" accounts.

- your employer provided pension is already roughly in the equity/bonds split that you want.
Do you have a more detailed breakdown between the subfunds?

- your 3rd pillar seems to be 100% equity. This seems to be defered taxation.
So the full 100% will work for you and compound. This looks favourable if your goal is to build a capital for your retirement.
Do you have a more detailed breakdown between the subfunds?


What are the amounts that you currently have in each of the above?
How much will you contribute to each of them each year?



Based on the above you will need to hold quite some "stable assets" in your personal account to achieve your 70/30 desired AA.
As mentioned above corporate bonds will not give you the stability that you need.
What is the interest % that you can get on savings accounts in your country? This might be a good alternative to bonds?
What is your current capital you have in this account today? How much will you contribute yearly to this account?
BeBH65. (only an investment enthusiast, not a financial adviser, perform your due diligence).

gmaynardkrebs
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Joined: Sun Feb 10, 2008 11:48 am

Re: First timer looking for help [Estonia]

Post by gmaynardkrebs » Fri Jun 15, 2018 5:02 pm

I'd keep some рубли́ rubli in small denominations around the house. Where you live, you never know when you might need them.

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BatChainPuller
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Re: First timer looking for help [Estonia]

Post by BatChainPuller » Sat Jun 16, 2018 3:13 am

Wow! Thanks everyone for the feedback, that's a lot of useful advice about things I didn't consider! I will answer to everyone:
ExitStageLeft wrote:
Thu Jun 14, 2018 4:31 pm
Welcome to the forum! Your pension is what is referred to in the US as a Defined Contribution Plan. Typically when using the word pension we are referring to a Defined Benefit Plan. I raise the distinction in answer to your question about adjusting allocation. In my situation I have a defined benefit plan that will pay 30% of my final salary (average of highest three years). Because of this pension I am willing to take more risk with my retirement portfolio.

Your Tuleva pension fund appears have a 73/27 allocation, whereas the III Pillar fund is 100% equities. It seems to me that you should adjust your fund purchases in your taxable account to compensate for the all-stocks III Pillar. Suppose you have 10,000€ to invest, and you currently have 20,000€ in Teluva and 10,000€ in III Pillar. That is a portfolio total of 40,000€ and to maintain your desired allocation it should be:

8,5% STOXX Europe 600 (Stocks)
16,5% Global Corporate Bond ETF (Bonds)
37,5% Teluva (Stocks)
13,5% Teluva (Bonds)
25% III Pillar (Stocks)

That doesn't take into account how much of your stock portfolio is international. I'm sorry, I'm a US-centric newbie that wouldn't know where to start ferreting out that information. :confused

A simple way to balance out the account is to make sure that the amount of Global Corporate Bond ETF in your taxable account is 33% of the amount in euros of (III Pillar fund + taxable fund). That would keep you very close to 70/30 allocation.
Thanks for the clarification about US pension plans (and for the portfolio breakdown), unfortunately these are very different from the ones here in EU and when reading US-centric investment books I often get confused. Good luck with your investments fellow newbie, hope we can both retire comfortably :D
Mors wrote:
Thu Jun 14, 2018 6:23 pm
Two points:

1) 50% Europe is too much. Yes you lower currency risk, but you introduce massive tracking error. Lower it to something closer to global market cap. Use XDWD and IEMM to achieve it.

2) global Corp bonds is fine if it is hedged, but it is unsuitable if it is not. If it is not hedged go 100% stocks in your accounts and move your fixed income in high yield cash investments. Edit: It seems it is hedged.
Thanks for the tips!
1) I didn't realize that I could combine those two funds and improve the tracking accuracy. I guess I should lower the domestic EXSA % and balance the international stocks between XDWD, IEMM and my pension fund.
2) The corporate bond fund is indeed hedged, unfortunately I realized that I should rather go for government bonds so I have to think about this.
silverex wrote:
Fri Jun 15, 2018 7:38 am
Couple points more:

1) As an EU resident, you can use other EU countries brokers via passporting rights. For example, LHV is a reseller of Interactive Brokers and/or Saxo Bank platforms, but you can use Interactive Brokers themselves, or another reseller, say Lynx.

You can also use cheap broker like Degiro. They won't accept your Estonian account, but you can open N26, bunq or Monese EUR accounts for free just for this purpose.

