Long term expat (European) - simple global portfolio

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Fraussie
Posts: 4
Joined: Tue Aug 15, 2017 4:35 am

Long term expat (European) - simple global portfolio

Post by Fraussie » Wed Aug 30, 2017 5:37 am

Emergency funds: Will keep 3-6 months of expenses
Debt: Mortgage on investment property in Japan - in-laws live in it and are paying the mortgage so it doesn't really count as debt. Otherwise we have no debt.
Tax Filing Status: Married - no kids (but plan to have 1 or 2 kids within the next five years)
Tax Rate: income tax on local income but not income tax on foreign income. No CGT.
Country of Residence: Singapore for now but tend to move a lot and no idea where we could go next
Age: 38
Desired Asset allocation: 80% stocks / 20% bonds

Hi guys

I'm a 38 year old French citizen currently based in Singapore. I have lived outside of France (UK, Australia, Japan, Singapore) for my entire adult life and do not plan to go back any time soon. I consider myself a global citizen and will most likely continue to live outside of my home country for the foreseeable future. My wife is Japanese. We have no idea where we will retire - could be anywhere and we could end up living in different countries throughout the year (who knows, it's in 20-25 years). My family is in France and hers is in Japan so I guess we will always have strong ties to those countries but have very much of an international outlook on life (no real home bias).

I wish I had come across Mr Bogle's investment philosophy earlier in life. A few years ago, I became concerned that being an expat I hadn't really made any financial arrangements for my retirement. I used to contribute to a pension fund in Australia but there isn't much in it and since then all my savings have been accumulating in my savings account. A couple of years ago I made the mistake of trusting one of those slimy financial advisors who roam the expat circles of Singapore and both my wife and I ended up investing in an offshore life insurance scheme (Friends Provident). After reading Andrew Hallam's books, I realised what a mistake that was and we are trying to get out of it.

In the meantime, I have been educating myself on how to set up a low cost ETF portfolio following the Bogleheads principles. I already know that from tax perspective, it is best for me to buy ETFs traded on the London Stock Exchange and domiciled in Ireland. I also focused on large ETFs with high AUM for liquidity reasons.

We around SGD 500k to invest and I would like to build a simple, diversified easy to maintain ETF portfolio. After the lump sum investment, my wife and I plan to contribute SGD 6k monthly into the portfolio. I have opened an IB brokerage account and I am ready to pull the trigger. After doing a lot of reading I am leaning towards the following choice and would love to hear to hear your views:

iShares Core MSCI World UCITS (IWDA) - 80% (TER 0.20%)
iShares US Aggregate Bond UCITS ETF (IUAG) - 20% (TER 0.25%)

Questions:
1. Equity - should I add emerging markets exposure?

The reason why I picked IWDA is because I wanted a highly diversified world ETF. iShares MSCI World UCITS ETF (IWRD) is too expensive. Vanguard FTSE All-World UCITS ETF (VWRD) sounded great but I like that IWDA is accumulating as I won't have to manually reinvest dividends. I have asked myself whether I should add emerging market exposure to turn my equity portfolio into a true world ETF similar to VWRD - adding 10% of iShares Core MSCI EM IMI UCITS ETF (EMIM) came to mind.

I am kind of reluctant to add EM exposure but happy to be challenged by you guys. It seems that EM does not really add any growth and instead adds risk and volatility. When I compare the progression of VWRD (which includes EM) vs IWDA (which doesn't), it looks like developed countries lead the pack. Is there any real benefit in adding EM exposure? Is IWDA not enough diversified? Am I right in thinking that most of the value in stock markets around the world is generated by developed markets?

2. Equity - Being European, I will always have ties to France/Europe and one day I may want to live there again, am I making a mistake in not adding an ETF focused on developed Europe to my portfolio? I was thinking of perhaps adding an ETF tracking the EUROSTOXX 600 index.

