Czechia | Long-term (10+) investment advice

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Topic Author
canaan
Posts: 2
Joined: Thu Jan 07, 2021 8:40 am

Czechia | Long-term (10+) investment advice

Post by canaan »

Country of Residence: I'm a tax resident of Czech Republic and this may be the biggest deciding factor for me now. If we buy stocks, we're allowed to sell them without paying any capital gains tax / reporting anything in case we buy and hold for 3+ years

International Lifestyle: Currently I'm not planning to move anywhere else but I'm ready to move if needed (e.g. during economical turmoil in that particular country)

Currency: I'm receiving income in CZK which is IMO pretty much bound to EUR value. I'm investing in EUR via Degiro Custody account.

Emergency funds: 6 months of expenses sitting in my bank account in CZK (1% growth yearly)

Debt: no debt

Age: 30 YO single, no plans for a close relationship for the next 5 years

Desired Asset allocation: 100% stocks via VWCE (not sure here tho)
Desired allocation to stocks outside your of country of residence: no idea here

Current portfolio size: around 10k EUR in random stocks (I've started "learning by doing" around 1.5 years ago) + 10k EUR in MSFT

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Hi all! Looking for some advice/criticism on my current investment plan.

I'm 30 yo and I'm a tax resident of Czechia. This allows me to buy stocks, hold them 3+ years and then sell it without paying any tax. Also I'm not paying taxes for the dividends if the profits from those do not exceed 6000 CZK (~200 EUR) yearly, and currently it doesn't.

Every month I'm automagically buying around 500 EUR worth of MSFT stocks via my ESPP plan. I'm aware of the risk of working for a company and getting its stocks, but as for MSFT, I'm pretty sure I'm good here.
Additionally I'm able to put around 1000 EUR more monthly - basically the question is where to put this sum.

My vision is long term (10-15+ years horizon), the goal is to get FU-money and some decision freedom.
Current spending - around 1000-1500 EUR monthly including rent.
Mortgage/buying seems not to be feasible atm - an adequate apartment in Prague costs starting from 200k EUR, while rent of a similar flat is about 500 EUR monthly for me.

Deciding factors:
1) very long-term investment
2) buy and hold as much as possible (due to tax residency)
3) accumulating ETFs only (as I'd have to report and pay taxes for the dividends, not eager to spend time/money on that)
4) using Degiro Custody account - avoiding dividends helps me to avoid commissions
5) as less pain/time spent as possible - I'm OK with buying 1 single ETF once monthly and forgetting about it for 10 years. Not OK with doing any more research / reporting taxes / spending too much time on any other investing action

Taking all above into account, I've decided to do the following:
20% MSFT with my ESPP plan
80% VWCE


After 10 years planning to start selling MSFT stocks and slowly convert 20% MSFT into 20% bonds. Currently I see bonds as a lost opportunity - still too young for that.

Questions:
1) anything clearly incorrect/idiotic in my plan?
2) VWCE choice - any better alternative?
3) is there a way to incorporate a mortgage into the plan so that I'm not losing 5-10 years of investment profits?

Any advice or criticism much appreciated!
mrekvy491
Posts: 35
Joined: Wed Jul 29, 2020 10:43 am

Re: Czechia | Long-term (10+) investment advice

Post by mrekvy491 »

Fellow Czech resident here.

I purchased an investment property because I want to retire in Czech, and am not so sure how stable EUR/CZK would be in the future. 1 EUR used to be more than 37 CZK in the early days. Czech national bank also used to keep CZK artificially low not so long ago. Rental income, equity, fixed interest mortgage debt in CZK help me balance the foreign currency exposure.

But I think it makes perfect sense for you not to own a property. I like real estates, and they do give you certain benefits. But it seems like you have not decided yet where to retire in, so I am sure you would be fine with VWCE. The Prague real estate market is also quite heated already at the moment.

I do have a few suggestions though :

1. Maybe you could buy other world cap weighted ETFs like IUSQ or XMAW every year, so you could sell some of them without capital gains tax. ex) VWCE in 2021, IUSQ in 2022, XMAW in 2022. So you could sell the VWCE in 2023 if you need it. You may need it. I know we all think as Bogleheads that we will never sell anything in 10 years, but things happen in life. You could meet a partner you really want to follow and relocate, or our family members can get ill. So good to have some fexibility.

2. Or you could add a bit of AGGH or EUR hedged world cap weighted ETFs. I know it is not recommended to hedge equities, but big currency swings can go on for more than a decade limiting your flexibility. Especially when everyone is talking about the prospect of weak USD.

3. You may also want to consider if the accumulating ETFs are also tax efficient in other countries you may want to relocate to (candidate countries you may consider as the next country residence, if there is one). I have no idea on this one.