2) In your portfolio, bonds act as a stabilizing part, so it would be best if you could use government or aggregate bond fund. Corporate bonds act way too much as stocks. Vanguard recommends EUR-hedged global bond fund for Euro area investors.

Since LHV don't appear to be offering such fund, it might be better to switch to another broker.

3) It's your personal choice whether to overweight Europe, but by default you should be considering whole world: XDWD (developed markets) plus maybe emerging markets, if those were available.

4) From the page you linked, LHV seems to be charging 1% for transactions and, what's more important, a whopping 0.60% yearly platform fee, that is really a lot these days, and will eat into your returns.
Hi, and thanks for the many useful points!
1 + 2) LHV (and Estonian banks in general) fund choice is not the best and now I'm considering switching to an online platform. I checked Interactive Brokers demo account but it seems incredibly complicated. Still have to try the others you mentioned.
3) Yep, seems like I underrated the importance of emerging markets in my portfolio.
4) I'm a newbie when it comes to trading platforms, and I have no idea about how high should the fees be. I could definitely open some account like N26 and use an online broker. Could you please advise me about what's the optimal fees range I should look for?
BeBH65 wrote:
Fri Jun 15, 2018 9:10 am
Hello BatChainPuller,


Welcome to the forum.

You have already received good advise.

It should be possible to build a personal portfolio taking into account your positions in your "pension" accounts.

- your employer provided pension is already roughly in the equity/bonds split that you want.
Do you have a more detailed breakdown between the subfunds?

- your 3rd pillar seems to be 100% equity. This seems to be defered taxation.
So the full 100% will work for you and compound. This looks favourable if your goal is to build a capital for your retirement.
Do you have a more detailed breakdown between the subfunds?


What are the amounts that you currently have in each of the above?
How much will you contribute to each of them each year?



Based on the above you will need to hold quite some "stable assets" in your personal account to achieve your 70/30 desired AA.
As mentioned above corporate bonds will not give you the stability that you need.
What is the interest % that you can get on savings accounts in your country? This might be a good alternative to bonds?
What is your current capital you have in this account today? How much will you contribute yearly to this account?
Thanks for welcoming me and for the feedback!
-Here's my pension fund breakdown:

73% Stocks
8% iShares Developed World ex-Tobacco Index Fund IE00BFG1TM61 0.14%
28% iShares Developed World Index Fund IE00B62WCL09 0.08%
28% iShares World Equity Index Fund LU0839962346 0.13%
9% iShares Emerging Markets Index Fund IE00B3D07M82 0.16%

27% Bonds
27% iShares Global Government Bond Index Fund LU0839970364 0.17%


- And here is my 3rd pillar pension fund breakdown:

Stocks (100%)
Developed markets: 64,5%
db x-trackers MSCI USA UCITS fund (IE00BJ0KDR00)
iShares core S&P500 fund (US4642872000)
Vanguard S&P500 fund (US9229083632)
Powershares QQQ Trust Nasdaq 100 fund (US73935A1043)
Vanguard FTSE Developed All Cap ex US fund (US9219438580)
Schwab FTSE Developed ex US fund (US8085248057)
Vanguard FTSE All World ex US fund (US9220427754)
iShares core MSCI World UCITS fund (IE00B4L5Y983)
Vanguard FTSE All World UCITS fund (IE00B3RBWM25)
db x-trackers MSCI World UCITS fund (IE00BJ0KDQ92)
Vanguard Total World fund (US9220427424)
iShares Edge MSCI Min Vol Global fund (US4642865251)

Emerging markets: 32,1%
db x-trackers MSCI Emerging Markets UCITS fund (IE00BTJRMP35)
Vanguard FTSE Emerging Markets fund (US9220428588)
iShares core MSCI Emerging Markets fund (US46434G1031)
Vanguard FTSE Emerging Markets UCITS fund (IE00B3VVMM84)
Schwab Emerging Markets Equity fund (US8085247067)

Frontier markets: 3,4%
iShares MSCI Frontier 100 fund (US4642861458)

- Banks savings accounts interest rates here are terrible, less than 1% for 12 months. There are some private credit unions that offer around 5-6% per year and deal in savings accounts and loans, but you never know how long they will be in business and the deposits are not guaranteed as for banks.