3. Bonds - is IUAG really the best choice for someone like me who has not ties to the US and has no home bias?

It seems that getting short term bonds is the best way to manage interest rates risk. I looked at 0-3 years maturity bonds ETFs but the return seems to be really low, especially in Europe. So I thought perhaps I should find a middle ground by picking 5-7 year maturity bonds. I also wasn't so keen on investing in European bonds ETFs given they all tend to contains bonds issued by countries like Italy, Spain etc. who have a pretty low credit rating. I want my bonds ETF to correlate with my equity ETF ie. when one is performing well, the other one isn't - this way I can re-balance my portfolio and reduce volatility on a regular basis (buy bonds or shares when they're underperforming). To me US Gvt Bonds are super safe, generate a decent return and correlate with my world ETF (given it has over 50% in US exposure) but I have no ties to the US. I may live there one day, but there are no concrete plans.

Am I making the right decision with IUAG?

I guess, whatever I pick, I need my portfolio to be portable given I have no idea where I will live and have no home bias - no?

shcnno
Posts: 24
Joined: Tue May 09, 2017 10:56 am

Re: Long term expat (European) - simple global portfolio

Post by shcnno » Wed Aug 30, 2017 7:01 am

Fraussie wrote:
Wed Aug 30, 2017 5:37 am
I like that IWDA is accumulating as I won't have to manually reinvest dividends.
If you're investing 6k every month, wouldn't it be easy to reinvent dividends by simply a buying more after you have received dividends?

shcnno
Posts: 24
Joined: Tue May 09, 2017 10:56 am

Re: Long term expat (European) - simple global portfolio

Post by shcnno » Thu Aug 31, 2017 2:49 am

Regarding emerging markets:
I don't think there is any correct answer to this. EM might do better or worse than developed markets. I personally like to add it as I think I would feel like I've missed out if EM rallied. Also, they are part of the world marked, so why leave it out?
When you compared history of VWRD vs IWDA then you are - comparing history. If you knew what markeds would win in the future then you could just focus on that, but as we don't we add the broadest exposure we can get to benefits from the movements of the markeds as a whole.

pin
Posts: 14
Joined: Sat Aug 26, 2017 5:32 am

Re: Long term expat (European) - simple global portfolio

Post by pin » Thu Aug 31, 2017 5:24 am

Hello OP, you have quite a few similarities to my situation.

The information I got from my own thread was very useful, it might also be of use to you:

viewtopic.php?f=1&t=226451

Fraussie
Posts: 4
Joined: Tue Aug 15, 2017 4:35 am

Re: Long term expat (European) - simple global portfolio

Post by Fraussie » Sun Sep 03, 2017 4:08 am

Thanks guys. I decided to go for the following:

iShares Core MSCI World UCITS ETF [IWDA] (70%)
iShares Core MSCI EM IMI UCITS ETF [EIMI] (10%)
iShares US Aggregate Bond UCITS ETF [IUAA] (20%)

My average TER is 0.21%

I've included details of my reasoning below -feel free to provide constructive criticism!

General preferences
  • Avoid US tax exposure => no US domiciled ETF
  • LSE is preferred stock exchange: largest stock exchange after US + largest choice of ETFs + no stamp duty (0.5%) on Ireland domiciled ETFs + no withholding tax on dividends/interest for non-residents
  • Ireland domiciled ETFs because low taxation + no stamp duty when bought on LSE
  • Prefer accumulating ETFs because dividends/interest are automatically reinvested => simple + full benefit of compounding interest
  • Pick only large ETFs (>USD1bn AUM) to ensure liquidity and manage risk of survivorship bias
  • Low cost (< 0.25%) - In general pick lowest fee ETF unless there is compelling reason to chose more expensive ETF
  • USD denominated for ease of understanding
  • Physical ETFs
  • Reputable issuers to minimise tracking errors eg. Vanguard, Ishares
  • UCITS compliant ETFs

