32 yo - Investment Plan/Retirement Portfolio - CZECH & EUROPE

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cizinec
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32 yo - Investment Plan/Retirement Portfolio - CZECH & EUROPE

Post by cizinec » Thu Dec 21, 2017 11:36 am

Hello Bogleheads,

I’m a newcomer to the forum and a complete noob when it comes to investing. I'd like to devise a sound investment strategy to secure my future financial well-being and would very much appreciate your opinions and help. I have never done more than piling money in savings accounts. My complete lack of any financial education, coupled with common opinions running in my family and circle of friends led me to believe that investing is an overly complicated, speculative, time consuming and above all extremely risky endeavor. A mere mortal is guaranteed to fail and regret his actions ☹
However, almost non-existent interest rates of savings accounts of recent years made me revisit the topic of money management. I was fortunate to discover this wonderful website and community and benefited greatly from the knowledge shared by its peers. Thank you all!
I have read a couple of books from the recommended reading section and countless posts on the forum in recent weeks. The information gained changed my whole perspective on money management.
I’m now sure, that I need to take action to protect my savings and to be able to accumulate enough wealth to retire comfortably in the future. But I don’t want to do anything stupid or act too recklessly in the beginning and will be very grateful for your feedback.

My current situation:
Age: 32
Single, long-time GF, no children
Stable government job
No property, no mortgage
$0 in debt. No car loan, no credit card debt, no student loans, etc.
Salary: $ 2.200 net/month ($ 26.400 net yearly)
Monthly savings: $ 1.400 (frugal lifestyle)
Total savings so far: $ 80.000
All savings are in the Czech Koruna.

Future outlook

Major future expenses in the next 2 years:
Flight training $ 30.000.
I will seek a career in the aviation industry within the next 2 years. Upon changing jobs, no savings accumulation is probable for one year. I choose to think positively and hope the job gamble pays off in the long run, if I manage to build a flying career in Western Europe.

Not looking to buy a property in the next 5 years.
No children planned for the next 2-3 years.
Not looking to buy a car in the next 5 years, if necessary will buy a used one well within the budget.

I plan on working & living in the EU, however not necessarily in the Czech Rep.

My investment plan

Major Goals: - Comfortable retirement
- Home purchase in the next 7-10 years, if future income permits.

With all of the above in mind, I’m considering the following:

1) Emergency fund - $ 10.000 in cash (12 months living expenses) in a savings account (current interest rate 1% pa before tax)
2) Flight Training Expenditures in the next 2 years- $ 30.000 - cash in a savings account
3) Retirement Portfolio – initial contribution of $20.000-30.000, then keep adding semi-annually, 10-15% of salary
4) That leaves me with $ 10.000-20.000, which I’d like to save towards future mortgage down-payment (in the next 5 – 7 years) …any suggestions where to put this money are welcome

Retirement Portfolio

Desired: DIY, low cost approach with little time requirements and easy maintenance, low risk of the plan failing in the long run (20+ years), short term volatility accepted.
Don’t plan on pulling the money early from the portfolio unless in a life or death situation. Won’t follow the markets daily, will revisit the portfolio twice a year.

Possible setup:

There are no reasonably expensive mutual funds available in my country.
Therefore, I’m looking into buying & holding low-cost, accumulating ETFs domiciled in Ireland. This is to optimize taxes. Dividends are taxed in the Czech Republic. Capital gains are not taxed, if assets are held more than 3 years.

$20-30.000 lump sum investment

Option A

IWDA iShares Core MSCI World UCITS…90%
EIMIM iShares Core MSCI EM IMI UCITS …10%

Option B

IWDA iShares Core MSCI World UCITS…75%
EIMIM iShares Core MSCI EM IMI UCITS …10%
WDSC SPDR MSCI World Small Cap UCITS…15%

Option C

IWDA iShares Core MSCI World UCITS…60%
EIMIM iShares Core MSCI EM IMI UCITS …10%
WDSC SPDR MSCI World Small Cap UCITS…15%
IMAE iShares MSCI Europe UCITS ETF EUR (Acc) 15%

After the initial investment I plan on contributing semi-annually 10-15% of my salary. The money will be used to re-balance the portfolio, to buy more conservative assets in the future and to increase their position. I’m considering adding IEAA iShares Core € Corp Bond UCITS ETF or similar in the near future.
Also, I heard it might be good to add an asset tracking real estate to the mix. What are your thoughts on this? What might be a good option?

What do you think about the possible portfolio setups? I haven’t studied enough on asset allocation yet. The allocations above are some ideas I picked up on this webpage.

Regarding brokers, I intend to use low-cost options. From what I’ve gathered DeGiro and Lynx seem like reasonable candidates. When the size of the portfolio grows into something more substantial, I will consider switching to a more reputable broker, e.g. Interactive Brokers.

Is this plan reasonable? Are there any glaring issues? Any other things I might have missed?