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BeBH65
Posts: 1197
Joined: Sat Jul 04, 2015 7:28 am

Re: First timer looking for help [Estonia]

Post by BeBH65 » Sun Jun 17, 2018 4:17 am

BatChainPuller wrote:
Sat Jun 16, 2018 3:13 am
Thanks for welcoming me and for the feedback!
-Here's my pension fund breakdown:

73% Stocks
8% iShares Developed World ex-Tobacco Index Fund IE00BFG1TM61 0.14%
28% iShares Developed World Index Fund IE00B62WCL09 0.08%
28% iShares World Equity Index Fund LU0839962346 0.13%
9% iShares Emerging Markets Index Fund IE00B3D07M82 0.16%
Seems a very diversified portfolio, lacking maybe some small caps. Expenses seem reasonable.
There is overlap in these funds the first 3 basically invest in the same.
(don't know why they have a more expensive ex=Tobacco fund, while investing in Tobacco in the other funds anyway)


27% Bonds
27% iShares Global Government Bond Index Fund LU0839970364 0.17%
Not an unreasonable choice - subject to currency volatility - strange that they do not hedge to the EURO, but maybe their horizon is soo far way that it does not matter.

We can probably leave this pension outside of the discussion as you have not control what soever about this. It migth play a role in the risk that you want to take with the invetments that you do control.



- And here is my 3rd pillar pension fund breakdown:

Stocks (100%)
Developed markets: 64,5%
Emerging markets: 32,1%
Frontier markets: 3,4%

Assuming that the ER are low, then these seem to be a decent set of funds. Looking at the overlaps, the managers of this fund clearly do not follow the bogleheads principle of simplicity. This is an agressive portfolio with the % of Emerging markets about 3x larger then the normal market weights



- Banks savings accounts interest rates here are terrible, less than 1% for 12 months. There are some private credit unions that offer around 5-6% per year and deal in savings accounts and loans, but you never know how long they will be in business and the deposits are not guaranteed as for banks.
Do not immediately discard the savings accounts. Yes the return is low, but (i assume) the risk is very-low (due to governmetn guarantee up to XXXXXX Euro). If you stay with your local broker this might be your only opportunity to hold stable assets, as you only seem to have access to equity funds and a corporate bond fund that is still very correlated to equity
You state you want 30% (stable assets) bonds. This is within the range for your age. - If you need to go for the very stable savings accounts, you might consider augmenting the equity % a bit to strive for more return there, with some extra risk



To build your portfolio we need to understand what your current investments are:

3rd pillar pension fund (tax-deferred)
XX% in the worldwide diversified set of equity funds that seem to follow the regional split that you desire.
personal account
XX% cash for investing

The goal is to split the cash for investing into stable assets (bonds/saving account) - 25-30% of the total and then to invest the remainder in equity. For the equity this seems to be the most diversified and cheapest option: MSCI World Index UCITS ETF; XDWD; 0,19%


Similarly you will need to decide how you will divide your future contribution between your tax-differed account and your personal accounts.


Next steps:
1- get the missing info
2- investate if you can invest outside of your country as suggested by others
3- decide on your initial mix
4- decide on the future contributions.
BeBH65. (only an investment enthusiast, not a financial adviser, perform your due diligence).

silverex
Posts: 46
Joined: Sun Jan 07, 2018 1:05 pm
Location: Vilnius, Lithuania

Re: First timer looking for help [Estonia]

Post by silverex » Mon Jun 18, 2018 4:39 am

BatChainPuller wrote:
Sat Jun 16, 2018 3:13 am


4) I'm a newbie when it comes to trading platforms, and I have no idea about how high should the fees be. I could definitely open some account like N26 and use an online broker. Could you please advise me about what's the optimal fees range I should look for?
You shouldn't pay any platform (yearly) fees, especially if they are a percentage of your assets. Also, anything less or equal to 0.1% transaction fee (min 10 EUR) seems to be reasonable, but of course everything depends on your own situation.

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BatChainPuller
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Re: First timer looking for help [Estonia]

Post by BatChainPuller » Wed Jun 20, 2018 5:06 am

BeBH65 wrote:
Sun Jun 17, 2018 4:17 am
BatChainPuller wrote:
Sat Jun 16, 2018 3:13 am
Thanks for welcoming me and for the feedback!
-Here's my pension fund breakdown:

73% Stocks
8% iShares Developed World ex-Tobacco Index Fund IE00BFG1TM61 0.14%
28% iShares Developed World Index Fund IE00B62WCL09 0.08%
28% iShares World Equity Index Fund LU0839962346 0.13%
9% iShares Emerging Markets Index Fund IE00B3D07M82 0.16%
Seems a very diversified portfolio, lacking maybe some small caps. Expenses seem reasonable.
There is overlap in these funds the first 3 basically invest in the same.
(don't know why they have a more expensive ex=Tobacco fund, while investing in Tobacco in the other funds anyway)


27% Bonds
27% iShares Global Government Bond Index Fund LU0839970364 0.17%
Not an unreasonable choice - subject to currency volatility - strange that they do not hedge to the EURO, but maybe their horizon is soo far way that it does not matter.