4. You could also lower the concentration risk by adding XDEV (MSCI World Value ETF) as you will be overweighting in IT sector. Your human capital, and portfolio all tied up with a specific sector may be risky should the tides turn.

But you should probably be perfectly fine with 20% Microsoft and 80% VWCE. Really depends on your risk appetite.

cf) I hold :

1. Real estate

2. ETFs (All accumulating ones, domiciled in Ireland)
50% VWCE
35% EACW (MSCI ACWI EUR hedged)
15% IUSN (MSCI world small caps)

3. + extra 10~20% CASH (or AGGH)

I use some of the cash to make an early repayment for my mortgage loan every year so I basically get 0 net gain from cash. Mortgage interest is at 2.6% rate (includ. secondary costs), and my savings account gets me 0.5% per year. Inflation is at around 3%. Better than bonds I rekon. Basically a 'negative bond' which could be an option if numbers make sense for you. There also are many properties outside Prague if you don't want to be too invested real estate.
Topic Author
canaan
Posts: 2
Joined: Thu Jan 07, 2021 8:40 am

Re: Czechia | Long-term (10+) investment advice

Post by canaan »

Rental income, equity, fixed interest mortgage debt in CZK help me balance the foreign currency exposure.
Interesting, never thought of this!
I've started to dig into the currency question only around 2013, so I don't have much visibility on how the situation was in the past from practical standpoint - had no income in CZK :D
The Prague real estate market is also quite heated already at the moment.
True, and I wonder if there're people from other EU countries who had a similar situation in the past - how did it work out in the end?
As per https://www.numbeo.com/property-investm ... region=150 data, I see that current price-to-rent ratio for Prague is around:33, price-to-income:18, and I'm not sure which numbers would be considered as "adequate" to buy for Europe. US bloggers tend to state that price/rent ratio should be no more than 15 - but would it ever be true for Europe?
Maybe you could buy other world cap weighted ETFs like IUSQ or XMAW every year, so you could sell some of them without capital gains tax. ex) VWCE in 2021, IUSQ in 2022, XMAW in 2022. So you could sell the VWCE in 2023 if you need it. You may need it. I know we all think as Bogleheads that we will never sell anything in 10 years, but things happen in life. You could meet a partner you really want to follow and relocate, or our family members can get ill. So good to have some fexibility.
Never thought of this again - can you please elaborate why buying different similar funds could be beneficial? I believe I can buy VWCE monthly and sell it after 3 years partly if needed - can you maybe share anything to read on that topic of having several similar ETF in the portfolio?
Or you could add a bit of AGGH or EUR hedged world cap weighted ETFs.
Yeah, that's what I'm thinking of doing in ~10 years or so - currently I'm more afraid to miss potential gains while I'm young and working.
You may also want to consider if the accumulating ETFs are also tax efficient in other countries you may want to relocate to (candidate countries you may consider as the next country residence, if there is one). I have no idea on this one.
Would be nice to know alternatives actually from fellow bogleheads! I've never thought on going outside the EU, wonder if there're countries to consider from that perspective
glorat
Posts: 801
Joined: Thu Apr 18, 2019 2:17 am

Re: Czechia | Long-term (10+) investment advice

Post by glorat »

From my reading

100% VWCE

Seems the simplest target asset allocation. Then worry about your career rather than investments.

(I assume you get incentives to collect MSFT so that's fine but I'd diversify out of this very concentrated risk when you no longer get incentives)
mrekvy491
Posts: 35
Joined: Wed Jul 29, 2020 10:43 am

Re: Czechia | Long-term (10+) investment advice

Post by mrekvy491 »

I think the most important thing is how likely it is for you to relocate to other parts of Europe. If you are not sure if you want to be in CZ long term, I would also recommend you to go for VWCE, MSFT, and maybe a bit of AGGH (or IS3V - global inflation linked bonds) like others did. Maybe you could just have everything in EUR and keep it simple. For me it is a bit complicated as I plan to get pensions in CZK and KRW, and my expenses will be in CZK. I “count” in CZK. I sometimes wish I was from a Eurozone country.
Interesting, never thought of this!
I've started to dig into the currency question only around 2013, so I don't have much visibility on how the situation was in the past from practical standpoint - had no income in CZK :D
I also heard from few old expats that a classic brick building in Vinohrady as a whole was sold at around 100k USD in the mid to late 90s. Things were quite different back then!
True, and I wonder if there're people from other EU countries who had a similar situation in the past - how did it work out in the end?
As per https://www.numbeo.com/property-investm ... region=150 data, I see that current price-to-rent ratio for Prague is around:33, price-to-income:18, and I'm not sure which numbers would be considered as "adequate" to buy for Europe. US bloggers tend to state that price/rent ratio should be no more than 15 - but would it ever be true for Europe?
Can't speak for other European markets, but I would only recommend the real estate investments for people willing to live in Prague long term. It made sense for me, as I will be applying to the permanent residency this fall, and hope to retire here. Not so sure how this would play out in your situation. I will summarize the local situation from my point of view, and pros/cons for potential real estate investment here. Maybe there is something that can justify the high real estate price in Prague, or make sense for you.