If anyone read the whole thing, thank you very much for your time. Your feedback is greatly appreciated.

imperia
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Re: 32 yo - Investment Plan/Retirement Portfolio - CZECH & EUROPE

Post by imperia » Thu Dec 21, 2017 1:49 pm

All options are good and it is difficult to predict what is better.
Just pick one option invest and "Stay the Course"

buylowbuyhigh
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Re: 32 yo - Investment Plan/Retirement Portfolio - CZECH & EUROPE

Post by buylowbuyhigh » Thu Dec 21, 2017 3:46 pm

I posted a similar topic basically at the same time, just living in Finland :D

The plan seems well-thought and reasonable. I'm doing your option B for my equities, just have EM and SC both with weight 12.5%. I too have found these to be the best choices for a balanced portfolio. Also the Europe ETF seems ok if one wishes to overweight, expense is higher than for IWDA but not much. I also see that EMIM does not hold any Czech companies even though they are included in the EM index. Any good including a little of a local domestic fund if you favor a home bias?

At the moment bonds in Europe seem to lose to savings accounts, so with mental accounting you could count having also an allocation to fixed income, which might help in staying the course. Have you considered an account in some euro country denominated in EUR, especially if you're possibly not staying in Czech Rep? I think currency risk is material with all savings in koruna unless you're only going to spend korunas.

cizinec
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Re: 32 yo - Investment Plan/Retirement Portfolio - CZECH & EUROPE

Post by cizinec » Fri Dec 22, 2017 8:36 am

Thank you both for your replies.

@buylowbuyhigh
Warm greetings to Finland! I’ve found your post just minutes after starting this thread. We indeed seem to be in a similar situation ☺ and I’ll be following your topic as well.


I’ve given my above mentioned investment plan some more thought and I’m leaning towards following:

1) Leave $40.000 in savings accounts – Emergency Fund + Flight trng expenses
2) Retirement portfolio – initial investment of $25.000 in equities + semi-annual contributions of 10-15%, time horizon 20y+. This sum represents 31% of my current savings.
3) Remaining $15.000 – Possible mortgage down-payment in 5-7y

Retirement Portfolio – Equities Part

Out of the options mentioned in my original post, I’m considering option A for the initial investment. Maybe put slightly more weight on emerging markets.

IWDA iShares Core MSCI World UCITS…88,5%
EIMIM iShares Core MSCI EM IMI UCITS …12,5%

Reasons behind this decision
- Simplicity
- Low TERs
- Large, highly liquid funds

I ‘ve decided to omit acquiring WDSC MSCI World Small Cap UCITS in the initial purchase, because the fund’s TER is quite high, the fund itself is relatively small and presumably not as liquid as the IWDA and EIMIM.
Also I’m considering splitting my initial equities purchase into 2 or 3 smaller parts, approx. 3 months apart, starting at the beginning of 2018. I’ll split the resources allocated to purchase the equities into 50%-35%-15% a quarter of a year apart. I’m thinking of this because the Czech Koruna has been gaining strength relative to the EUR recently due to a significant change in monetary policy of the Czech National Bank last year. And the second reason for this decision is that I basically don’t know much about the correct asset allocation yet. I want to leave myself a little more time and resources, should I desire to adjust the initial portfolio setup in the near future. For example adding Small Cap.

Possible Mortgage down-payment/Bond/Cash Part

$15.000, which I likely won’t need in the next 5-7 years. Still searching for a best option where to deposit the money. Savings account interest rates in the Czech Rep. are hovering around 1%. Two or 3y fixed term bank deposit interest rates are roughly 1,2%. These are in the local currency.
The best rate I can find in EUR is in the nearby Slovakia, which is 2% for a 3y deposit. I’m considering this option, however it would introduce even more currency risk, especially if my job gamble doesn’t work out and I stayed living in the Czech rep. But I’ll probably accept the risk and bet on using this part of my resources in euro in the future.
If you have a better idea as to where to deposit this part of my resources, I’ll be grateful for any suggestions.

In the very long-term, I’m not too worried about currency risk. Basically, I can’t do much about it. The Czech Koruna is only useful in the Czech Rep. and who knows, if it’ll still be around in the next 20 years. Perhaps the Czech Rep. will also switch to Euro at some point in time. Slovaks did it years ago and we used to be one country. The current sentiment in the Czech Rep. is very much anti-Euro but that might change in the more distant future.

To address the point of adding a local domestic fund for home bias; Domestic funds in the Czech rep. are notoriously expensive, with high operating costs and purchasing costs. I’ll look more into it in the future, but I’m not considering it to be essential for the initial setup. What might be the benefits of adding a bit of home bias?

Thank you for reading this again rather long post. I’d be very grateful, if someone more experienced than myself could give this plan a nod or warn me, if I’m headed into a wrong direction.

@buylowbuyhigh
I’d like to ask you about your equity setup of IWDA75% EIMIM12.5 % WDSC12.5% that you describe in your post as representing the current market weight. Can you point me in the right direction on how to derive this information and why it might be good to follow the market weight in the future?
I’m sorry if these questions sound stupid. I’m really new to all this and lack a lot of education. Thank you!

buylowbuyhigh
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Re: 32 yo - Investment Plan/Retirement Portfolio - CZECH & EUROPE

Post by buylowbuyhigh » Sat Dec 23, 2017 10:55 am

cizinec wrote:
Fri Dec 22, 2017 8:36 am
@buylowbuyhigh
I’d like to ask you about your equity setup of IWDA75% EIMIM12.5 % WDSC12.5% that you describe in your post as representing the current market weight. Can you point me in the right direction on how to derive this information and why it might be good to follow the market weight in the future?
I’m sorry if these questions sound stupid. I’m really new to all this and lack a lot of education. Thank you!
The 75-12.5-12.5 was based on my calculation by hand earlier this year. These ratios also change over time and 75-10-15 might well be closer to the truth. IWDA seems to represents something between 75-80% of the global equity market and both EIMI and WDSC something between 10-15%. This is derived at comparing the MSCI indeces that these funds follow to MSCI ACWI IMI and also to FTSE global all cap. I also compared a model portfolio of 75-12.5-12.5 to the Vanguard Total World Stock ETF using Morningstar's X-ray, which is a useful tool. I believe in following market weights since the alternative is basically predicting that some market will perform better (>return and/or <risk), something I don't think I can or want to do.

