My Portfolio - Seeking Advice. Romania. 4 Currencies.

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Topic Author
bravenewworld
Posts: 9
Joined: Mon Nov 11, 2019 8:18 am

My Portfolio - Seeking Advice. Romania. 4 Currencies.

Post by bravenewworld » Tue Nov 12, 2019 9:47 am

Country of Residence: I'm a Romanian Citizen

International Lifestyle: I work online. My business is set up in Romania, working exclusively with countries outside of the EU (primarily the US.) I travel (A LOT) it changes year to year, but I have an apartment in a Western European country and my partner is British, so I regularly bounce between the 3 countries... + the occasional flying across the pond for conferences and meeting clients.

I intend to retire in the UK, however, that is open to change. Brexit, work, etc...

Currency: Complicated. I get paid in USD, pay taxes in RON, spend it in RON, GBP, EUR and USD (Thank you TransferWise!) I have no intention to live in the States, however, I have accounts in all currencies, USD is my main one, and I would like to keep it that way.

Emergency funds: Enough to live comfortably for at least a year.

Debt: No debts whatsoever.

Age: 30

Desired Asset allocation: 70% stocks / 30% bonds? I'm finding myself more risk-averse because I don't feel confident in my choices.

Desired allocation to stocks outside your of country of residence: I have no desire to attach myself to RON. I have a Fixed Deposit Account with my Bank in RON and I'm looking at possibly getting some treasury bonds.

Up until a year ago I only looked at metals and real estate as a reliable form of investing - communism will do that to you. I have read the Bogleheads' Guide + devoured this forum inside out (you guys are amazing!) and I'm just so overwhelmed. It's a rabbit hole of acronyms. Most advice online is, naturally, directed at US citizens or regarding the US market OR just outdated. Laws and regulations keep changing, whenever I think I'm on top of something, I'm quickly proven otherwise.

As it stands, I have two big issues:
1. I don't know what I don't know...
2. I don't want to fall for analysis paralysis. I want to play the long game, compounding and simplicity are my BFFs. I have about 20 notebooks created with "potential portfolios" and pieces of advice collected during my research. I'm all over the place. Which is why I'm asking for help...

Here are the bullet points:
  • I'm looking at investing $10,000 to begin with.
  • Planning on using Interactive Brokers
  • Hedged to the USD?
  • ETFs domiciled in Ireland
  • Definitely buy and hold (forget) for as long as it's reasonable. I want to maximise my future investment returns, so I'm gravitating towards accumulated ETFs
Miscellaneous Qs:
1. Lump-sum or slow drip?
2. There's a possibility that my parents will want me to invest some of their EUR. At a macro view, would the change in currency impact in any way my choices? I know IB allows you to hold different currencies, would it be as if I'm doing 2 sets of portfolios?
3. How new is too new when it comes to the inception date of an ETF? Based on what I've read here, you want to be looking for the established ETFs

Finally, I'm looking for both macro and micro level advice. Anything from "Focus on a single all world ETF or a two-fund all-world combination" to "AGGU is the best option for you + ...."

I've started diving into justETF, to get myself used to this type of research. This is one of the ETFs that caught my eye, could you please have a look and tell me if I missed anything? It looks as if it ticks a lot of my boxes:

iShares Core S&P 500 UCITS ETF (Acc)
ISIN IE00B5BMR087, Ticker CSP1, TER 0.07%
Inception Date 19 May 2010
Strategy risk Long-only
Fund currency USD
Currency risk Currency unhedged
Fund Domicile - Ireland
Distribution policy Accumulating

https://www.justetf.com/uk/etf-profile. ... 00B5BMR087

Thank you so much!

glorat
Posts: 302
Joined: Thu Apr 18, 2019 2:17 am

Re: My Portfolio - Seeking Advice. Romania. 4 Currencies.

Post by glorat » Wed Nov 13, 2019 4:12 am

bravenewworld wrote:
Tue Nov 12, 2019 9:47 am
2. I don't want to fall for analysis paralysis. I want to play the long game, compounding and simplicity are my BFFs. I have about 20 notebooks created with "potential portfolios" and pieces of advice collected during my research. I'm all over the place. Which is why I'm asking for help...
Investment is simple once you have the information! The wiki has a tonne for non-US investors although the organisation is still a bit messy. It is getting better over time as volunteers clean-up. In the mean time, ask specific questions here

