portfolio advice: HNWI Early retiree from Italy/Germany

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cafe72
Posts: 18
Joined: Sat Oct 05, 2019 11:41 am

portfolio advice: HNWI Early retiree from Italy/Germany

Post by cafe72 » Sat Oct 05, 2019 12:00 pm

Dear fellow Bogleheads,

I will be asking advice on behalf of my father. He just retired in Italy and will be needing a fixed income until his public pension kicks in in 7 years. I'd really appreciate any advice!

Country of Residence: Italy

International Lifestyle: plans to buy a 1.5 million euro apartment in Germany within the next year or two. He wants to use it 1-3 months per year for the first 10-15 years, and then to move there permanently eventually. (this will become more relevant below)

Currency: EUR

Debt: 1 million at 2% interest

Age: 60

Desired asset allocation: 40/60 or 50/50 (s/b) - not entirely sure

Portfolio size: 15 million euro (after debt is payed)

Public pension: 300k/year to start in 7 years when he is 67

Company retirement account: 2 million euro

Investments: 12 million euro worth of one stock. Stock is non-investment grade.

Cash: 2 million euro

_______________________________________________________________

Objectives:
- Pay off debt
- Find fee only financial advisor in Europe
- Sell shares of stock and put everything into ETFs.
- provide enough fixed income (200-250k/year) until his public pension starts in 7 years
- At the minimum retain portfolio size during these 7 years
- After 7 years, implement a growth strategy with a 60/40 (s/b) asset allocation that will increase portfolio size for him and his children over the long-term.
- Have a simple portfolio that can be easily understood and rebalanced from time to time

Portfolio idea:
Wiki reference for italy:
- Capital gains tax only applied when selling in Italy, so accumulating equity etf recommended
- 12.5% tax on profits deriving from eligible government bonds and 26% from other bonds

Equity: 40-50%
- 75% of iShares Core MSCI World UCITS ETF (SWDA/IWDA) - TER 0.2%
- 10% of iShares Core MSCI Emerging Markets IMI UCITS ETF (EIMI) - TER 0.18%
- 15% of SPDR® MSCI World Small Cap UCITS ETF (WDSC) - TER 0.45%

For bonds I'm not sure whether to buy:
- euro denominated bonds or global government bond fund hedged to euro
- short-term or short/intermediate-term.

Bonds: 60-50%
- iShares Core € Govt Bond UCITS ETF (SEGA) - TER 0.09%,YTM -0.1%, maturity: 10 years
- Vanguard Global Aggregate Bond UCITS ETF (VAGE) - TER 0.1%, YTM 1.1%, maturity: 7

_______________________________________________________________


Questions:

1. Could you recommend a fee-only (not aum) financial planner/advisor that works across Europe? If not do you know how I can find one? I found a few in Italy but nowhere else.

2. Does buying an apartment in Germany as a German citizen really make you an automatic tax resident on worldwide income if one only spends 2 months there? This has something to do with the double tax treaty between Germany and Italy. I am asking because German ETF tax rules are different.

3. Which online broker do you recommend for him - IB, saxo, or another?

4. Is the 40/60 (S/B) asset allocation okay for a desired fixed income of 200-250k/year? If not should he consider investing in a distributing (rather than accumulating) equity ETF or tilt towards high dividend equity ETFs?

5. Are the equity ETFs I chose and their allocations good?

6. Since EU bonds are plagued with low interest rates, should he invest in a global government bond fund hedged to euro instead? Or a combination of the 2?

7. Are the bond ETFs I chose above good for him?

8. What average maturity of eu gov bond ETFs is good? 3/5/7?

9. If he needs to liquidate 1.5-2 million in 1 year, should he keep this in a market money fund, CD, bank deposit account, or short/very-short term bonds?

10. Once he retires in 7 years would a 60/40 (s/b) asset allocation be good?

11. What about ETF commodities and REIT? Yes or no? and if yes, what share of portfolio?

12. Is it safe for him to invest all of his money in just one portfolio with just a few funds? or would you recommend 2 portfolios with different funds?

13. Any other recommendations about my overall strategy?

Thanks!! :happy
Last edited by cafe72 on Wed Oct 09, 2019 11:41 pm, edited 1 time in total.

Schlabba
Posts: 151
Joined: Sat May 11, 2019 9:14 am

Re: portfolio advice: HNWI Early retiree from Italy

Post by Schlabba » Sun Oct 06, 2019 4:06 am

At 15m net worth you should be giving us advice instead of asking for it :happy !

