Portfolio Advice [Mid-Twenties Starting Out]

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Portfolio Advice [Mid-Twenties Starting Out]

Post by brisingr » Sun Jun 28, 2020 11:28 am

Hello everyone,

I have been working for a few years but am just starting to figure out asset allocation for my portfolio. A bit late I know, but better late than never. I don't have any retirement funds built up at the moment, just sitting on a pile of cash and would like to seek advice on the best way to construct my portfolio given various circumstances. Appreciate any advice you may have.

Personal Information
Age: Mid-twenties

Location: Currently working in the US on a H1B visa, but intend to return to my home country in a few years. Not planning to apply for green card.

Debt: No real debt except credit card debt that I pay every month to build my credit score

Emergency Fund: $30,000

Current Retirement Funds: I did not participate in my employer's 401(K) program as I will be leaving the country in a few years so zero.

Portfolio Considerations
I currently have ~$200k+ in cash sitting in my bank account, excluding emergency fund stated above. I don't have much obligations at the moment but am considering purchasing a house when I move back to my home country, so sometime in the next 5 years or so. Downpayment for the house would be ~$500k (yes, housing is really expensive back home) but will be split between my partner and I, so my share would cost ~$250k.

While this would represent a significant cash outlay in the medium term, I will be earning income in the interim years which should in aggregate be sufficient to cover the outlay. Hence I think it makes sense to allocate a portion of my cash amount to long-term retirement savings.

My questions are therefore as follows:

1. How do you determine whether to set aside funds to purchase a house vs investing it in other asset classes and continue to rent? My inclination is towards the former, but curious to hear what others think.
  • Rental yields in my home country are really low (~2-3%) so it always makes more sense to rent if you think you can get a higher yield on that cash by investing in other asset classes. But given historical yields, that may imply renting for the 20-30 years.
  • Yet I have seen some people get financing rates cheaper than that which might make it sensible to purchase a house, from a finance theory perspective. Plus, it's nice to end up owning your own home in the end.
2. How would you invest cash that you know would likely have to be used in ~5 years to go towards house downpayment?
  • I am thinking Certificates of Deposits, but would appreciate any other ideas. If bond funds, would the yields be better than CDs? (Also I know this won't be popular on this forum, but I am planning to actively manage a chunk of this money myself.)
3. In terms of allocation of my retirement savings, I am thinking of the following: 90% stocks, 10% bonds for now with the idea of reducing the stock allocation over time as I get older. Stocks will be allocated 70% US / 30% international using VOO and VXUS. Would appreciate any feedback / push back to my thinking:
  • I had considered a higher international allocation than 30% given the current somewhat overvalued state of the US market and higher economic potential of emerging markets like China. But I also give credit to observations that high economic growth has not been correlated with broad stock market index returns in China due to various market-specific factors. As such, I'm thinking of 70% / 30% given that a Vanguard paper did mention that this captures most of the diversification benefits of an international allocation.
  • Nevertheless, I do recognize that arguments of mean reversion may suggest a higher international weighting, so still trying to figure this question out...
  • I went with ETFs instead of mutual funds as I am investing in taxable accounts and ETFs are more tax-efficient.
  • In terms of the bond allocation, I don't have much experience in this area and am considering just putting this allocation in Certificates of Deposits to earn a higher interest...
4. Logistics - does using Interactive Brokers for Vanguard ETFs make sense? Tax impact of international ETFs?
  • Does it make sense to IB to purchase Vanguard ETFs if I plan to buy and hold long term? From their website, it seems that IB Lite offers zero commissions for all US-exchange listed ETFs. I presume VOO and VXUS would qualify, but curious if anyone can confirm this. Does one have to explicitly sign up for an IB Lite account to get zero commission trading?
  • What is the tax impact of purchasing international ETFs such as VXUS? I presume I have to pay the ordinary tax rate on dividends received, same as VOO, but that I can claim a Foreign Tax Credit...?
5. Logistics - strategy to enter the market?
  • I have been sitting on this sum of cash for quite a while and unfortunately did not take advantage of the March lows to allocate a meaningful portion apart from a small amount (yes I was dumb). I have not entered the market meaningfully since then.
  • Is the best strategy in this case to dollar cost average and say split my total amount into say 6 pieces and invest over 6 months? Or take advantage of any market dips (e.g. last Fri) and just buy whenever the market goes down? While I know that market timing is irrational and does not make sense over 20 years, I worry about buying at the peak of the market given that equity markets today aren't cheap at all and supported by Fed liquidity, coupled with slowing real economic growth in the US. I considered offsetting it with a greater international allocation and but have doubts around that as well, so am still trying to come to a decision (hence the numerous questions)... Curious to know how you think about this issue.