These estimates are maybe not precise, and for example emerging markets were close 15% of the market not too many years ago but now maybe closer to 10%. I don't think the sharp percentages are that important in the end, mine are mostly aimed towards simplicity. In my opinion having both emerging markets and developed small caps between 5-15% of equity is perfectly fine. I think going over 20% or completely omitting either should be for a good reason (and that higher ER + lower liquidity with WDSC is a good reason). Perhaps a better ETF will come along in the near future.

As to your other questions, the home market bias was just a guess based on your third option of overweighting Europe. It looks like most US investors favor their home market, and also in Finland it's common to overweight the Finnish market. I'm not familiar with Czech stocks and their market weight is likely so small that any reasonable allocation is not noticeable. Also no idea about koruna other than investing it to some nice beer last year :sharebeer

I too am a beginner and suggest you don't believe anything I said without looking into it yourself. Hopefully someone more experienced can give you further advice and correct my thinking above as needed.

Happy holidays!

cizinec
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Re: 32 yo - Investment Plan/Retirement Portfolio - CZECH & EUROPE

Post by cizinec » Tue Dec 26, 2017 10:19 am

@buylowbuyhigh
Thank you for your insights and very happy holidays to you too! :happy :beer I plan to read a couple more books before parting with my savings. On the other hand, I don’t want to sit on the fence too long, possibly overthinking the situation too much.



The thing with the third option of overweighting the Europe was built around a piece of information I read on a Slovak investing advice website. Someone suggested that if you hold European securities through an European UCITS ETF, the fund receives dividends tax-free, which are then reinvested (for an accumulating ETF). That would mean avoiding the L1TW tax (tax withheld by the home country of the security on the dividends distributed). That would improve the investment performance quite a bit I believe. However I’m not sure, if this really is the case.
Hopefully someone more informed can confirm or correct this information.

trixit
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Re: 32 yo - Investment Plan/Retirement Portfolio - CZECH & EUROPE

Post by trixit » Sat Jan 20, 2018 12:59 am

Cizince, poslal jsem vam soukromou zpravicku. Rad bych se s vami spojil a poradil jakou spolecnost jste si vybral na investovani v CR.
Dekuji!

Mors
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Re: 32 yo - Investment Plan/Retirement Portfolio - CZECH & EUROPE

Post by Mors » Sat Jan 20, 2018 10:37 am

I do not see the reason to include a seperate European allocation since you do not decrease your currency risk this way. Are there any tax benefits for investing in the European market?

I could see that you invest a part of your portfolio in a CZK-hedged msci world tracker, or ina local index.

I would probably invest in the first allocation for simplicity and lower costs. I do not believe that adding a small small caps allocation is worth the increased trading costs, ER and complexity.

Mors
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Re: 32 yo - Investment Plan/Retirement Portfolio - CZECH & EUROPE

Post by Mors » Sat Jan 20, 2018 10:53 am

cizinec wrote:
Tue Dec 26, 2017 10:19 am
The thing with the third option of overweighting the Europe was built around a piece of information I read on a Slovak investing advice website. Someone suggested that if you hold European securities through an European UCITS ETF, the fund receives dividends tax-free, which are then reinvested (for an accumulating ETF). That would mean avoiding the L1TW tax (tax withheld by the home country of the security on the dividends distributed). That would improve the investment performance quite a bit I believe. However I’m not sure, if this really is the case.
Hopefully someone more informed can confirm or correct this information.
The dividend withholding issue is mitigated in a large degree by investing in US securities (and in general in countries with big dividend taxation) through funds domiciled in Ireland, since the latter has favorable tax treaties with a lot of countries, including the US (30%->15% tax withholding).

The iShares funds you have chosen are domiciled in Ireland, so you are fine from this regard.

If you wish to deviate from market cap in an attempt to chase returns by assuming increased risk, you can overweight emerging markets. Wealthfront allocates almost up to 30% EM stocks to the less risk-averse suitable investors. I would argue that making the 10% -> 20% is a reasonable increase.