IWDA
  • Wanted global market share ETF for diversification purposes but no real one stop shop for non US residents - there one all world ETF (Powershares) but it is expensive and has counterparty risk (not physical etf). Best options are VWRD and IWDA.
  • Only decent alternative was VWRD - slightly cheaper (0.18%) and included emerging markets but distributing only. Preferred the convenience of accumulating feature and preferred to have emerging markets separately to decide allocation myself and benefit from rebalancing opportunity if IWDA and EIMI performance were to be at odds
  • MSCI index is reputable index, on par with FTSE World + coherent with EIMI eg South Korea is emerging market for MSCI but no for FTSE
EIMI
  • Thought long and hard about whether to add EM - seems to exhibit a lot of volatility and possibly dragging down performance of VWRD vs IWDA over the last few year. In the end decided to add it because EM are part of the world and I wanted a globally diversified shares portfolio. EM don’t always perform in line with developed nations so it may also give me an opportunity to rebalance my portfolio to take the benefit of future underperformance.
  • To be consistent with IWDA, better to stick to MSCI rather than go for the Vanguard option which is VFEM (same price and 5 times smaller)
    VFEM has 9.3% emerging markets so I chose 10% for EIMI vs 80% IWDA
IUAA
  • wanted protection of my assets and stabilisation of my portfolio
  • => low credit risk 85% in A - AAA, all investment grade
  • => reasonably low interest rate risk: average maturity is 7.9 years. Wanted something lower to minimise interest rate risk exposure but could not find the right ETF
  • => decent YTM 2.47% on balance vs safety and average maturity
  • decided against EURO bonds for several reasons
    • a lot of Euro ETFs have credit risk as they include countries like Spain and Italy which are overleveraged and given fragility could default like Greece did
    • while I would have preferred exposure to the Euro/Europe given that is where I am from and I am likely to spend some time there in the future, I felt that the current uncertainties affecting the EU and the Euro currency(Brexit, Greek crisis, migrant crisis etc.) added risk which I do not want. USD/American economy is perceived as safer than Europe.
    • I am likely to spend the rest of my life in countries which have links to US/USD eg. Singapore, Japan etc.
      interests rates in the EU are currently extremely low and yields for Euro bonds are currently negative - US bonds have always benefited from a reasonably decent yield
    • US is good for correlation effect with equities ETF - world etf has >50% exposure to US
    • did not want much exposure to corporate bonds due to risk of default - government bonds are safer. IUAA has very little corporate bonds exposure - just enough to help with yields (usually yields are higher for corporate bonds than gvt bonds)
    • reasonably diversified - no point getting global exposure for bonds. Better to stick to bonds of country/region with which have a connection
    • Looked at all EU/US/Global options - SUAA was the best given low cost, safe, decent yield
Other considerations
  • Considered whether to add small cap exposure to my equities portfolio given there is none in IWDA or EIMI but there is no decently priced/sizeable ETF available at this stage - to be reviewed later
  • Review bonds situation later as our plans regarding settlement/retirement get clearer
  • Also considered overweighting Europe by adding an Developed Europe ETF. Decided against it because that would be betting on performance of Europe vs US and that is exactly the type of decision I want to avoid by picking a world ETF.

Valuethinker
Posts: 36727
Joined: Fri May 11, 2007 11:07 am

Re: Long term expat (European) - simple global portfolio

Post by Valuethinker » Mon Sep 04, 2017 4:03 am

Fraussie wrote:
Sun Sep 03, 2017 4:08 am
Thanks guys. I decided to go for the following:

iShares Core MSCI World UCITS ETF [IWDA] (70%)
iShares Core MSCI EM IMI UCITS ETF [EIMI] (10%)
iShares US Aggregate Bond UCITS ETF [IUAA] (20%)

My average TER is 0.21%

I've included details of my reasoning below -feel free to provide constructive criticism!

General preferences
  • Avoid US tax exposure => no US domiciled ETF
  • LSE is preferred stock exchange: largest stock exchange after US + largest choice of ETFs + no stamp duty (0.5%) on Ireland domiciled ETFs + no withholding tax on dividends/interest for non-residents
  • Ireland domiciled ETFs because low taxation + no stamp duty when bought on LSE
  • Prefer accumulating ETFs because dividends/interest are automatically reinvested => simple + full benefit of compounding interest
  • Pick only large ETFs (>USD1bn AUM) to ensure liquidity and manage risk of survivorship bias
  • Low cost (< 0.25%) - In general pick lowest fee ETF unless there is compelling reason to chose more expensive ETF
  • USD denominated for ease of understanding
  • Physical ETFs
  • Reputable issuers to minimise tracking errors eg. Vanguard, Ishares
  • UCITS compliant ETFs