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Re: Portfolio Advice [Mid-Twenties Starting Out]

Post by sycamore » Mon Jun 29, 2020 2:39 pm

1. Your first question sounds like you want to make the decision to buy versus rent based on the economic situation. (Sorry, I'm probably being dense and not understanding what you meant.) That's one way to approach it. My spouse and I wanted a house for all the various reasons - make it a "home," ability to remodel & paint at will, improve landscaping, the "joy" of ownership, etc. I never thought of the house as an investment. Well, I remember thinking it would probably keep up with inflation. But I never compared its cost and potential return to those of renting+investing. In any case, suggest you and your partner discuss whether you have the same ideas about what the house means to each of you so you're on the same page.

2. Agree with you on using CDs or other savings/short-term bonds for money intended toward a down payment.

3. A decreasing stock allocation as you age is a very common suggestion at Bogleheads. There are a few folks who advocate a "bond tent" portfolio where stock allocation declines as you approach retirement, and then slightly increases sometime after. Others think a static allocation works best for them.

There are lots of discussions here about whether market-weighting US/Intl is best, whether the recent under-performance of international will finally turn around, etc. No one knows the future, so diversifying into some US and some International is the right idea to start with. And 70/30 is entirely reasonable. I wouldn't spend any more time thinking about that aspect of your AA.

Using bonds or CDs is fine. There's a default suggestion on BH to use intermediate-term bonds. That's what I use. It's something of a Goldilocks idea: it's not too short and not too long, not too safe (Treasurys only) and not too risk (corporate bonds only). There are two another prominent ideas to consider:
- take your risk in equities, not in bonds. That usually means US Government Treasurys or US-backed agency bonds.
- pick the bond duration based on your investing horizon. If you're young-ish (say 50 or less), use long-term bonds. Slowly decrease the bond duration as you age after that. You can read this post if you're interested.

But at only 10% of your AA in bonds, I wouldn't worry much about it.

When all is said and done, I think the main criterion is whether you can stick with your AA when the chips are down, or when one asset is doing better than another. So pick an AA that you can justify as being reasonable, and know that it will never be perfect but it will be good enough.

4. I don't have experience with Interactive Brokers but in the past year or so the major brokerages are now all offering no-commission ETF trading. I think any of them will be just fine for holding Vanguard ETFs.

Regarding the tax impact of international ETFs, you'll get a 1099 form probably in March of 2021 that indicates the amount of dividends, qualified dividends, and foreign tax paid on your holdings in 2020. There's a one tax rate for qualified dividends. For the remainder of the dividends (i.e., the non-qualified ones), you'll pay income tax rate. There are some steps to go through to claim the Foreign Tax Credit but for most people it's straightforward.

5. There is a current thread about how DCA is an abomination that should be purged from anyone's thoughts lest they commit the sin of not achieving maximal return on their investment. Ok, that's overstating things but folks around here have strong opinions about DCA. My take is that you should definitely take your personality into account. If lump-summing gives you ulcers or ruins your sleep, then don't do it.

Given what you wrote, I suggest an automatic purchase plan (you can do this at Vanguard, not sure about IB) to buy $X every two weeks, AND buy some extra on the dips, like you suggested. IMO, you've got decades of investing ahead of you so unless you really feel like you can time the market it's a great plan to just invest regularly.

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