Of course, the latter approach embraces some speculation for its reasoning.

trixit
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Re: 32 yo - Investment Plan/Retirement Portfolio - CZECH & EUROPE

Post by trixit » Tue Jan 23, 2018 8:37 am

Cizinec, have you decided what brokerage firm are you going to use to invest in the Czech Republic?

cizinec
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Re: 32 yo - Investment Plan/Retirement Portfolio - CZECH & EUROPE

Post by cizinec » Thu Jan 25, 2018 5:55 pm

Hello guys,
Thank you all for your valuable input. I’ve finally made a decision and started implementing my plan. For anyone who might be following this thread, I want to share the beginning of my investment journey.
For the equity part of my portfolio, I’ve decided to go for iShares Ireland domiciled accumulating ETFs IWDA+EIMIM in a 85/15% split. I’ve decided to stick with simplicity, low expenses and low trading cost for the beginning. I might revise my approach and add further ETFs to the portfolio later, but for now I’m happy with this combo.
Then I debated the question of investing all of my dedicated cash as a lump sum vs DCA. I’ve decided to take the middle road and have purchased 30% of my equity portfolio with a lump sum. The rest I’ll continue to invest monthly during this year in smaller installments until reaching my desired allocation. Then I’ll continue to contribute semi-annually whatever I can spare.
I’ve decided on this approach for a couple of reasons:
A) I wanted to stop off-putting the implementation of my investment plan and to start clocking in time in the market
B) The stocks are really high right now and if there was a huge drop within the next few months, I’d be kicking myself for making a bad purchase. This way I’ll have funds left to buy more or to buy different assets, should I discover that I made a bad decision.
C) Habit building. Investing is a completely new venture for me. This way I’ll get into the habit of periodically contributing towards my portfolio and see how the market’s ups and downs affect me psychologically.
D) My broker’s commissions don’t preclude this approach
Regarding brokers I’ve decided to go with Degiro’s custody account, at least initially. Their fees are low and IWDA, which makes up the majority of my portfolio, is currently on Degiro’s commission free list.
For fixed income I’m sticking with ISAs for now and will investigate other options in the near future.
That’s about it. Hope somebody finds this information useful!
Your thoughts and comments on my investment strategy are very welcome and highly appreciated.
Closing thoughts: I’m still feeling a bit uneasy about investing quite a significant part of my savings into ETFs but I did my research and am taking a leap of faith here.
One thing that worries me is the ETF getting closed/cancelled during a bad bear market. You are then forced out of your investment and receive cash according to the ETF’s present value and may suffer capital losses. What is the probability for such a situation to occur? And another thought; How safe is to hold a significant part of your savings invested in just those two ETFs using a low-cost broker? Will they - the ETFs and the broker be around after 10-20-30 years? What are the things that might go wrong with this approach? For these reasons, I plan to diversify my investments in the future.
Good luck to everyone!

investor_123
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Re: 32 yo - Investment Plan/Retirement Portfolio - CZECH & EUROPE

Post by investor_123 » Sun Nov 04, 2018 9:23 am

Hello @cizinec, thank you so much for creating this thread and sharing your thoughts! This helped me a lot, as I'm from the same country too and finding useful information that applies to our case isn't exactly straightforward.

I've just been wondering, as I'm new to this - is there any particular reason, why did you choose IWDA instead of CSPX (iShares Core S&P 500 UCITS ETF)? As the two indices seem to move more or less in sync, yet the cost of the later is pretty much 1/3 of the former?

Is it because S&P 500 seems to be more based on US companies? But even with that, US based companies get roughly 45-50% of their revenues globally, so it would balance out, wouldn't it? It's likely that I'm missing some important point here, as I said - I'm a total newbie here.

If you or someone else can shed some light on this for me, I'll be very grateful!

andrew99999
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Re: 32 yo - Investment Plan/Retirement Portfolio - CZECH & EUROPE

Post by andrew99999 » Sun Nov 04, 2018 10:58 am

investor_123 wrote:
Sun Nov 04, 2018 9:23 am
Hello @cizinec, thank you so much for creating this thread and sharing your thoughts! This helped me a lot, as I'm from the same country too and finding useful information that applies to our case isn't exactly straightforward.

I've just been wondering, as I'm new to this - is there any particular reason, why did you choose IWDA instead of CSPX (iShares Core S&P 500 UCITS ETF)? As the two indices seem to move more or less in sync, yet the cost of the later is pretty much 1/3 of the former?

Is it because S&P 500 seems to be more based on US companies? But even with that, US based companies get roughly 45-50% of their revenues globally, so it would balance out, wouldn't it? It's likely that I'm missing some important point here, as I said - I'm a total newbie here.

If you or someone else can shed some light on this for me, I'll be very grateful!
Your argument of "US based companies get roughly 45-50% of their revenues globally" so no need for international, has been used in my home country (Australia), as an argument of why you shouldn't bother with any international diversification at all - because the market in Australia gets around 40% of revenue globally. However, Australia is 2.5% of the worlds market by capitalisation. Do you think your reason still applies to Australia? If not, why would it apply to the US?

One example I've heard of how this argument falls down is that, both Apple and Samsung sell internationally so you can just invest in the US one and it's just as good, right? Wrong. Maybe everyone will (finally) realise that with iPhones you are paying extra for a logo and then everyone could stop buying it, and the fact that both companies sell internationally doesn't help you. I've heard other examples but can't remember them offhand.