IWDA
  • Wanted global market share ETF for diversification purposes but no real one stop shop for non US residents - there one all world ETF (Powershares) but it is expensive and has counterparty risk (not physical etf). Best options are VWRD and IWDA.
  • Only decent alternative was VWRD - slightly cheaper (0.18%) and included emerging markets but distributing only. Preferred the convenience of accumulating feature and preferred to have emerging markets separately to decide allocation myself and benefit from rebalancing opportunity if IWDA and EIMI performance were to be at odds
  • MSCI index is reputable index, on par with FTSE World + coherent with EIMI eg South Korea is emerging market for MSCI but no for FTSE
EIMI
  • Thought long and hard about whether to add EM - seems to exhibit a lot of volatility and possibly dragging down performance of VWRD vs IWDA over the last few year. In the end decided to add it because EM are part of the world and I wanted a globally diversified shares portfolio. EM don’t always perform in line with developed nations so it may also give me an opportunity to rebalance my portfolio to take the benefit of future underperformance.
  • To be consistent with IWDA, better to stick to MSCI rather than go for the Vanguard option which is VFEM (same price and 5 times smaller)
    VFEM has 9.3% emerging markets so I chose 10% for EIMI vs 80% IWDA
IUAA
  • wanted protection of my assets and stabilisation of my portfolio
  • => low credit risk 85% in A - AAA, all investment grade
  • => reasonably low interest rate risk: average maturity is 7.9 years. Wanted something lower to minimise interest rate risk exposure but could not find the right ETF
The correct number to use is Modified Duration. Which measures (roughly) the impact on the bond value if interest rates move up or down 1%. e.g. duration of 7 years would be (7%) if interest rates moved up 1%. (approximations are the assumption that the whole Yield Curve makes a parallel shift of 1%; also the Yield To Maturity calculation assumes all coupons are reinvested at the same rate, i.e. a flat Yield Curve to maturity).
  • => decent YTM 2.47% on balance vs safety and average maturity
  • decided against EURO bonds for several reasons
    • a lot of Euro ETFs have credit risk as they include countries like Spain and Italy which are overleveraged and given fragility could default like Greece did
My gut says the risk in the Eurozone now is in the banking system. Italian banks in particular. Spain appears to have got through the worst, property prices are rising again, so is only a problem as collateral damage from somewhere else. There are German financial institutions which I suspect are not rock solid, and has anyone looked at Finland? The whole Monti di Paschina saga has given the Germans even more ammunition to avoid a Eurozone wide banking system, and that's dangerous.

I was at a seminar when someone pointed out the risk in Hong Kong. You have an inflated property market, all the known problems with the PRC property bubble, and you have huge financial institutions. This sounds remarkably like an East Asian Iceland, Ireland, Britain etc. AND you have the known housing bubbles in Australia/ NZ and Canada, which will blow-- and there will be exposure by banking clients, if not directly by HK banking institutions (but there will be that exposure too, at the very minimum due to Private Banking relationships). We just don't have a handle on how much HK money is going into Vancouver and Toronto condominium construction.
  • while I would have preferred exposure to the Euro/Europe given that is where I am from and I am likely to spend some time there in the future, I felt that the current uncertainties affecting the EU and the Euro currency(Brexit, Greek crisis, migrant crisis etc.) added risk which I do not want. USD/American economy is perceived as safer than Europe.
  • I am likely to spend the rest of my life in countries which have links to US/USD eg. Singapore, Japan etc.
    interests rates in the EU are currently extremely low and yields for Euro bonds are currently negative - US bonds have always benefited from a reasonably decent yield
  • US is good for correlation effect with equities ETF - world etf has >50% exposure to US
  • did not want much exposure to corporate bonds due to risk of default - government bonds are safer. IUAA has very little corporate bonds exposure - just enough to help with yields (usually yields are higher for corporate bonds than gvt bonds)
  • reasonably diversified - no point getting global exposure for bonds. Better to stick to bonds of country/region with which have a connection
  • Looked at all EU/US/Global options - SUAA was the best given low cost, safe, decent yield
[/list]

Other considerations
  • Considered whether to add small cap exposure to my equities portfolio given there is none in IWDA or EIMI but there is no decently priced/sizeable ETF available at this stage - to be reviewed later
  • Review bonds situation later as our plans regarding settlement/retirement get clearer
  • Also considered overweighting Europe by adding an Developed Europe ETF. Decided against it because that would be betting on performance of Europe vs US and that is exactly the type of decision I want to avoid by picking a world ETF.
This is all fine.