Analysis paralysis causes 0.5bps (0.005%) of lost opportunity per day. Time to get acting
bravenewworld wrote:
Tue Nov 12, 2019 9:47 am
  • Hedged to the USD?
That's generally a question for bonds, not equities. And for bonds, you also have the option of buying a world of bonds and not hedge them at all if you don't know where you will settle. I happen to do this.
bravenewworld wrote:
Tue Nov 12, 2019 9:47 am
  • ETFs domiciled in Ireland
Yes
bravenewworld wrote:
Tue Nov 12, 2019 9:47 am
1. Lump-sum or slow drip?
At 10k USD, just lump sum it!
bravenewworld wrote:
Tue Nov 12, 2019 9:47 am
2. There's a possibility that my parents will want me to invest some of their EUR. At a macro view, would the change in currency impact in any way my choices? I know IB allows you to hold different currencies, would it be as if I'm doing 2 sets of portfolios?
It makes zero difference. The assets you'll be recommended to buy are across a range of global currencies. What currency you use to buy that global basket doesn't matter. If you don't believe this yet (it is somewhat counterintuitive) do ask about it. Also, do all currency conversions within IB where their FX spreads and commissions are the smallest you can imagine.
bravenewworld wrote:
Tue Nov 12, 2019 9:47 am
3. How new is too new when it comes to the inception date of an ETF? Based on what I've read here, you want to be looking for the established ETFs
If you choose from the biggest ETF providers (Vanguard, iShares, State Street) you can feel fairly good
bravenewworld wrote:
Tue Nov 12, 2019 9:47 am
Finally, I'm looking for both macro and micro level advice. Anything from "Focus on a single all world ETF or a two-fund all-world combination" to "AGGU is the best option for you + ...."
My personal advice is to go to https://www.boglebot.com, answer the questions and post back your suggested ETFs for further advice
bravenewworld wrote:
Tue Nov 12, 2019 9:47 am
I've started diving into justETF, to get myself used to this type of research. This is one of the ETFs that caught my eye, could you please have a look and tell me if I missed anything? It looks as if it ticks a lot of my boxes:

iShares Core S&P 500 UCITS ETF (Acc)
There is better information in the wikis here (and in these forums). S&P 500 is good and low cost but from a diversification perspective it is quite poor. The general recommendation is to go for a globally diversified ETF.

My only other thought is to consider what your local tax situation is regarding dividends and capital gains as that's a big factor for your investment.

Other than that, my standard recommendation for the newcomer is a 2-fund global equity/global bond portfolio, which https://www.boglebot.com was designed to help you construct. 2 ETFs - it is as simple as that!

buylowbuyhigh
Posts: 60
Joined: Thu Dec 21, 2017 8:34 am

Re: My Portfolio - Seeking Advice. Romania. 4 Currencies.

Post by buylowbuyhigh » Wed Nov 13, 2019 6:44 am

70% stocks / 30% bonds? I'm finding myself more risk-averse because I don't feel confident in my choices.
May be conservative for your age, but since you have little experience in stock investing, it could be wise to ease into the stock allocation by mixing lump sum and dollar cost averaging. For example when you have the investment vehicle figured out, start with a 50/50 allocation and increase the stock allocation by 5 %-points to the point you are comfortable (arbitrary numbers). The difference of 50% to 80% stock allocation for a few years has little impact in the long run compared to new contributions. Not that you should time the market, but experiencing both good and bad returns should give you better understanding of the correct risk level for you. Home ownership, real estate investments and the level of social security (public pensions, public healthcare, unemployment benefits) should play a role in deciding the asset allocation. Also bank accounts could be a good enough alternative to bonds in the beginning, and better than rushing in to a poorly chosen bond ETF.
Hedged to the USD?
Why? If you're not going to spend in USD, then USD weakening against RON/EUR/GBP would reduce your salary AND your hedged investments from the point of view of your personal purchase power.
iShares Core S&P 500 UCITS ETF (Acc)
ISIN IE00B5BMR087, Ticker CSP1, TER 0.07%
Inception Date 19 May 2010
Strategy risk Long-only
Fund currency USD
Currency risk Currency unhedged
Fund Domicile - Ireland
Distribution policy Accumulating
Good choice if accumulating share class is better for you tax-wise, but a broader global stock ETF would be more diversified and simpler, like Vanguard VWRL or iShares IWDA+EMIM. You can of course build a global portfolio with regional ETFs like the S&P500 one and similar for Europe, Asia, emerging markets etc. It is however surprisingly easy to underperform the simplest one fund portfolio with more complex portfolios.

Topic Author
bravenewworld
Posts: 9
Joined: Mon Nov 11, 2019 8:18 am

Re: My Portfolio - Seeking Advice. Romania. 4 Currencies.

Post by bravenewworld » Thu Nov 14, 2019 7:16 am

Thank you both!

I'm unpacking your advice. Will follow-up shortly, with (hopefully) a clearer plan of action.

XtremePWN
Posts: 5
Joined: Fri Aug 23, 2019 3:01 am

Re: My Portfolio - Seeking Advice. Romania. 4 Currencies.

