Please rate my portfolio

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Topic Author
urizaf
Posts: 31
Joined: Wed Jun 12, 2019 1:43 pm

Please rate my portfolio

Post by urizaf » Wed Jun 12, 2019 2:25 pm

Hello. I am a 26 years old pianist from Israel.

State of residence- Israel
Age - 26
Desired Asset allocation: Unsure.
Desired International allocation: 40-50% of stocks? Unsure.

I have read about investing following our Israeli elections.
My portfolio is a kind of mix between Bogle and Buffet.
I am somehow pleased with it:

BND Vanguard Total Bond Market ETF - 29 %
VXUS Vanguard Total International Stock ETF - 30%
NOBL ProShares S&P 500 Dividend Aristocrats- 30%
VNQ Vanguard Real Estate ETF- 11 %

My thought process is the following:
1.Three fund portfolio is nice. I am not that proficient to invest in individual stocks. I wanted to diversify to some real assets so I added REIT.
2. I like dividend aristocrats cause it follows Graham rule on investing - “An investment is an operation that promises safety of principal and a satisfactory return.” Also dividend aristocrats beat S&P and have lower volatility. Or so they say. On the other hand it has 0.40 fee.
3. is VXUS that good? I am investing there because US market is overvalued according to Schiller P/E and Vanguard says diversify away. But it seems VXUS just goes up and down.
4. Also I decided on ETFs cause it's easier.
5. Last thing, since stock market in US is overpriced, I guess a 50/50 stock/bonds could be good according to Bogle or Graham. On the other hand, there is an advice not to try and time the market. I could invest some more on Bonds.
6. Bonds options are many. Some say BND. Some say TLT. Some say interest will go up. Some say interest will go down. Most say US will eventually age and therefore long term interests are going down. So, BND or TLT? I like BND cause I believe assets under management has some connection with overall trust, and It is the biggest bond ETF. On the other hand TLT has more dividends?

I would appreciate opinions regarding my portfolio and the six points I've raised.

Thanks
Uri

TedSwippet
Posts: 2224
Joined: Mon Jun 04, 2007 4:19 pm

Re: Please rate my portfolio

Post by TedSwippet » Wed Jun 12, 2019 3:58 pm

Welcome.
urizaf wrote:
Wed Jun 12, 2019 2:25 pm
Hello. I am a 26 years old pianist from Israel.
First of all, are you a US citizen?

If you are not a US citizen, then you will be better off avoiding all the US domiciled funds and ETFs that you reference above, and instead using Ireland domiciled equivalents from Vanguard and iShares.

Israel has only limited US tax treaty coverage, and as a result you stand to lose 25% of your dividends to US income tax, and you also risk US estate tax of between 26% and 40% of the balance of any US holdings that exceed just $60,000 in aggregate. In contrast, using Ireland domiciled ETFs would reduce your US tax burden to between 15% and 0% depending on what assets the ETF holds, and at the same time eliminate any risk of US estate tax.

More in this section of the wiki:
Outline of Non-US domiciles - Bogleheads

In particular, these three pages:
Nonresident alien taxation - Bogleheads
Non-US investor's guide to navigating US tax traps - Bogleheads
Nonresident alien's ETF domicile decision table - Bogleheads

You can also find a few example portfolios here. Although this page is primarily aimed at EU investors, the example portfolios in it should work well for most non-US investors:
EU investing - Bogleheads

If you are a US citizen, ignore all of the above and instead read this wiki page:
Taxation as a US person living abroad - Bogleheads

Topic Author
urizaf
Posts: 31
Joined: Wed Jun 12, 2019 1:43 pm

Re: Please rate my portfolio

Post by urizaf » Wed Jun 12, 2019 5:05 pm

Hi. I am not a US citizen. results come up that I should avoid US domiciled ETFs and prefer Non-US domiciled ETFs. So as I see:

As written in answer A6:
"For funds or ETFs that track only the S&P 500 or other purely US stock indexes, choosing a US domiciled fund may be a good option. "

So, I get to keep my NOBL, BND and VNQ

"For funds or ETFs that track only non-US stock indexes, there is no gain from using a US domiciled fund except perhaps for the lower fund annual management charge. In this case, you would pay 15% in US tax reclaimable against local tax. By comparison, if you held an Ireland domiciled fund tracking the same index, you would suffer no withholding tax but then have to pay full local tax on the entire dividend, for the same end result[10]."

so for my VXUS, I need to change to Irish? is it such a big difference? 15% on dividends?

