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.
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.
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.
- 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.)
- 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...
- 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...?
- 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.