Post by XtremePWN » Thu Nov 14, 2019 7:19 am

As a fellow romanian I have a question, what website or app are you using to invest, Interactive brokers? How difficult is it to pay taxes on dividends(what forms to complete for us funds, is it hard to calculate for our IRS the amount of taxes on dividends)?

Topic Author
bravenewworld
Posts: 9
Joined: Mon Nov 11, 2019 8:18 am

Re: My Portfolio - Seeking Advice. Romania. 4 Currencies.

Post by bravenewworld » Thu Nov 14, 2019 11:11 am

I come bearing (good?) news!

Spent several hours digging through a multitude of formal documents and articles online. The terminology was throwing me at the beginning AND the fact that the legislation was changed last year. I ended up reading a lot of outdated, conflicting information.

Distributed dividends are taxed at 5%
Accumulated dividends are only taxed when the funds are actually distributed, with no restriction on the number of years in which you can accumulate the dividends. (Pardon if the phrasing is off sounding, I'm doing an, almost, word for word translation from Romanian to English.
Interests are taxed at 10%
Capital gains are taxed at 10%

The one thing I'm not completely sure one is this: according to what I've been reading, any interest earned through government and municipal bonds is completely tax exempt. If that applies strictly to Romanian bonds... I'm not sure. The language there is very vague.

Armed with this information and considering I'm looking at playing the long game, I'm leaning towards investing solely in a global equity portfolio (at least for now) for the sake of the 5% tax on dividends.

I've filtered it down to a few ETFs, namely:
1. Vanguard FTSE Developed World UCITS ETF Acc | TER 0.12% | AUM $355 million | Inception Date - 24 September 2019 (problem?)
Under the factsheet I saw their Ongoing Charges Figure - 0.18% - I've done a quick search on Google, however, I'm still unclear as to how it is different to the TER and whether or not it stacks onto it. https://www.justetf.com/uk/etf-profile. ... 00BK5BQV03

2. iShares Core MSCI World UCITS ETF USD (Acc) | TER 0.20% | AUM $21,503 million | Inception Date - 25 September 2009
https://www.justetf.com/uk/etf-profile. ... 00B4L5Y983

3. SPDR MSCI World UCITS ETF | TER 0.12% | AUM $325.39 million |Inception Date - 28 February 2019 (problem?)
https://www.justetf.com/uk/etf-profile. ... 00BFY0GT14

4. Vanguard FTSE All-World UCITS ETF (USD) Accumulating| TER 0.22% | AUM $3,696 million | Inception Date - 23 July 2019 (problem?)
Same thing here with the OCF - listed at 0.25%
This was also the ETF recommended by the bot @glorat
https://www.justetf.com/uk/etf-profile. ... 00BK5BQT80

To be honest, my untrained eye cannot spot a significant difference between the 4 (aside from the TER, AUM and inception date, of course) they all seem to have similar breakdowns, give or take a few percentiles. Not sure if I'm missing anything else of value.

Thank you for your help, it's much appreciated!

---

To my conational. You should find the tax info I've shared above quite useful. I'm leaning towards Interactive Brokers. With regards to filing taxes, here's a bit of copy/paste from my findings:
"Baza de impozitare este calculata la sfarsit de an prin insumarea tuturor castigurilor si pierderilor de capital de pe parcursul anului si se declara de catre contribuabil prin declaratia 200, pana pe data de 25 mai a anului urmator pentru anul precedent.
Calculul castigului net de capital va fi facut de broker si trimis investitorului sub forma de fisa de portofoliu, la inceputul anului. Pe baza acestei Fise de portofoliu se va completa declaratia 200. Atentie! Castigurile de capital realizate pe bursa din afara tarii, se declara separat, pe baza declaratiei 201."

XtremePWN
Posts: 5
Joined: Fri Aug 23, 2019 3:01 am

Re: My Portfolio - Seeking Advice. Romania. 4 Currencies.

Post by XtremePWN » Thu Nov 14, 2019 5:12 pm

Thank you for the long answer, things are getting a bit clearer to me!

oogZoo
Posts: 28
Joined: Mon Sep 02, 2019 12:05 pm

Re: My Portfolio - Seeking Advice. Romania. 4 Currencies.

Post by oogZoo » Thu Nov 14, 2019 6:40 pm

bravenewworld wrote:
Thu Nov 14, 2019 11:11 am
1. Vanguard FTSE Developed World UCITS ETF Acc | TER 0.12% | AUM $355 million | Inception Date - 24 September 2019 (problem?)
Under the factsheet I saw their Ongoing Charges Figure - 0.18% - I've done a quick search on Google, however, I'm still unclear as to how it is different to the TER and whether or not it stacks onto it.

...