I won't answer all your questions because I can't, but let me point out a few things I noticed.
4. Is the 40/60 (S/B) asset allocation okay for a desired fixed income of 200-250k/year? If not should he consider investing in a distributing (rather than accumulating) equity ETF or tilt towards high dividend equity ETFs?
Why don't you simply take the Vanguard FTSE All-World UCITS ETF for your stock allocation part. It currently yield 2.17% so on a 10m portfolio that would be 217k.
5. Are the equity ETFs I chose and their allocations good?
I would be more aggressive. Allocation percentage wise it is just fine but for me holding 7+ million in bonds seems too much. I would sleep perfectly fine at night with only 3 million in bonds.
6. Since EU bonds are plagued with low interest rates, should he invest in a global government bond fund hedged to euro instead? Or a combination of the 2?
I invest in the global aggregate bond market. But holding bonds is not about making decent returns, it is about lowering your risk. Hopefully they will go up when the stock market crashes and mostly they hold their value.
I see it more like an insurance. It costs money (compared to holding the money in shares) but you get safety instead.
11. What about ETF commodities and REIT? Yes or no? and if yes, what share of portfolio?
You don't need them at all. The total market is all you need.
IWDA: MSCI World | EMIM: MSCI Emerging Markets | AGGH: Global Aggregate Bond Hedged to €

Topic Author
cafe72
Posts: 18
Joined: Sat Oct 05, 2019 11:41 am

Re: portfolio advice: HNWI Early retiree from Italy/Germany

Post by cafe72 » Sun Oct 06, 2019 10:15 am

    Thanks so much! I have a few followup questions if you don't mind

    1a. So are you saying that getting your fixed income from equity ETF's (dividends taxed at 26% in Italy) is better than getting it from gov bond ETF's (div taxed at 12.5% in Italy) today?
    1b. wouldn't there be too much volatility in dividends from equity ETFs during a downturn? that 217k cash flow wouldn't stay the same right?

    2. Why Vanguard over iShares?

    3. what about investing everything in US treasury bills or a money market fund and waiting for a downturn to buy the equity and bond ETF's at a better price and condition?
    Last edited by cafe72 on Wed Oct 09, 2019 4:44 am, edited 1 time in total.

    Schlabba
    Posts: 151
    Joined: Sat May 11, 2019 9:14 am

    Re: portfolio advice: HNWI Early retiree from Italy

    Post by Schlabba » Sun Oct 06, 2019 2:49 pm

    cafe72 wrote:
    Sun Oct 06, 2019 10:15 am
    Thanks so much! I have a few followup questions if you don't mind

    1a. So are you saying that getting your fixed income from equity ETF's (dividends taxed at 26% in Italy) is better than getting it from gov bond ETF's (div taxed at 12.5% in Italy) today?
    1b. wouldn't there be too much volatility in dividends from equity ETFs during a downturn? that 217k cash flow wouldn't stay the same right?

    2. Why Vanguard over iShares?

    3. what about investing everything in US treasury bills or a money market fund and waiting for a downturn to buy the equity and bond ETF's at a better price and condition?
    1a. You were contradicting yourself when you said you wanted an income, and then choosing an accumulating etf. Therefore I recommended a distributing etf.
    1b. Absolutely. But don't forget you can still sell shares/bonds if dividends don't cut it. According to the "4% rule" (https://www.bogleheads.org/wiki/Safe_withdrawal_rates) you can withdraw about 600.000 a year without probably running out of money. You only need less than 2% so you won't run out of money.

    2. It is not about vanguard vs ishares, I just picked a worldwide low cost distributing fund. You can find more examples here: https://www.bogleheads.org/wiki/Simple_ ... portfolios

    3. Timing the market usually doesn't work out. Why would you even want to do that? It seems with 15m and an expected cost of living of 250k you can easily support yourself. Why bother trying to increase your return, at the risk of having lower returns than the market?
    IWDA: MSCI World | EMIM: MSCI Emerging Markets | AGGH: Global Aggregate Bond Hedged to €

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    BeBH65
    Posts: 1555
    Joined: Sat Jul 04, 2015 7:28 am

    Re: portfolio advice: HNWI Early retiree from Italy

    Post by BeBH65 » Tue Oct 08, 2019 2:57 pm

    Hello Cafe72,

    Welcome to the forum.
    Here is some additional thoughts, in addition to the answers that you already received.

    Looks like there are 3 horizons.
    1- to buy the appartment : 1,5M in 2 years?
    2- fixed income for the next 7 years: 7x 200-250k
    3- long term growth (because pension will cover expenses)

    Equities can loos 50% of more in a short term and not rebound even after several years.
    For the two first goals you need to avoid risks. So indeed avoid putting that in stocks.

    Cash: make sure that this is kept in (government) insured accounts.

    Indeed keeping almost your full net worth in one stock is risky. Try to convert them to a diversified portfolio ASAP.