TedSwippet
Posts: 2224
Joined: Mon Jun 04, 2007 4:19 pm

Re: Please rate my portfolio

Post by TedSwippet » Thu Jun 13, 2019 3:08 am

urizaf wrote:
Wed Jun 12, 2019 5:05 pm
As written in answer A6:
"For funds or ETFs that track only the S&P 500 or other purely US stock indexes, choosing a US domiciled fund may be a good option. "
It seems that you are reading the wrong conclusion here for your particular case. This section applies to investors living in countries with a US income tax treaty rate on dividends of 15% or less, and who are either investing under $60,000 in total or who live in countries with a US tax treaty. Israel's US income tax treaty rate is 25%, and it has no US estate tax treaty.

The section that applies to you would be answer A4. What is your local rate of tax in Israel on your dividends? Will you hold more than $60,000 in investments? There are a few special circumstances in which US domiciled investments come out around neutral tax-wise to the investor, but the 'neutral' is the best case, and in general it is highly likely that you will get better results by entirely avoiding US domiciled ETFs.

Valuethinker
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Joined: Fri May 11, 2007 11:07 am

Re: Please rate my portfolio

Post by Valuethinker » Thu Jun 13, 2019 3:18 am

urizaf wrote:
Wed Jun 12, 2019 2:25 pm
Hello. I am a 26 years old pianist from Israel.

State of residence- Israel
Age - 26
Desired Asset allocation: Unsure.
Desired International allocation: 40-50% of stocks? Unsure.

I have read about investing following our Israeli elections.
My portfolio is a kind of mix between Bogle and Buffet.
I am somehow pleased with it:

BND Vanguard Total Bond Market ETF - 29 %
VXUS Vanguard Total International Stock ETF - 30%
NOBL ProShares S&P 500 Dividend Aristocrats- 30%
VNQ Vanguard Real Estate ETF- 11 %

My thought process is the following:
1.Three fund portfolio is nice. I am not that proficient to invest in individual stocks. I wanted to diversify to some real assets so I added REIT.
2. I like dividend aristocrats cause it follows Graham rule on investing - “An investment is an operation that promises safety of principal and a satisfactory return.” Also dividend aristocrats beat S&P and have lower volatility. Or so they say. On the other hand it has 0.40 fee.
3. is VXUS that good? I am investing there because US market is overvalued according to Schiller P/E and Vanguard says diversify away. But it seems VXUS just goes up and down.
The penalty of diversification is that one (or more) of your investments will always look poor compared to the rest.

In truth I think you should hold the US stock market in its entirety. Roughly speaking the ratio should be 55 US/ 45 non US developed markets. Emerging Markets would come on top of that (15% of your total equity exposure).

If you hold Dividend Aristocrats it should be as a subsection of your US holding.

REITs will be very sensitive to market movements.
4. Also I decided on ETFs cause it's easier.
5. Last thing, since stock market in US is overpriced, I guess a 50/50 stock/bonds could be good according to Bogle or Graham. On the other hand, there is an advice not to try and time the market. I could invest some more on Bonds.
It depends how you feel on volatility. More equities means more volatility.

"US is overpriced" OR the US simply has the world's biggest high growth tech stocks (except for the Chinese internet stocks).

It may simply be the fact that US valuations reflect:

- US is in a period of higher economic growth than the other major markets
- US has the tech cos - the FAANGs + Microsoft in particular
- US banks recovered faster from the Financial Crisis than European ones, especially

So there's no way to know.
6. Bonds options are many. Some say BND. Some say TLT. Some say interest will go up. Some say interest will go down. Most say US will eventually age and therefore long term interests are going down. So, BND or TLT? I like BND cause I believe assets under management has some connection with overall trust, and It is the biggest bond ETF. On the other hand TLT has more dividends?