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BeBH65
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Re: 32 yo - Investment Plan/Retirement Portfolio - CZECH & EUROPE

Post by BeBH65 » Sun Nov 04, 2018 11:11 am

investor_123 wrote:
Sun Nov 04, 2018 9:23 am
I've just been wondering, as I'm new to this - is there any particular reason, why did you choose IWDA instead of CSPX (iShares Core S&P 500 UCITS ETF)? As the two indices seem to move more or less in sync, yet the cost of the later is pretty much 1/3 of the former?
"Past performance is no indication for the future. "

Diversification is one of the Bogleheads principles. By using IWDA you aere investing in a larger portion of the market.
CSPX covers about 55% of the world, by using IWDA you add the large caps of the developed markets to this.
BeBH65. (only an investment enthusiast, not a financial adviser, perform your due diligence).

indexfundinvestor.eu
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Re: 32 yo - Investment Plan/Retirement Portfolio - CZECH & EUROPE

Post by indexfundinvestor.eu » Sun Nov 04, 2018 11:39 am

I've just been wondering, as I'm new to this - is there any particular reason, why did you choose IWDA instead of CSPX (iShares Core S&P 500 UCITS ETF)? As the two indices seem to move more or less in sync, yet the cost of the later is pretty much 1/3 of the former?

Is it because S&P 500 seems to be more based on US companies? But even with that, US based companies get roughly 45-50% of their revenues globally, so it would balance out, wouldn't it? It's likely that I'm missing some important point here, as I said - I'm a total newbie here.
The main reasoning behind picking IWDA instead of CSPX is because IWDA is a simple way to have access to stocks from developed countries weighted by market capitalization. You get the global diversification without having to buy specific funds for each country/region yourself. According to the breakdown by geography the US market represents ~62.15% of the fund.
As you mentioned, both funds are highly correlated. They are correlated because the US represents a significant percentage of IWDA.
IWDA is pricey when compared to a S&P 500 fund, but you also have to account for the cost of buying different funds (to emulate IWDA's global diversification) and the cost in time of managing/rebalancing such a portfolio.

investor_123
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Re: 32 yo - Investment Plan/Retirement Portfolio - CZECH & EUROPE

Post by investor_123 » Sun Nov 04, 2018 12:13 pm

Thank you all very much! What you've said makes sense of course.

Also, digging around small cap funds I also ran into iShares MSCI World Small Cap UCITS ETF (TER 0.35%) vs SPDR MSCI World Small Cap UCITS ETF (TER 0.45%). I can't quite wrap my mind around this, as they seem to be following the same benchmark, but the iShares ETF has significantly lower costs. Would it make sense to choose the less costly ETF in this case or am I missing some important points again?

DJN
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Re: 32 yo - Investment Plan/Retirement Portfolio - CZECH & EUROPE

Post by DJN » Sun Nov 04, 2018 1:03 pm

Hi there,
good planning going on!
What's your tax position? I understand that the flat rate income tax is 15% on all income and capital gains. There is also something called a solidarity tax at 7% applied above a certain threshold. Probably good to double check the ETF's you are considering vis a vis your tax.
good luck,
DJN

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BeBH65
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Re: 32 yo - Investment Plan/Retirement Portfolio - CZECH & EUROPE

Post by BeBH65 » Sun Nov 04, 2018 1:33 pm

investor_123 wrote:
Sun Nov 04, 2018 12:13 pm
Thank you all very much! What you've said makes sense of course.

Also, digging around small cap funds I also ran into iShares MSCI World Small Cap UCITS ETF (TER 0.35%) vs SPDR MSCI World Small Cap UCITS ETF (TER 0.45%). I can't quite wrap my mind around this, as they seem to be following the same benchmark, but the iShares ETF has significantly lower costs. Would it make sense to choose the less costly ETF in this case or am I missing some important points again?
There is some "price war" for European ETFs (finally). The iShares fund (WSML) is fairly new but there is no reason not to buy that one.
BeBH65. (only an investment enthusiast, not a financial adviser, perform your due diligence).

investor_123
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Re: 32 yo - Investment Plan/Retirement Portfolio - CZECH & EUROPE

Post by investor_123 » Sun Nov 04, 2018 5:00 pm

DJN wrote:
Sun Nov 04, 2018 1:03 pm
I understand that the flat rate income tax is 15% on all income and capital gains. There is also something called a solidarity tax at 7% applied above a certain threshold. Probably good to double check the ETF's you are considering vis a vis your tax.
As I understand, in the Czech republic when you hold a position for 3 years and longer OR don't have income of more than 100 000 CZK (roughly 4000 EUR) from selling your investment position per tax period, then there is no income tax to be declared. It's supposed to incentivise investors to be in the market for longer.

As for the 7% solidarity tax - this applies to very high income individuals, when their yearly income goes above the threshold of some 1.5mil CZK. The limit changes every year though. And I afraid my little trials with ETF here will be far too low for this tax to bother me :mrgreen:

Otherwise, like you said - the income tax is 15% in all cases, but the actual tax calculations differ depending on specific situations. Btw: Do you also happen to be from the CZ?