4. Vanguard FTSE All-World UCITS ETF (USD) Accumulating| TER 0.22% | AUM $3,696 million | Inception Date - 23 July 2019 (problem?)
Same thing here with the OCF - listed at 0.25%
The TERs/OCFs on the fact sheet PDFs are just not up-to-date since they lowered the fees recently. You can see the changes at the following link: https://www.vanguardinvestor.co.uk/arti ... commitment

Also those funds are not new. Only the accumulating share classes are new. They have existed for a long time with only the distributing share class. They are just two different "entry points" to the same fund.

SPDR MSCI World UCITS ETF is the only new fund on your list.

glorat
Posts: 302
Joined: Thu Apr 18, 2019 2:17 am

Re: My Portfolio - Seeking Advice. Romania. 4 Currencies.

Post by glorat » Fri Nov 15, 2019 12:27 am

bravenewworld wrote:
Thu Nov 14, 2019 11:11 am
I've filtered it down to a few ETFs, namely:
1. Vanguard FTSE Developed World UCITS ETF Acc | TER 0.12% | AUM $355 million | Inception Date - 24 September 2019 (problem?[/b]

2. iShares Core MSCI World UCITS ETF USD (Acc) | TER 0.20% | AUM $21,503 million | Inception Date - 25 September 2009[/b]

3. SPDR MSCI World UCITS ETF | TER 0.12% | AUM $325.39 million |Inception Date - 28 February 2019 (problem?)[/b]

4. Vanguard FTSE All-World UCITS ETF (USD) Accumulating| TER 0.22% | AUM $3,696 million | Inception Date - 23 July 2019 (problem?)

To be honest, my untrained eye cannot spot a significant difference between the 4 (aside from the TER, AUM and inception date, of course) they all seem to have similar breakdowns, give or take a few percentiles. Not sure if I'm missing anything else of value.
From a portfolio point of view, 1,2,3) only covers the developed world (so excluded emerging markets). 4) is a genuine all-world tracker (which is why it costs a bit more)

1,2,3) can be turned into all-world portfolios by combining 1) with the FTSE EM ETF (VDEM/VFEM) or combining 2,3) with the MSCI EM ETF (EIMI/EMIM) in an approximate 88/22 developed world/EM ratio.

The boglebot got updated yesterday to cover all these options!

msk
Posts: 1390
Joined: Mon Aug 15, 2016 10:40 am

Re: My Portfolio - Seeking Advice. Romania. 4 Currencies.

Post by msk » Fri Nov 15, 2019 12:47 am

All World accumulating (includes Emerging Markets) VWRA. After 4 decades of playing the world's stock markets, including Options, I have gravitated to 100% VWRA as my final choice. At Interactive Brokers. If you wish to receive dividends, VWRD is the alternative. Bonds? At age 30? Why? The world will NOT come to an end, even if there is World War 3. No point in worrying about it. You have 50 to 60 years investment horizon ahead of you, not just to retirement age. You will NEVER pick the maximum performing ETF nor single stock nor precious metal, so generally futile to try except with play money.

Topic Author
bravenewworld
Posts: 9
Joined: Mon Nov 11, 2019 8:18 am

Re: My Portfolio - Seeking Advice. Romania. 4 Currencies.

Post by bravenewworld » Fri Nov 15, 2019 3:54 am

Thank you both so much for taking the time!

It's been a very very steep learning curve considering my field leans more on the creative side and I completely lacked this type of education. I'm definitely starting to wrap my head around the essentials. I'm now in the process of creating my account with IB.

If I may, I only have one big questions hovering over:

Out of all of the books I've been reading, they're all hammering on commissions, costs, rates etc. Keep them as low as possible. I've also seen someone saying TER should be kept at 0.1%, there's no hard-fast rule I imagine.

Having said that... would it be a more sensible decision to go for:
80% Vanguard FTSE Developed World UCITS ETF Acc (TER 0.12%) and 20% Vanguard FTSE Emerging Markets UCITS ETF Acc (TER 0.22%)

As opposed to investing it all in Vanguard FTSE All-World UCITS ETF (TER 0.22%) / which combines both.

Is there a benefit I'm missing to having it all combined in one ETF (aside from simplicity, of course)?

That's it! Thank you again!

Valuethinker
Posts: 39065
Joined: Fri May 11, 2007 11:07 am

Re: My Portfolio - Seeking Advice. Romania. 4 Currencies.

Post by Valuethinker » Fri Nov 15, 2019 4:05 am

bravenewworld wrote:
Fri Nov 15, 2019 3:54 am
Thank you both so much for taking the time!

It's been a very very steep learning curve considering my field leans more on the creative side and I completely lacked this type of education. I'm definitely starting to wrap my head around the essentials. I'm now in the process of creating my account with IB.