I would appreciate opinions regarding my portfolio and the six points I've raised.

Thanks
Uri
When you move to the Irish domiciled funds, there is a global government bond fund (USD denominated). That's probably what you want to be in.

Topic Author
urizaf
Posts: 31
Joined: Wed Jun 12, 2019 1:43 pm

Re: Please rate my portfolio

Post by urizaf » Thu Jun 13, 2019 3:25 am

TedSwippet wrote:
Thu Jun 13, 2019 3:08 am
Israel's US income tax treaty rate is 25%, and it has no US estate tax treaty.
That means I answer Q7 as a no, then I answer Q9 as no, then I go to result A6. That means it is the right answer. Am I wrong?
Last edited by urizaf on Thu Jun 13, 2019 3:43 am, edited 1 time in total.

Topic Author
urizaf
Posts: 31
Joined: Wed Jun 12, 2019 1:43 pm

Re: Please rate my portfolio

Post by urizaf » Thu Jun 13, 2019 3:35 am

Valuethinker wrote:
Thu Jun 13, 2019 3:18 am

The penalty of diversification is that one (or more) of your investments will always look poor compared to the rest.

In truth I think you should hold the US stock market in its entirety. Roughly speaking the ratio should be 55 US/ 45 non US developed markets. Emerging Markets would come on top of that (15% of your total equity exposure).

If you hold Dividend Aristocrats it should be as a subsection of your US holding.

Why should I hold US stock market entirety and not dividend aristocrats in your opinion? They seem less volatile and beating S&P. I pay 0.32% more fees but I believe it makes not much difference?
Valuethinker wrote:
Thu Jun 13, 2019 3:18 am
"US is overpriced" OR the US simply has the world's biggest high growth tech stocks (except for the Chinese internet stocks).

It may simply be the fact that US valuations reflect:

- US is in a period of higher economic growth than the other major markets
- US has the tech cos - the FAANGs + Microsoft in particular
- US banks recovered faster from the Financial Crisis than European ones, especially

So there's no way to know.

When you move to the Irish domiciled funds, there is a global government bond fund (USD denominated). That's probably what you want to be in.
Schiller P/E says US stocks are overvalued... So says the Buffet indicator.. So too said Jack Bogle...

TedSwippet
Posts: 2224
Joined: Mon Jun 04, 2007 4:19 pm

Re: Please rate my portfolio

Post by TedSwippet » Thu Jun 13, 2019 4:15 am

urizaf wrote:
Thu Jun 13, 2019 3:25 am
That means I answer Q7 as a no, then I answer Q9 as no, then I go to result A6. That means it is the right answer. Am I wrong?
I see. Will your total investments in all these ETFs always be below $60,000, forever? If yes, then you are safe from US estate taxes.

Then note the 'For holdings below $60,000, see also the results from following Question 8.' advice for Q9. That will take you to A4. The flowchart gets a bit problematic in this area, since the optimal outcome really depends on local country tax rates and conditions, and these vary too much to capture in a simple diagram.

For A6, consider your local Israeli tax rate, and whether or not you can obtain a credit against it for US tax paid. I do not know how tax works in Israel, so I cannot tell you the answer to these two things. However, if your Israeli tax liability on dividends is larger than 25%, and if you can claim full credit against it for the 25% that you will pay the US, then holding US domiciled ETFs will be tax-neutral for you. (I see that the text in A6 assumes a 15% US rate throughout, whereas yours is 25% -- this is the case for most people but not for everyone, and I should correct it; thanks for helping to point this out.)

For all other cases, Ireland domiciled ETFs will usually produce better results overall, since you cut your US tax rate from 25% to 15% on dividends from the US stock held by the ETF, and to 0% on dividends from non-US stock held by the ETF. Also, no entanglements with US estate taxes.