We can probably leave this pension outside of the discussion as you have not control what soever about this. It migth play a role in the risk that you want to take with the invetments that you do control.

Tuleva, the company who launched this fund, says that they follow Bogle's principles, and they have the lowest fees here. Hopefully soon they will open a 3rd pillar pension fund too.


- And here is my 3rd pillar pension fund breakdown:

Stocks (100%)
Developed markets: 64,5%
Emerging markets: 32,1%
Frontier markets: 3,4%

Assuming that the ER are low, then these seem to be a decent set of funds. Looking at the overlaps, the managers of this fund clearly do not follow the bogleheads principle of simplicity. This is an agressive portfolio with the % of Emerging markets about 3x larger then the normal market weights

This fund is managed by a bank, and it's the 3rd pillar fund with the lowest fees here.



- Banks savings accounts interest rates here are terrible, less than 1% for 12 months. There are some private credit unions that offer around 5-6% per year and deal in savings accounts and loans, but you never know how long they will be in business and the deposits are not guaranteed as for banks.
Do not immediately discard the savings accounts. Yes the return is low, but (i assume) the risk is very-low (due to governmetn guarantee up to XXXXXX Euro). If you stay with your local broker this might be your only opportunity to hold stable assets, as you only seem to have access to equity funds and a corporate bond fund that is still very correlated to equity

I understand. I might go for a savings account then, while I accumulate a large enough portfolio to switch to another broker and then invest into a government bonds fund.

You state you want 30% (stable assets) bonds. This is within the range for your age. - If you need to go for the very stable savings accounts, you might consider augmenting the equity % a bit to strive for more return there, with some extra risk



To build your portfolio we need to understand what your current investments are:

3rd pillar pension fund (tax-deferred)
XX% in the worldwide diversified set of equity funds that seem to follow the regional split that you desire.
personal account
XX% cash for investing

The goal is to split the cash for investing into stable assets (bonds/saving account) - 25-30% of the total and then to invest the remainder in equity. For the equity this seems to be the most diversified and cheapest option: MSCI World Index UCITS ETF; XDWD; 0,19%


Similarly you will need to decide how you will divide your future contribution between your tax-differed account and your personal accounts.


Next steps:
1- get the missing info
2- investate if you can invest outside of your country as suggested by others
3- decide on your initial mix
4- decide on the future contributions.
I'm back with more information :D
1- Current investments: my portfolio is currently empty, no 3rd pillar investments either. Can't afford to invest a starting lump sum now.
2- I'd like to use an external broker, as the fund selection is way better, but for now I think I'll stick with my bank (no management fees for the 1st year) and switch to a different platform once my portfolio gets larger. In Estonia I do not pay income tax on dividends until I "take out more than the invested capital", but to to this I have to designate an "investment account" opened with any European credit institution (a bank, not a private broker), and those all require minimum initial amounts.
3- How about going for 40% XDWD, 30% 3rd pillar fund and 30% into a savings account? Or should I include an European index fund like EXSA?
4- Future contributions: can invest 300€ per month, split between my portfolio (stocks + bonds/savings account) and 3rd pillar fund. I get back 20% income tax for investments in my 3rd pillar.
Once again, thanks for the invaluable assistance!

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BatChainPuller
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Re: First timer looking for help [Estonia]

Post by BatChainPuller » Mon Jun 25, 2018 8:09 am

Bumping my topic only once to see if I get some feedback on my last message.

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BeBH65
Posts: 1197
Joined: Sat Jul 04, 2015 7:28 am

Re: First timer looking for help [Estonia]

Post by BeBH65 » Thu Jun 28, 2018 10:43 am

Your AA and plan looks good.
For the monthly contributions you add to the fund that is most below your intended %, or keep in Cash if that is lowest.
BeBH65. (only an investment enthusiast, not a financial adviser, perform your due diligence).

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