If I may, I only have one big questions hovering over:

Out of all of the books I've been reading, they're all hammering on commissions, costs, rates etc. Keep them as low as possible. I've also seen someone saying TER should be kept at 0.1%, there's no hard-fast rule I imagine.

Having said that... would it be a more sensible decision to go for:
80% Vanguard FTSE Developed World UCITS ETF Acc (TER 0.12%) and 20% Vanguard FTSE Emerging Markets UCITS ETF Acc (TER 0.22%)

As opposed to investing it all in Vanguard FTSE All-World UCITS ETF (TER 0.22%) / which combines both.

Is there a benefit I'm missing to having it all combined in one ETF (aside from simplicity, of course)?

That's it! Thank you again!
Rebalancing. The whole Boglehead method (and the principles of all portfolio management) are based on the idea that we rebalance back to our target percentages.

Given different performance, the 80-20 split will keep getting out of line. You will have to see Developed World equities and buy EM, for example - that's the principle of rebalancing at work.

Depending on your tax system, that can create the realisation of taxable capital gains. Minimizing taxes is an important way of controlling expenses.

For example in the UK in tax protected accounts we often hold Accumulation funds, which do the reinvesting of dividends for us. However in taxable accounts you avoid that, because the dividends are taxed as income, even though in an Accumulating Fund you receive no actual cash. Whereas with a Distribution unit you do. (many fund managers offer both Accumulating and Distributing units, on the same fund - different share classes).

US tax system has a "flow thru" as I understand it. You pay capital gains taxes each year, based on the gains realised by the Fund. Whether you sold shares/ units in the fund or not. UK you only pay that capital gains tax when you redeem/ sell units (realise a gain).

So the reason to hold the whole world fund is the simplicity/ avoiding of capital gains taxes (depending on how your tax rules work). The fund will automatically rebalance between EM and DM for you.

Topic Author
bravenewworld
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Joined: Mon Nov 11, 2019 8:18 am

Re: My Portfolio - Seeking Advice. Romania. 4 Currencies.

Post by bravenewworld » Fri Nov 15, 2019 5:50 am

Valuethinker wrote:
Fri Nov 15, 2019 4:05 am
So the reason to hold the whole world fund is the simplicity/ avoiding of capital gains taxes (depending on how your tax rules work). The fund will automatically rebalance between EM and DM for you.
That makes complete sense! Thank you :sharebeer

glorat
Posts: 302
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Re: My Portfolio - Seeking Advice. Romania. 4 Currencies.

Post by glorat » Fri Nov 15, 2019 8:50 am

Valuethinker wrote:
Fri Nov 15, 2019 4:05 am
Rebalancing. The whole Boglehead method (and the principles of all portfolio management) are based on the idea that we rebalance back to our target percentages.

Given different performance, the 80-20 split will keep getting out of line. You will have to see Developed World equities and buy EM, for example - that's the principle of rebalancing at work.
I must give a rare disagreement to Mr Valuethinker who is factually mistaken in this case. 80/20 splits and rebalancing is a strategy to deal with equity/bond asset allocations. In the case of intra-equity allocations, Bogleheads apply market-cap weighted proportions of diverse sets of equities. Aside from being the way to match the market it also has the benefit of not requiring any rebalancing as stock prices go up and down. If a stock doubles in price, it doubles in allocation and no trades happen.

The corollary for is that the 88/12 is not a static ratio but a market cap weighted ratio. As the ratio deviates, there should be no individual attempt to "rebalance" back to 88/12. The ratio deviates because the market cap weights change. There is nothing to do.

The actual reason to hold two funds is simply that the net TER is 0.1% lower.
Valuethinker wrote:
Fri Nov 15, 2019 4:05 am
Depending on your tax system, that can create the realisation of taxable capital gains. Minimizing taxes is an important way of controlling expenses.

So the reason to hold the whole world fund is the simplicity/ avoiding of capital gains taxes (depending on how your tax rules work). The fund will automatically rebalance between EM and DM for you.
I agree these are the reasons why a single fund is preferred. If one is new, I'd recommend taking the single fund (e.g VWRA) for equities. Simplicity is more important than complex "perfection"

BogleJohn
Posts: 3
Joined: Fri Nov 15, 2019 6:27 pm

Re: My Portfolio - Seeking Advice. Romania. 4 Currencies.

Post by BogleJohn » Fri Nov 15, 2019 6:29 pm

bravenewworld wrote:
Thu Nov 14, 2019 11:11 am
Accumulated dividends are only taxed when the funds are actually distributed, with no restriction on the number of years in which you can accumulate the dividends. (Pardon if the phrasing is off sounding, I'm doing an, almost, word for word translation from Romanian to English.
Do you know if this applies to accumulating bond ETFs as well, for Romanians? I'm thinking it must be, right? It would make no sense otherwise, we wouldn't even know what to pay.