Given you live in Singapore, you should consider the higher correlation of your labour income (and property equity if you have it) with Emerging Markets, than the average.

I would not therefore overweight EM. Your weighting is probably about appropriate.

Re the volatility of EM. In an efficient market (which we assume, here) the market knows about the volatility of EM and the risks, and prices them accordingly.

Singapore Dollar is linked to USD? But not a formal peg like HKD?

Dollar Bonds are OK. Eurozone as you say certain governments have credit risk (Italy is the one that sticks out, but, like Japan, a big fraction of Italian government bonds (the world's 4th largest govt bond market, who knew?) are held by Italian households; it's also true there is no way the Eurozone could allow Italy to default, it would be the end of the European Union).

As you say you can think harder about your bonds closer to retirement. 20% is at the absolute bottom of a sensible weighting for bonds (30% is probably better).

If I was honest in your shoes I'd probably be 15% Dollar Bonds, 15% Eurozone Bonds. The reason being that the market knows the risks in the Eurozone. If they get worse, then the Euro will drop. But if they don't happen, the Euro will rise (as it has been doing of late; not good for those of us GBP earners who like to holiday on the Continent ;-)). The US has its own set of peculiar problems and those might show up in the exchange rate.

So I would be:

62% developed world equities
8% Emerging Markets
15% USD bonds
15% Eurozone bonds
(or 30% global investment grade government bond funds; that would put 20% i.e. 6% into Japanese Government Bonds)

The difference in performance and volatility between that and what you propose, however, will be quite small.

I do think, though, that 80% equities is a very high level of risk to be running.

Some fund managers I quite admire (Dominic Fisher at Thistledown-- see interview in Morningstar, Rothschild Investment Trust have all been cutting equity exposure, especially to USA. OK they are value managers, and they have been wrong the last couple of years. But they have all managed money for 30+ years, and they are shrewd.

But it does feel a bit like 1999-2000, where despite all the risks out there the market has just been sailing upwards in its own euphoria-- I mustn't go more into politics than that, but the market's reaction to political events in the last year has been interesting, to say the least (remember, I live in the UK). Of course that dot com/ The New Economy bubble ended, and then we had 9-11 ;-).

Fraussie
Posts: 4
Joined: Tue Aug 15, 2017 4:35 am

Re: Long term expat (European) - simple global portfolio

Post by Fraussie » Tue Sep 05, 2017 1:34 am

Thank you very much for your input Valuethinker - very useful.

I will follow your advice re bonds and get a global bonds ETF for 30% of my portfolio - IGLO looks good to me. Pity it has Italy exposure...but that's only 9.3% and the rest of the exposure is with A-AAA countries. My wife is Japanese and we also have a house in Japan so I guess getting Japan exposure is not a bad idea. I also like the fact that it does not have any corporate bonds.

sharukh
Posts: 127
Joined: Mon Jun 20, 2016 10:19 am

Re: Long term expat (European) - simple global portfolio

Post by sharukh » Wed Dec 05, 2018 1:36 pm

Hi Fraussie,

Can you share which broker do you use to buy these ETFs?
Where is the broker located?

Thanks.
Fraussie wrote:
Sun Sep 03, 2017 4:08 am
Thanks guys. I decided to go for the following:

iShares Core MSCI World UCITS ETF [IWDA] (70%)
iShares Core MSCI EM IMI UCITS ETF [EIMI] (10%)
iShares US Aggregate Bond UCITS ETF [IUAA] (20%)

My average TER is 0.21%

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