I would also love to see comments from other European investors investing in other countries.

Pros

1. The price is high, but the nominal yield is around 3% in many areas (maybe lower in more central areas). If you consider the maintenance (fond oprav) and taxation, small repairs the yields drop to low 2%. Which is not bad compared to the yields of bonds. Inflation in CZ was around 3% in 2020 (https://tradingeconomics.com/czech-repu ... lation-cpi)

I also heard some people are buying big panelaks and renting it out to 6-8 Ukrainian migrant workers who use it as a kind of dormitory with bunk beds. In some areas outside Prague, you can buy some properties that the government rents to house the low income households. Quite stable yield, I heard. I don’t gamble with these but there still seem to be opportunities if you look hard. In this case the yield is higher. Or you could go for houses the villages around Prague for capital gains.

2. The supply is limited. Because of the world heritage status of the Prague city center, you cannot just put high density high risers to increase supplies. I cannot even redo the insulation works on my flat because of the regulation. Also the building permit takes forever to get, so what is being built is from the plans submitted 10 years ago. There are only 5~6 major developers that are in control here (FINEP, CG etc), and people accuse them of doing artificial price/supply control. No idea if it is true, but this shows that people feel like there is a lack of supply.

3. Prague is still attracting young professionals, and there are less opportunities in other parts of the country. Most people you meet in corporate environment are from somewhere else. Not many Prague locals.

4. I think your monthly gross income could be somewhere around 90k and 100k CZK. That is a very good wage in CZ. And being employed by the big name corporation will make it a lot easier for you to get a mortgage. Your credit is also a great asset, so why not use it to increase the equity? Maybe you could do what the Americans call 'house hacking' - Buying a 2-3 bedroom flat with mortgage and have your friends as flatshare tenants. You use your social network to recruit tenants, and use your credit and capital (downpayment) to gain equity with zero or positive cash flow. Depends on the downpayment.

5. Maybe there will be a firesale of airbnb flats in near future, if the tourism does not show a V-shaped recovery in Prague. You could wait for a good deal and buy it with a mortgage to try some short term rental. Could be profitable if you buy it low. Prague old town will always attract people.

Cons

1. Prague real estate is heavily relying on further price appreciation, and yield is not high already. Even more so in the central areas due to the Airbnb flats being rented as long term accommodations.

2. CZ market can be more vulnerable to the interest rate hikes

3. If you relocate to other parts of Europe, the CZK property will be an illiquid asset with a currency risk.

4. Real estate is not typically a good compounding asset. Especially compared to the S&P500 and NASDAQ that had a spectacular decade. If the run continues, you will be thinking you should have gone all in on equities.

5. The yield is too low for 'house hacking' at least in Prague.
Never thought of this again - can you please elaborate why buying different similar funds could be beneficial? I believe I can buy VWCE monthly and sell it after 3 years partly if needed - can you maybe share anything to read on that topic of having several similar ETF in the portfolio?
I suggested having three finds like VWCE, XMAW, IUSQ because I am not so sure how the capital gains tax is exactly calculated if you sell the only ETF (let’s say it is VWCE) you are contributing monthly. If you use 3 funds, it will act like the ‘bond ladder’ many retirees use and you won't have to look for a tax accountant to get exactly how it works. You will always have an ETF that is untouched for 3 years (after 3 years of course) free from the taxation. Could be an 1X rebalancing unit. But nothing important.
FIFTWEU
Posts: 9
Joined: Wed Jul 24, 2019 7:29 am

Re: Czechia | Long-term (10+) investment advice

Post by FIFTWEU »

I suggest you both check your own tax code for a term like FIFO = First in First Out.
This is how normally taxation for capital gains tax is calculated (oldest bought shares in WVCE are counted as sold for CGT in this context), albeit it might be different in Czechia due to what sounds a very generous 0% CGT after 3yrs.
mrekvy491 wrote: Sun Jan 10, 2021 9:46 am I suggested having three finds like VWCE, XMAW, IUSQ because I am not so sure how the capital gains tax is exactly calculated if you sell the only ETF (let’s say it is VWCE) you are contributing monthly. If you use 3 funds, it will act like the ‘bond ladder’ many retirees use and you won't have to look for a tax accountant to get exactly how it works. You will always have an ETF that is untouched for 3 years (after 3 years of course) free from the taxation. Could be an 1X rebalancing unit. But nothing important.
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