Topic Author
bravenewworld
Posts: 9
Joined: Mon Nov 11, 2019 8:18 am

Re: My Portfolio - Seeking Advice. Romania. 4 Currencies.

Post by bravenewworld » Sat Nov 16, 2019 7:26 am

glorat wrote:
Fri Nov 15, 2019 8:50 am
The corollary for is that the 88/12 is not a static ratio but a market cap weighted ratio. As the ratio deviates, there should be no individual attempt to "rebalance" back to 88/12. The ratio deviates because the market cap weights change. There is nothing to do.

The actual reason to hold two funds is simply that the net TER is 0.1% lower.
I'm following you, but I'm not sure I fully understand the process at work here. How does "rebalancing" work in an ETF such as VWRA, wouldn't they always make sure the balance tilts at 88/12?

The math is most likely not as clear cut as this, but for the sake of this example:
I invest $10k today, based on their algorithm $8800 goes to the developed market and $1200 to EM. The market, like you said, isn't static, that 88/12 ratio will most likely deviate based on performance. They're not trying to time the market, so what influences that redistribution of dividends? Isn't it the original ratio? Wouldn't they always seek to stay as true to it as possible?

Thank you!

Topic Author
bravenewworld
Posts: 9
Joined: Mon Nov 11, 2019 8:18 am

Re: My Portfolio - Seeking Advice. Romania. 4 Currencies.

Post by bravenewworld » Sat Nov 16, 2019 7:44 am

BogleJohn wrote:
Fri Nov 15, 2019 6:29 pm
Do you know if this applies to accumulating bond ETFs as well, for Romanians? I'm thinking it must be, right? It would make no sense otherwise, we wouldn't even know what to pay.
To be completely honest with you, I don't know. I got confused by the terminology and translations.
My understanding is that typically, bonds (obligatiuni) pay interests (dobanzi), but bond ETFs do pay dividends (dividende)

For us, it's a matter of paying 5% taxes on dividends or 10% taxes on interests. So it's an important distinction.

To quote an article I found online:
"Bond ETFs do pay dividends, but they don't follow the same schedule as with individual bonds. While interest payments on a single bond are typically paid semiannually, or twice each year, bond ETFs pay dividends -- which are a combination of interest payments and market price gains -- every month."

If you look at the factsheet on an Accumulated Bond ETF it mentions dividends. So there's that...

glorat
Posts: 302
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Re: My Portfolio - Seeking Advice. Romania. 4 Currencies.

Post by glorat » Sat Nov 16, 2019 9:00 am

bravenewworld wrote:
Sat Nov 16, 2019 7:26 am
I'm following you, but I'm not sure I fully understand the process at work here. How does "rebalancing" work in an ETF such as VWRA, wouldn't they always make sure the balance tilts at 88/12?
No they won't. If the EM market "doubles" in value from 12 to 24, they do nothing. The new FTSE ratio is 76/24 because the market cap of EM has doubled so the market cap ratio is *supposed* to be 76/24.

Or as another example, if Google doubles in value and goes from 2% and 4% of the index, well its market cap has also gone from 2% to 4% it now needs to be 4% of the index. But the 2% of shares you had earlier have also doubled in value to 4% without buying/selling so there is nothing doing. The magic of market cap weighed strategies.

The point is that they are tracking the market cap weighted ratio which changes over time and needs no rebalancing

This is not to be confused with, for example Vanguard LifeStrategy 80% that holds 80% equity and 20% bonds. Here the strategy is to maintain the fixed 80/20 ratio to keep the risk level constant. So once in a while, it will automatically rebalance as the ratios drift. This has the beneficial side effect of buying low and selling high to keep the ratio and avoid the behavioural mistakes most investors make when they maintain more than one fund themselves.

Topic Author
bravenewworld
Posts: 9
Joined: Mon Nov 11, 2019 8:18 am

Re: My Portfolio - Seeking Advice. Romania. 4 Currencies.

Post by bravenewworld » Sat Nov 16, 2019 9:27 am

glorat wrote:
Sat Nov 16, 2019 9:00 am
The point is that they are tracking the market cap weighted ratio which changes over time and needs no rebalancing

This is not to be confused with, for example Vanguard LifeStrategy 80% that holds 80% equity and 20% bonds. Here the strategy is to maintain the fixed 80/20 ratio to keep the risk level constant. So once in a while, it will automatically rebalance as the ratios drift. This has the beneficial side effect of buying low and selling high to keep the ratio and avoid the behavioural mistakes most investors make when they maintain more than one fund themselves.
Got it! That makes perfect sense. It's very important to know the distinction. I genuinely appreciate you taking the time to educate me (and whoever else is lurking around)!