@BeBH65 Thank you a lot for this reassurance! :)

indexfundinvestor.eu
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Re: 32 yo - Investment Plan/Retirement Portfolio - CZECH & EUROPE

Post by indexfundinvestor.eu » Mon Nov 05, 2018 2:48 am

Also, digging around small cap funds I also ran into iShares MSCI World Small Cap UCITS ETF (TER 0.35%) vs SPDR MSCI World Small Cap UCITS ETF (TER 0.45%). I can't quite wrap my mind around this, as they seem to be following the same benchmark, but the iShares ETF has significantly lower costs. Would it make sense to choose the less costly ETF in this case or am I missing some important points again?
The main differences I see between both other than TER are:
* Tax Status - the iShares is only tax reporting in Austria, while the SPDR is tax reporting in Austria, UK, Germany, Switzerland. This does not matter to you since you are a fiscal resident in CZ. You can check this in justETF.
* Securities lending - the iShares ETF lends securities while the SPDR ETF does not. You can check this in justETF.
* Volume - the iShares ETF has more volume in Xetra (67k) than the SPDR ETF (~2.6k). You can check this in your broker.
* price per share - the iShares ETF has a lower share price than the SPDR ETF. This may matter depending on the quantity of money you want to invest (e.g. lower share prices decrease barriers for investors with less money to invest since you can't buy fractional shares in a stock exchange). You can check this in justETF or your broker.

I think the iShares ETF is a reasonable choice if you don't live in the UK, Germany or Switzerland.

buylowbuyhigh
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Re: 32 yo - Investment Plan/Retirement Portfolio - CZECH & EUROPE

Post by buylowbuyhigh » Mon Nov 05, 2018 3:01 am

The iShares MSCI World Small Cap (WSML/IUSN) was launched after the OP. I have personally switched from SPDR WDSC/ZPRS to iShares WSML/IUSN. It seems to be a little better in all aspects, but the difference is probably too small to have any impact.

Valuethinker
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Re: 32 yo - Investment Plan/Retirement Portfolio - CZECH & EUROPE

Post by Valuethinker » Mon Nov 05, 2018 4:33 am

buylowbuyhigh wrote:
Thu Dec 21, 2017 3:46 pm
I posted a similar topic basically at the same time, just living in Finland :D

The plan seems well-thought and reasonable. I'm doing your option B for my equities, just have EM and SC both with weight 12.5%. I too have found these to be the best choices for a balanced portfolio. Also the Europe ETF seems ok if one wishes to overweight, expense is higher than for IWDA but not much. I also see that EMIM does not hold any Czech companies even though they are included in the EM index. Any good including a little of a local domestic fund if you favor a home bias?
Why would someone sitting in Europe want to overweight Europe against the world index?
At the moment bonds in Europe seem to lose to savings accounts, so with mental accounting you could count having also an allocation to fixed income, which might help in staying the course. Have you considered an account in some euro country denominated in EUR, especially if you're possibly not staying in Czech Rep? I think currency risk is material with all savings in koruna unless you're only going to spend korunas.

selters
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Re: 32 yo - Investment Plan/Retirement Portfolio - CZECH & EUROPE

Post by selters » Mon Nov 05, 2018 4:43 am

I love the simplicity and low costs of Option A.

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Re: 32 yo - Investment Plan/Retirement Portfolio - CZECH & EUROPE

Post by selters » Mon Nov 05, 2018 4:53 am

Valuethinker wrote:
Mon Nov 05, 2018 4:33 am
buylowbuyhigh wrote:
Thu Dec 21, 2017 3:46 pm
I posted a similar topic basically at the same time, just living in Finland :D

The plan seems well-thought and reasonable. I'm doing your option B for my equities, just have EM and SC both with weight 12.5%. I too have found these to be the best choices for a balanced portfolio. Also the Europe ETF seems ok if one wishes to overweight, expense is higher than for IWDA but not much. I also see that EMIM does not hold any Czech companies even though they are included in the EM index. Any good including a little of a local domestic fund if you favor a home bias?
Why would someone sitting in Europe want to overweight Europe against the world index?
It would have to be the very low dividend tax leakage within the EU (or EEC, to be precise).

EMIM does hold the four Czech constituents in the MSCI Czech Republic Index. Check (pun intended) yourself at ishares.com.

ICH
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Re: 32 yo - Investment Plan/Retirement Portfolio - CZECH & EUROPE

Post by ICH » Mon Nov 05, 2018 2:46 pm

selters wrote:
Mon Nov 05, 2018 4:53 am
Valuethinker wrote:
Mon Nov 05, 2018 4:33 am
buylowbuyhigh wrote:
Thu Dec 21, 2017 3:46 pm
I posted a similar topic basically at the same time, just living in Finland :D

The plan seems well-thought and reasonable. I'm doing your option B for my equities, just have EM and SC both with weight 12.5%. I too have found these to be the best choices for a balanced portfolio. Also the Europe ETF seems ok if one wishes to overweight, expense is higher than for IWDA but not much. I also see that EMIM does not hold any Czech companies even though they are included in the EM index. Any good including a little of a local domestic fund if you favor a home bias?
Why would someone sitting in Europe want to overweight Europe against the world index?
It would have to be the very low dividend tax leakage within the EU (or EEC, to be precise).

EMIM does hold the four Czech constituents in the MSCI Czech Republic Index. Check (pun intended) yourself at ishares.com.
Really? A European would overweight Europe because of the low dividend tax leakage?

selters
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Re: 32 yo - Investment Plan/Retirement Portfolio - CZECH & EUROPE

Post by selters » Tue Nov 06, 2018 12:51 am

ICH wrote:
Mon Nov 05, 2018 2:46 pm

Really? A European would overweight Europe because of the low dividend tax leakage?
I think that makes sense. Not by a lot. But 5%, maybe.