    On the bond side: try to diversify, from Italy to EUROpe and also to global. This would avoid problems linked with Italy or Europe.
    Maturity of 10 years means that the bonds are very susceptible to interest rate changes, as you can see this year. The fund will gain 10% when the interest drops with 1%, and drop 10% if the interest gains 1%. Make sure you have a good combination of short, intermediate and long term bonds(funds).

    Normally one becomes tax resident if one is domiciled in a country or if one is resident for the majority of the year. Chcke the local laws. (maybe add "Germany" in your title to attrack German members to this post)

    On this forum most people look for total return. It does not matter if income comes from dividends or selling shares. This is the same. Optimise the taxation. If you can postpone it, your reinvested dividends will compound the full 100%.

    On this forum we avoid Markettiming. Nobody knows when the next downturn starts, or reaches the bottom.
    BeBH65. (only an investment enthusiast, not a financial adviser, perform your due diligence). | Have a look at https://www.bogleheads.org/wiki/Outline_of_Non-US_domiciles

    Topic Author
    cafe72
    Posts: 18
    Joined: Sat Oct 05, 2019 11:41 am

    Re: portfolio advice: HNWI Early retiree from Italy

    Post by cafe72 » Wed Oct 09, 2019 3:15 pm

    Hi BeBH65,

    Thanks so much for your detailed response! I have a few followup questions if you don't mind.

    1a.) What asset allocation would you recommend? I'm not sure if you know the italian and german tax laws but they are the following:
    - Italy: 26% tax on distributed etf equity dividends, no tax on accumulating (only when sold on capital gains ofc). 26% on dividends from corporate bonds and 12.5% on government bonds.
    - Germany: always 26% no matter what
    1b.)For Italy's case (tax laws) to accomplish the first 2 horizons would the a or b portfolio be better:
    a. accumulating equity ETF with bonds - withdraw to get "income" needed that bond dividends wont fulfill
    b. distributing equity ETF with bonds - get dividends from both (and in case of a downturn and fixed income is not enough, withdraw)

    2.) your take on bonds seems very reasonable to me. Would you invest everything into a global aggregate bond ETF hedged to euro or mix it with another bond ETF just of European bonds?

    3.) This may seem like an ignorant question but do you have any tips on the execution of opening a brokerage account and making the investments. My father is understandably and rightfully very anxious about doing the execution ourselves since it's a lot of money. Do you think I can get a fee-only advisor from the US like https://adviceonlyfinancial.com/ to help with the execution? My opinion is to open an IB account, learn the gist, and then try out small trades but help from a professional would be helpful.

    4.) Do banks really matter at the end of the day? My father wants to go to Switzerland to interview certain banks. From what he told me, it seems like the banks can help with the execution but I can't help but think they will try to sell him their own "products". From my understanding and tell me if I'm correct, it doesn't really matter which bank you choose (since bank interest rates wont do much for my father's net-worth). I think having two bank accounts, one in Germany and one in Italy, with 100k EU insured accounts each makes sense. And then have money flowing in from his brokerage account being either IB or Saxo. What do you think?

    Thanks again!! this community is so wonderfully helpful

    User avatar
    BeBH65
    Posts: 1555
    Joined: Sat Jul 04, 2015 7:28 am

    Re: portfolio advice: HNWI Early retiree from Italy/Germany

    Post by BeBH65 » Fri Oct 11, 2019 11:16 am

    Hi Cafe72,



    Personally, I like to make a distinction between Asset allocation (choice between asset classes), and the actual choice of the funds (based on technical parameters).

    - For the asset allocation in equities, I would start your reflection starting from a world allocation.
    - I am assuming there will only be one country that will do the taxing, first Italy and in the future Germany. I am not an expert of either. I think you already read the respective wiki pages.
    - on this forum most of the people take the total return approach: both dividends and capital gains are "good". Optimise for the fiscal regime. If you need income you can sell assets as needed.
    - I would create different AA. One for each goal that you have. A short term goal needs a different AA (few stocks - too risky) then a long term horizon.

    - In bonds, like in equity, diversification is important.

    - I have no recommendation/valid experience with brokers/advisors.
    - Watch out for the salesman in the financial industry. Many want indeed to sell their products. I have no experience with fee only advisors in Europe.
    BeBH65. (only an investment enthusiast, not a financial adviser, perform your due diligence). | Have a look at https://www.bogleheads.org/wiki/Outline_of_Non-US_domiciles

    finrod_2002
    Posts: 27
    Joined: Fri Feb 15, 2019 6:04 am

    Re: portfolio advice: HNWI Early retiree from Italy/Germany

    Post by finrod_2002 » Sun Oct 13, 2019 1:35 am

    Italy: 26% tax on distributed etf equity dividends, no tax on accumulating (only when sold on capital gains ofc). 26% on dividends from corporate bonds and 12.5% on government bonds.
    I guess you should then be extra careful with aggregate/global distributing bond funds. Those contain corporate bonds as well. So doing the tax declaration could be challenging, to determine the portion that needs to be taxed with 12.5% and the one with 26%.