Topic Author
urizaf
Posts: 31
Joined: Wed Jun 12, 2019 1:43 pm

Re: Please rate my portfolio

Post by urizaf » Thu Jun 13, 2019 5:31 am

Wow that's a great answer! Thanks! Six more questions please:
TedSwippet wrote:
Thu Jun 13, 2019 4:15 am

I see. Will your total investments in all these ETFs always be below $60,000, forever? If yes, then you are safe from US estate taxes.
1.If I plan my investment to go above 60,000, should I start investing in Ireland now?
TedSwippet wrote:
Thu Jun 13, 2019 4:15 am
Then note the 'For holdings below $60,000, see also the results from following Question 8.' advice for Q9. That will take you to A4. The flowchart gets a bit problematic in this area, since the optimal outcome really depends on local country tax rates and conditions, and these vary too much to capture in a simple diagram.
2. Question 8 is irrelevant since Israel doesn't have an estate tax treaty with the US. So why should I go to question 8?
TedSwippet wrote:
Thu Jun 13, 2019 4:15 am
For A6, consider your local Israeli tax rate, and whether or not you can obtain a credit against it for US tax paid.
3. Didn't quite understand that. I think it refers to my next question. Am I correct?
TedSwippet wrote:
Thu Jun 13, 2019 4:15 am
I do not know how tax works in Israel, so I cannot tell you the answer to these two things. However, if your Israeli tax liability on dividends is larger than 25%, and if you can claim full credit against it for the 25% that you will pay the US, then holding US domiciled ETFs will be tax-neutral for you. (I see that the text in A6 assumes a 15% US rate throughout, whereas yours is 25% -- this is the case for most people but not for everyone, and I should correct it; thanks for helping to point this out.)

For all other cases, Ireland domiciled ETFs will usually produce better results overall, since you cut your US tax rate from 25% to 15% on dividends from the US stock held by the ETF, and to 0% on dividends from non-US stock held by the ETF. Also, no entanglements with US estate taxes.
4. according to this: https://hcat.co/your-taxes-israeli-tax-rates-in-2019/
The regular dividend tax rate is 30%-33% for 10%-or-more shareholders, 25%-28% for other shareholders, resulting in a combined tax burden on distributed corporate profits of 42.25%-48.41%, subject to any tax treaty.

My dividend should be 25-28% taxed, and I should be able to take credit on the 25% with my accountant on the US dividends. But it seems much more complicated than just doing it through Ireland.

6. Overall things show it's better not to get complicated with US taxes. How exactly do I find non US domiciled ETFs?

danielbird193
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Joined: Thu Mar 21, 2019 2:15 pm

Re: Please rate my portfolio

Post by danielbird193 » Thu Jun 13, 2019 5:43 am

A good place to search for non-US domiciled ETFs is the following: https://www.justetf.com/uk/find-etf.html

It's aimed at EU investors but most of the funds should be available to you in Israel. You can filter by asset class, geography, factor (and plenty more besides).

TedSwippet
Posts: 2224
Joined: Mon Jun 04, 2007 4:19 pm

Re: Please rate my portfolio

Post by TedSwippet » Thu Jun 13, 2019 6:13 am

urizaf wrote:
Thu Jun 13, 2019 5:31 am
1.If I plan my investment to go above 60,000, should I start investing in Ireland now?
Probably. I would, if I were in your shoes.

There is a US estate tax exemption of $60,000, but everything you hold above that is at risk from US estate taxes. It is possible to split your investments so that the US domiciled part stays below $60,000, but that would be fiddly and probably require you to move stuff from the US domiciled part to the non-US domiciled one every year or two so that you don't exceed $60,000. And as your investments grow, this US domiciled part will become a smaller and smaller percentage of what you own, and so of less and less use overall.