It's the same kind of reasoning for US investors. US stocks make up 52% of world market cap, but even if you are an efficient markets absolutist, it makes sense to put 55% or 60% of your portfolio in US stocks because tax costs and higher expense ratios for ex-US funds makes their expected risk adjusted return 0.2-0.3 percent lower per year.

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Re: 32 yo - Investment Plan/Retirement Portfolio - CZECH & EUROPE

Post by ICH » Tue Nov 06, 2018 5:29 am

selters wrote:
Tue Nov 06, 2018 12:51 am
ICH wrote:
Mon Nov 05, 2018 2:46 pm

Really? A European would overweight Europe because of the low dividend tax leakage?
I think that makes sense. Not by a lot. But 5%, maybe.

It's the same kind of reasoning for US investors. US stocks make up 52% of world market cap, but even if you are an efficient markets absolutist, it makes sense to put 55% or 60% of your portfolio in US stocks because tax costs and higher expense ratios for ex-US funds makes their expected risk adjusted return 0.2-0.3 percent lower per year.
Just ran some numbers, based on this: https://www.bogleheads.org/wiki/Nonresi ... Irish_ETFs

An S&P500 ETF (VUSA) has an expense ratio of 0.07% and tax withholding ratio of 0.30%. Hence total expense ratio including tax drag = 0.37%.

A FTSE All world stock ETF (VWRD) has an expense ratio of 0.25% and tax withholding ratio of 0.21%. Hence total expense ratio including tax drag = 0.46%.

A FTSE Developed Europe ETF (VEUR) has an expense ratio of 0.12% and tax withholding ratio of 0.18%. Hence total expense ratio including tax drag = 0.30%. (I calculated the tax withholding as 3.2% yield x 5.5% L1TW).

So for a 100% stock portfolio, the expense ratio including the tax drag is:
If VWRD only -> 0.46%
If 95% VWRD and 5% VEUR -> 0.46% x 0.95 + 0.30 x 0.05 = 0.45%.
The difference is insignificant. However, in the process of having one more ETF, your trading costs increase, your re-balancing is becoming difficult and staying the course even more difficult. You are moving away from simplicity.

If you go extreme and put 50%-50% VWRD-VEUR -> 0.46*0.5 + 0.30*0.5 = 0.38%. But if you're going to overweight that much, might as well go all in S&P500, which is cheaper and more likely to give you profits :-)

Fortunately or unfortunately, the advantages US investors may have by over-weighting US stocks, are not really applicable for other investors over-weighting their home country stocks.

P.S. Of course expense ratios and tax drags vary. I cannot verify the accuracy of the above data, in ways other than using the wiki.

buylowbuyhigh
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Re: 32 yo - Investment Plan/Retirement Portfolio - CZECH & EUROPE

Post by buylowbuyhigh » Tue Nov 06, 2018 7:04 am

selters wrote:
Mon Nov 05, 2018 4:53 am
Valuethinker wrote:
Mon Nov 05, 2018 4:33 am
buylowbuyhigh wrote:
Thu Dec 21, 2017 3:46 pm
I posted a similar topic basically at the same time, just living in Finland :D

The plan seems well-thought and reasonable. I'm doing your option B for my equities, just have EM and SC both with weight 12.5%. I too have found these to be the best choices for a balanced portfolio. Also the Europe ETF seems ok if one wishes to overweight, expense is higher than for IWDA but not much. I also see that EMIM does not hold any Czech companies even though they are included in the EM index. Any good including a little of a local domestic fund if you favor a home bias?
Why would someone sitting in Europe want to overweight Europe against the world index?
It would have to be the very low dividend tax leakage within the EU (or EEC, to be precise).

EMIM does hold the four Czech constituents in the MSCI Czech Republic Index. Check (pun intended) yourself at ishares.com.
1. The statement about the Europe ETF was about choosing a fund IF one wishes to overweight, which might have some upsides currencywise:

https://finpage.blog/2017/03/18/investi ... ld-part-1/

Personally I don't have a home bias, and my allocation to Finnish stocks is equal to their share of market cap, 0.3-0.4% of stocks.

The tax leakage is also real, for example investing in US stocks in any way from Europe has "tax withholding ratio" (see post above) of ~0.3%. For another example Finland does not withhold taxes on dividends in funds, even for ETFs domiciled in Ireland.

2. I remember checking the holdings from iShares last year and not seeing any Czech companies. I may also remember wrong.
Last edited by buylowbuyhigh on Wed Nov 07, 2018 12:34 am, edited 1 time in total.

selters
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Re: 32 yo - Investment Plan/Retirement Portfolio - CZECH & EUROPE

Post by selters » Tue Nov 06, 2018 7:15 am

0.18% sounds high for Europe. But I may be wrong. I calculated the the percentage for a European index fund domiciled in my home country for 2017 and its tax costs was in the 0.07-0.08% range. The same asset manager runs an MSCI USA fund and an MSCI Emerging Markets fund. Gross of their expense ratio, the MSCI Europe fund beats the MSCI Europe Net Return Index by about 0.50% per year, the MSCI USA fund beats the MSCI USA Net Return Index by about 0.10% per year but loses to the MSCI Emerging Markets Net Return Index by about 0.30% per year. I was expecting the same to be the case for iShares and Vanguard. If anything, I would expect Vanguard/iShares to be better at paying less taxes than a Scandinavian asset manager one hundredth their size.