I've decided to go for VWRA for now. Created an account with IB, waiting for the approval. Next week I should be good to go. I've been playing with my Paper Trading account in the meanwhile. I'll slowly expand once I get more confident and comfortable with, well... everything, really.

I know it may not seem like a big deal to most on this forum, but I do feel like a good chunk of Europeans lack this sort of financial education. Especially someone like myself, coming from a country such as, ugh... regressive? as Romania. My parents, bless them, still look at money under the mattress, real estate and precious metals as the only viable way to invest, which isn't inherently bad, but it gives you a good indicator on how their mentality has been shaped over the years.

Cheers!

Valuethinker
Posts: 39065
Joined: Fri May 11, 2007 11:07 am

Re: My Portfolio - Seeking Advice. Romania. 4 Currencies.

Post by Valuethinker » Sat Nov 16, 2019 10:51 am

glorat wrote:
Fri Nov 15, 2019 8:50 am
Valuethinker wrote:
Fri Nov 15, 2019 4:05 am
Rebalancing. The whole Boglehead method (and the principles of all portfolio management) are based on the idea that we rebalance back to our target percentages.

Given different performance, the 80-20 split will keep getting out of line. You will have to see Developed World equities and buy EM, for example - that's the principle of rebalancing at work.
I must give a rare disagreement to Mr Valuethinker who is factually mistaken in this case. 80/20 splits and rebalancing is a strategy to deal with equity/bond asset allocations. In the case of intra-equity allocations, Bogleheads apply market-cap weighted proportions of diverse sets of equities. Aside from being the way to match the market it also has the benefit of not requiring any rebalancing as stock prices go up and down. If a stock doubles in price, it doubles in allocation and no trades happen.

The corollary for is that the 88/12 is not a static ratio but a market cap weighted ratio. As the ratio deviates, there should be no individual attempt to "rebalance" back to 88/12. The ratio deviates because the market cap weights change. There is nothing to do.
I might be a victim of muddy thinking here. But this is how I see it:

If one has $100 invested in 2 funds, 80% Developed Markets, 20% Emerging Markets, and one neither makes withdrawals nor further contributions, the percentages will remain as the relative market movements. If DM go + 20% you will have $96 in DM and if EM go +10% you will have $22 in EM. Your percentages are now 96/ 118 = 81% in DM and 22/ 118 = 19%.

So then you rebalance back to 80%/ 20% by selling 1% of DM and buying 1% in EM.

That is how rebalancing works?

Or were you thinking we would just "ride" the relative percentages ie let the market figure out what the "right" percentages are. That works fine *as long as* you have got the weightings between the 2 funds right in the first place ie your market split was exact (and that depends upon which index you choose).

In any case if you are investing each month you'd have to change the percentages invested (in the above case to 81% in DM and 19% in EM).
The actual reason to hold two funds is simply that the net TER is 0.1% lower.
Valuethinker wrote:
Fri Nov 15, 2019 4:05 am
Depending on your tax system, that can create the realisation of taxable capital gains. Minimizing taxes is an important way of controlling expenses.

So the reason to hold the whole world fund is the simplicity/ avoiding of capital gains taxes (depending on how your tax rules work). The fund will automatically rebalance between EM and DM for you.
I agree these are the reasons why a single fund is preferred. If one is new, I'd recommend taking the single fund (e.g VWRA) for equities. Simplicity is more important than complex "perfection"
[/quote]

It depends upon taxes. And simplicity really is a godly virtue in investing - it's a complex subject so one must make it as simple as possible but not so simple that it causes meaningful distortion.

glorat
Posts: 302
Joined: Thu Apr 18, 2019 2:17 am

Re: My Portfolio - Seeking Advice. Romania. 4 Currencies.

Post by glorat » Sun Nov 17, 2019 8:58 am

Valuethinker wrote:
Sat Nov 16, 2019 10:51 am
If one has $100 invested in 2 funds, 80% Developed Markets, 20% Emerging Markets, and one neither makes withdrawals nor further contributions, the percentages will remain as the relative market movements. If DM go + 20% you will have $96 in DM and if EM go +10% you will have $22 in EM. Your percentages are now 96/ 118 = 81% in DM and 22/ 118 = 19%.
Correct.
Valuethinker wrote:
Sat Nov 16, 2019 10:51 am
So then you rebalance back to 80%/ 20% by selling 1% of DM and buying 1% in EM.