Unless the benefit at asset levels of below $60,000 of using US domiciled holdings rather than non-US domiciled ones is a worthwhile one, you might just as well start out with non-US from the beginning. For you, because the US/Israel dividend tax rate is 25%, it is unlikely that there will be much benefit at all to you with US domiciled holdings. For comparison, the withholding an Ireland domiciled ETF pays in US tax is 15% on US source dividends, and (of course) 0% on non-US source dividends.
urizaf wrote:
Thu Jun 13, 2019 5:31 am
2. Question 8 is irrelevant since Israel doesn't have an estate tax treaty with the US. So why should I go to question 8?
Question 8 comes into play for the case where total investments is always below $60,000. That probably will not be a common case, but it could apply to some people. US estate taxes start at $60,000 for investors in countries without a US estate tax treaty, but if you live in one such country you could ignore US estate taxes anyway, but only provided you never hold more than $60,000 in US situated assets.
urizaf wrote:
Thu Jun 13, 2019 5:31 am
3. Didn't quite understand that. I think it refers to my next question. Am I correct? ... The regular dividend tax rate is 30%-33% for 10%-or-more shareholders, 25%-28% for other shareholders, resulting in a combined tax burden on distributed corporate profits of 42.25%-48.41%, subject to any tax treaty. ... My dividend should be 25-28% taxed, and I should be able to take credit on the 25% with my accountant on the US dividends. But it seems much more complicated than just doing it through Ireland.
The section of the document you quote, and the 30-33% rates, are under the heading 'Businesses'. If you look further down, you will see "Passive income from securities are generally taxed at rates of 25%-33%.".

So your tax on dividends might meet or exceed the 25% US/Israel tax treaty rate. However, this would need to be your marginal tax rate. You might receive tax-free allowances that mean you pay no or lower tax to Israel on lower incomes. In that case, you could only claim a credit up to your actual Israeli tax rate that you have to pay on these dividends.

It is indeed simpler to use non-US domiciled ETFs, but you probably will not be able to claim back the 15% US tax that the ETF pays internally to the US, so you have to weigh up the different options here. What matters is your marginal Israeli tax rate relative to the 25% loss to US tax on everything that is US domiciled, and (of course) the risk of US estate tax above $60,000.

Topic Author
urizaf
Posts: 31
Joined: Wed Jun 12, 2019 1:43 pm

Re: Please rate my portfolio

Post by urizaf » Thu Jun 13, 2019 6:23 am

So if I want to build a three fund portfolio I could choose:

60% iShares Core MSCI World UCITS ETF USD (Acc)

40 % of either:

iShares USD TIPS UCITS ETF USD (Acc)
iShares USD Treasury Bond 1-3yr UCITS ETF (Acc)
iShares USD Treasury Bond 3-7yr UCITS ETF (Acc)

If you were to suggest TIPS, Short Treasury Bonds or medium Treasury bonds, what would you suggest?

TedSwippet
Posts: 2224
Joined: Mon Jun 04, 2007 4:19 pm

Re: Please rate my portfolio

Post by TedSwippet » Thu Jun 13, 2019 7:11 am

urizaf wrote:
Thu Jun 13, 2019 6:23 am
So I just invest in Vanguard through London... Am I correct?
Yes. Or through Euronext, SIX Swiss, or any other exchange that carries the ETFs that you want. London is probably the primary exchange at the moment.

There might also be some local Israeli funds or ETFs you can use, but I am entirely unfamiliar with the investing landscape in Israel.
urizaf wrote:
Thu Jun 13, 2019 6:23 am
Vanguard S&P 500 UCITS ETF in europe is Vanguard S&P 500 ETF (VOO). Something of the sort?
VOO is US domiciled, and so is exactly the type of thing you probably want to avoid. Its Ireland domiciled equivalent is VUSD.