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Re: 32 yo - Investment Plan/Retirement Portfolio - CZECH & EUROPE

Post by ICH » Tue Nov 06, 2018 8:19 am

selters wrote:
Tue Nov 06, 2018 7:15 am
0.18% sounds high for Europe. But I may be wrong. I calculated the the percentage for a European index fund domiciled in my home country for 2017 and its tax costs was in the 0.07-0.08% range. The same asset manager runs an MSCI USA fund and an MSCI Emerging Markets fund. Gross of their expense ratio, the MSCI Europe fund beats the MSCI Europe Net Return Index by about 0.50% per year, the MSCI USA fund beats the MSCI USA Net Return Index by about 0.10% per year but loses to the MSCI Emerging Markets Net Return Index by about 0.30% per year. I was expecting the same to be the case for iShares and Vanguard. If anything, I would expect Vanguard/iShares to be better at paying less taxes than a Scandinavian asset manager one hundredth their size.
I am not certain if Vanguard or ishares can do anything about that, since the funds have to follow the index; i.e. they must have the same shares as the index.

Maybe the numbers are slightly different, but I calculated the 0.18% tax withholding as 3.2% yield x 5.5% L1TW.

Yield 3.2% is "as at close 30 Sep 2018" as shown in Vanguard's website today: https://www.vanguardinvestor.co.uk/inve ... tributions

L1TW is 5.5% but refers to 2014, as per the wiki: https://www.bogleheads.org/wiki/Nonresi ... Irish_ETFs

Since the actual yield of VEUR is 3.2%, to have a tax withholding of 0.08% would mean that current (2018) L1TW is half what it was in 2014. Could be, I am not sure.

What's the expense ratio of the European index fund domiciled in your home country? Is it following a broad European index or maybe something like Eurostoxx 50?

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Re: 32 yo - Investment Plan/Retirement Portfolio - CZECH & EUROPE

Post by selters » Wed Nov 07, 2018 1:43 pm

ICH wrote:
Tue Nov 06, 2018 8:19 am
I am not certain if Vanguard or ishares can do anything about that, since the funds have to follow the index; i.e. they must have the same shares as the index.

What's the expense ratio of the European index fund domiciled in your home country? Is it following a broad European index or maybe something like Eurostoxx 50?
I don't know exactly how fund companies do this, but as far as I know they apply to foreign tax authorities in order to get the withheld taxes refunded the following year. If they think they have a good case, they can run their case through the judicial system in each country. It has little or nothing to do with which stocks the fund holds.

The expense ratios are 0.10% for institutional investors with more than approximately $1 million to invest and 0.20% for retail investors. The funds follow MSCI indexes with an ESG screen where about 100 of the 2800 companies in the MSCI ACWI index are not included. But very few mega caps are excluded, so the tracking error caused by the ESG screen is minimal.

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Re: 32 yo - Investment Plan/Retirement Portfolio - CZECH & EUROPE

Post by Pilotdude1984 » Wed Nov 07, 2018 2:03 pm

I'm a pilot living in Germany and although this forum is wonderful for older individuals, at 32 you can be a bit riskier. My advice (and its not going to be popular here) would be to invest in American tech (Amazon, Netflix/NVDA, Square, Google). These are great companies that have a bright future and I personally have made a good chunk of change investing in them.

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Re: 32 yo - Investment Plan/Retirement Portfolio - CZECH & EUROPE

Post by ICH » Wed Nov 07, 2018 3:11 pm

Pilotdude1984 wrote:
Wed Nov 07, 2018 2:03 pm
I'm a pilot living in Germany and although this forum is wonderful for older individuals, at 32 you can be a bit riskier. My advice (and its not going to be popular here) would be to invest in American tech (Amazon, Netflix/NVDA, Square, Google). These are great companies that have a bright future and I personally have made a good chunk of change investing in them.
So many wonderful youngsters were wiped out with Enron, so I say: why not? There 's plenty of time along the way to make more money to throw away in the next hobby.

There is a misconception that Bogleheads are risk adverse for some reason. In fact taking on risk (that you can handle of course) is a bogleheads investing principle.

Personally I indulge my self in the roulette from times to times. Good sport to pass the time, free unlimited drinks and free food depending on the occasion.
And I don't need to spend hours after hours reading financial statements, as I assume you 're doing, to know that these are great companies.

Some people would argue that these stocks are slightly expensive by the way. Have you seen their P/E?

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Re: 32 yo - Investment Plan/Retirement Portfolio - CZECH & EUROPE

Post by BeBH65 » Wed Nov 07, 2018 3:52 pm

selters wrote:
Wed Nov 07, 2018 1:43 pm
I don't know exactly how fund companies do this, but as far as I know they apply to foreign tax authorities in order to get the withheld taxes refunded the following year. If they think they have a good case, they can run their case through the judicial system in each country. It has little or nothing to do with which stocks the fund holds.
Tax treaties between countries determine the taxes that need to be paid
I think you can be sure that the fundcompanies utilise these treaties to the maximum.... but taxes will be paid.
BeBH65. (only an investment enthusiast, not a financial adviser, perform your due diligence).

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