That is how rebalancing works?
Rebalancing in these forums refers to adjusting your equity/bond ratios to maintain an appropriate level of risk. It does not or should not refer to how you compose your market cap weighted equity portfolio.
Valuethinker wrote:
Sat Nov 16, 2019 10:51 am
Or were you thinking we would just "ride" the relative percentages ie let the market figure out what the "right" percentages are. That works fine *as long as* you have got the weightings between the 2 funds right in the first place ie your market split was exact (and that depends upon which index you choose).
Correct. The "market" in this case is the FTSE Russell index or the MSCI World index. In your above case, you'll see these indices reflect a new 81/19 split on their website instead of the old 80/20.

It also works fine if you got the weightings wrong in the first place. Suppose you accidentally overweighed one portion by 10%. After the market moves, you are still overweight by 10% (exactly or approximately depending on your method of calculating overweight. Again the proper method is % above/below market cap weight). In other words, any wrongness won't get worse or better over time.
Valuethinker wrote:
Sat Nov 16, 2019 10:51 am
In any case if you are investing each month you'd have to change the percentages invested (in the above case to 81% in DM and 19% in EM).
Correct.

So the pain of knowing your % to allocate each month and dealing with taxes between two funds are all great reasons to simply have one fund. For most people I reckon this benefit is worth more than the 0.1% TER difference

BogleJohn
Posts: 3
Joined: Fri Nov 15, 2019 6:27 pm

Re: My Portfolio - Seeking Advice. Romania. 4 Currencies.

Post by BogleJohn » Tue Nov 19, 2019 7:06 pm

bravenewworld wrote:
Sat Nov 16, 2019 7:44 am
To be completely honest with you, I don't know. I got confused by the terminology and translations.
My understanding is that typically, bonds (obligatiuni) pay interests (dobanzi), but bond ETFs do pay dividends (dividende)

For us, it's a matter of paying 5% taxes on dividends or 10% taxes on interests. So it's an important distinction.
So ultimately what is the tax treatment of holding an accumulating ETF for example for 3 years (whether bonds or stocks), for Romanians? Wouldn't we simply have to apply the capital gains tax on the difference between the sell and buy price? Is there any other way to do it?

BogleJohn
Posts: 3
Joined: Fri Nov 15, 2019 6:27 pm

Re: My Portfolio - Seeking Advice. Romania. 4 Currencies.

Post by BogleJohn » Thu Nov 21, 2019 8:22 am

BogleJohn wrote:
Tue Nov 19, 2019 7:06 pm
bravenewworld wrote:
Sat Nov 16, 2019 7:44 am
To be completely honest with you, I don't know. I got confused by the terminology and translations.
My understanding is that typically, bonds (obligatiuni) pay interests (dobanzi), but bond ETFs do pay dividends (dividende)

For us, it's a matter of paying 5% taxes on dividends or 10% taxes on interests. So it's an important distinction.
So ultimately what is the tax treatment of holding an accumulating ETF for example for 3 years (whether bonds or stocks), for Romanians? Wouldn't we simply have to apply the capital gains tax on the difference between the sell and buy price? Is there any other way to do it?
I found this on a website:
Usually countries charge a dividends tax whenever dividends are distributed and a capital gains tax whenever a stock is sold. In these countries, an investor of an accumulating fund only has to pay capital gains tax when the fund is sold. Therefore, more capital would be invested in the accumulating fund, leading to greater compound effects and bigger returns than a comparable distributing fund which would get its dividends taxed.

Not all countries provide this tax benefit to accumulating funds. In the UK if you hold an accumulating fund, you would have to record how many units were reinvested throughout the lifetime of your holding in order to avoid being double taxed when paying capital gains tax.
As far as I know (from what I read on a few websites) in Romania it works as in the first paragraph (not as in the UK), so we'd pay only the capital gains tax on the difference between the sell and buy price (whether it's a bond ETF or stock ETF). What do you think? (I don't even know how people in the UK would be doing this; is there a way to actually find what an ETF did with the money so that they would find how many units were reinvested? Seems like a complete headache).

Topic Author
bravenewworld
Posts: 9
Joined: Mon Nov 11, 2019 8:18 am

Re: My Portfolio - Seeking Advice. Romania. 4 Currencies.

Post by bravenewworld » Thu Nov 21, 2019 11:15 am

BogleJohn wrote:
Thu Nov 21, 2019 8:22 am
Usually countries charge a dividends tax whenever dividends are distributed and a capital gains tax whenever a stock is sold. In these countries, an investor of an accumulating fund only has to pay capital gains tax when the fund is sold. Therefore, more capital would be invested in the accumulating fund, leading to greater compound effects and bigger returns than a comparable distributing fund which would get its dividends taxed.
That's it, Romanians keep it very simple. 5% on dividends, 10% on capital gains and interests. You only pay the dividend tax when they're distributed, otherwise... nothing.

I went into greater detail in a post above, but essentially that's the main reason I picked an Accumulated ETF.

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