    On the other hand I'm no expert here, so it could be a non issue. :wink:

    ivk5
    Posts: 948
    Joined: Thu Sep 22, 2016 9:05 am

    Re: portfolio advice: HNWI Early retiree from Italy/Germany

    Post by ivk5 » Sun Oct 13, 2019 9:02 am

    His instinct to interview Swiss banks suggests he’s intimidated enough that he’s willing to give up a lot to enrich a bank at his expense.

    This is unfortunate but I’d tread carefully in your shoes- one inclined to trust “experts” may also be inclined to hold you responsible if you say “trust me” and there is even modest disappointment in the outcome (whether the disappointment is warranted or not).

    What aspect of the execution is unfamiliar or intimidating to him? Has he ever invested previously in equities or bonds? Not trying to be judgmental, but these are simple transactions, so it may be important to understand exactly what the “block” is. It’s not clear on the facts presented whether finding an hourly fee or fixed fee advisor is likely to address the root cause or avoid behavioral errors or relationship tensions.

    Topic Author
    cafe72
    Posts: 18
    Joined: Sat Oct 05, 2019 11:41 am

    Re: portfolio advice: HNWI Early retiree from Italy/Germany

    Post by cafe72 » Sun Oct 13, 2019 5:09 pm

    BeBH65 - thanks for responding again! two things:
    1. your advice about making different AA's for each horizon was a very useful way of thinking about it. My new asset allocation idea below reflects that
    2. optimizing for the fiscal regime - got it, so accumulating ETFs and withdraw if needed

    finrod_2002 - thanks for reminding me! So rather invest in global government bond ETFs rather than global aggregate ones.

    Ivk5 - Thanks for that! So the "block" is that he doesn't have any experience with investing. In his career he always had a high income and was very busy, so he never had the time or the urgency to invest. He also finds it difficult to fully trust information on the internet like this forum because he comes from that generation that retrieves information predominately from people and not from a "google search". I think what he needs is someone with credibility to validate this investment plan and to guide him through the execution. Tomorrow and Tuesday I'll learn everything I need to know about how IB works and then hopefully execute the plan ourselves as soon as we receive enough thumbs up. I'm waiting to hear from a few fee-only FA's. I think what I'm worried about is how much money to transfer and in what intervals to the IB account and how quickly to execute the limit orders. My thinking is to learn everything, practice a few $100 trades, and then trade in large amounts. What do you think?

    Regarding the swiss banks, I think he is overestimating the importance of them. Again, this is a generational thing (I think) because people used to over-rely on banks with their entire finances. He thinks the bank can setup and advice on his IB brokerage account for a fixed fee but I think this is a mistake because it's better to learn and manage it yourself because it's better not to trust anybody with your finances who is in a conflict of interest.

    Updated investment plan:
    Asset Allocation: 60/40 (equity/bonds) - 9 million equity, 6 million bonds

    ETF selection criteria:
    • Since he needs 1.5M for real estate within the next year, at least 1.5M should be placed in short-term euro government bonds
    • To reduce risk over the next 7 years where he desires 250k/year, have at least 50% of his total bond allocation in EU government bonds
    • Hold the remaining in a global government bond fund hedged to euro since the global fixed income market can provide risk-reduction and diversification benefits
    • Buy accumulating equity ETFs domiciled in Ireland that approximate the global equity market.
    • invest roughly 500k in healthcare and clean energy (he would like to support these market segments - purpose driven)
    Target Allocation
    Equity:
    • 72% of SWDA - iShares Core MSCI World UCITS ETF
    • 9% o EIMI - f iShares Core MSCI Emerging Markets IMI UCITS ETF
    • 14% of WDSC - SPDR® MSCI World Small Cap UCITS ETF
    • 3% of INGR - iShares Global Clean Energy UCITS ETF
    • 2% of HEAL - iShares Healthcare Innovation UCITS ETF
    Bonds:
    • 50% of SAAA - iShares Global AAA-AA Govt Bond UCITS ETF
    • 25% of IBGS - iShares Euro Government Bond 1-3yr UCITS ETF
    • 25% of SEGA - iShares Core € Govt Bond UCITS ETF

    Q: What do you guys think about this allocation and fund choices?

    Thanks again you guys! :D

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