TedSwippet
Posts: 2224
Joined: Mon Jun 04, 2007 4:19 pm

Re: Please rate my portfolio

Post by TedSwippet » Thu Jun 13, 2019 7:14 am

urizaf wrote:
Thu Jun 13, 2019 6:23 am
So if I want to build a three fund portfolio I could choose:

60% iShares Core MSCI World UCITS ETF USD (Acc)

40 % of either:

iShares USD TIPS UCITS ETF USD (Acc)
iShares USD Treasury Bond 1-3yr UCITS ETF (Acc)
iShares USD Treasury Bond 3-7yr UCITS ETF (Acc)
Yes. This looks entirely sensible to me. UCITS ETFs are not US domiciled. Be sure that you understand how Israeli tax will work when using 'accumulating' funds. Some countries make this a bit complicated relative to 'distributing' funds, but not all.

Topic Author
urizaf
Posts: 31
Joined: Wed Jun 12, 2019 1:43 pm

Re: Please rate my portfolio

Post by urizaf » Thu Jun 13, 2019 7:31 am

1. What is better in your opinion? Accumulating or Distributing?

2. Tips is short term, short bonds a bit longer and medium bonds a bit longer. It all depends on inflation predictions. What would you suggest out of the three?

Topic Author
urizaf
Posts: 31
Joined: Wed Jun 12, 2019 1:43 pm

Re: Please rate my portfolio

Post by urizaf » Thu Jun 13, 2019 7:38 am

TedSwippet wrote:
Thu Jun 13, 2019 7:11 am
There might also be some local Israeli funds or ETFs you can use, but I am entirely unfamiliar with the investing landscape in Israel.
Israel ETFs are quite expensive. tracking the S&P 500 in israel costs 0.83

Valuethinker
Posts: 38099
Joined: Fri May 11, 2007 11:07 am

Re: Please rate my portfolio

Post by Valuethinker » Fri Jun 14, 2019 7:51 am

urizaf wrote:
Thu Jun 13, 2019 7:31 am
1. What is better in your opinion? Accumulating or Distributing?
In tax protected (UK) accounts I use Accumulating. Otherwise I used Distributing.

2. Tips is short term, short bonds a bit longer and medium bonds a bit longer. It all depends on inflation predictions. What would you suggest out of the three?
TIPS is very long term. Longest duration of any bond fund (and it's a Real Duration, not a Nominal Duration, so it's not really comparable to other bond funds). Basically because so much of your return is the inflation indexation of the final redemption, so returns are back loaded. Unless you buy zero coupon nominal bonds (where duration = maturity date time left in years, by definition).

I would go for medium bonds. In the long run the Yield Curve is your friend. The market pays you say 100 basis points (1%) maybe up to 2% for going long, and compound that over 30 years or so and that's a decent chunk of change (higher final portfolio value). In the mean time, volatility can be lived with.

Valuethinker
Posts: 38099
Joined: Fri May 11, 2007 11:07 am

Re: Please rate my portfolio

Post by Valuethinker » Fri Jun 14, 2019 7:53 am

urizaf wrote:
Thu Jun 13, 2019 6:23 am
So if I want to build a three fund portfolio I could choose:

60% iShares Core MSCI World UCITS ETF USD (Acc)

40 % of either:

iShares USD TIPS UCITS ETF USD (Acc)
iShares USD Treasury Bond 1-3yr UCITS ETF (Acc)
iShares USD Treasury Bond 3-7yr UCITS ETF (Acc)

If you were to suggest TIPS, Short Treasury Bonds or medium Treasury bonds, what would you suggest?
You are really there, with this. All you need.

(not sure if the World fund has Emerging Markets. If not there's a case for 50% in world fund, 10% in EM fund (or 52%/8%). It should not make a huge difference in the long run).

I would either be 40% in the Intermediate Term US Treasury Bond fund OR 20% in that, 20% in TIPS.

For a lot of reasons the 2nd portfolio is more likely on a 30 year view to be closer to the Efficient Frontier (optimal risk-return tradeoff) BUT it will be more volatile on the way. America once had double digit inflation (Israel had hyperinflation) so the merits of an inflation-linked instrument are always at the back of my mind (UK inflation was higher than US, for longer; however UK Index Linked Gilts (TIPS in effect) trade at -1.9% real yields right now; it's really painful to give the government money for a negative return, guaranteed).

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