Building a non-US Boglehead portfolio

 provides information on building a Bogleheads portfolio outside the US. It sets out at high level the steps to build such a portfolio, and provides suggestions on the funds that you might use.

The article includes a discussion on the main differences between approaches for a non-US investor and a US Boglehead investor. There are some special considerations for European Union (EU) investors.

Challenges
Bogleheads originated in the US, from a deep knowledge base that is mainly oriented towards US retail investors, in the form of Bogleheads Wiki. Because of the wide differences in the details of investing from outside the US, gathering similar information for retail investors in these countries is a large project.

There are fundamental distinctions between saving and investing in the US and in other countries. These include:


 * Taxation
 * Domicile
 * Legal system and regulations
 * Local products
 * Existing insurance pension products and tied agents

Language is also a factor. The Bogleheads wiki and forum use English, but this can be a barrier for anyone whose first language is not English. (Although, some Boglehead forums use other languages, for example Spanish for Bogleheads investing from Spain.)

Aside from these more obvious differences, the basic Boglehead principles work for investors anywhere, although perhaps after accounting for local taxes and laws. The main benefits of asset allocation and simplicity are universal.

The summary of non-US domiciles section below provides information and resources relevant to many countries. For example, there is an entirely separate Wiki available specifically for Bogleheads investing from Canada. See: finiki, the Canadian financial wiki.

This article aims to bridge the Boglehead philosophy, as presented in Bogleheads' Guide to Investing, with what is available to non-US and EU investors. It may also help you if you want to adjust your portfolio by including funds other than those suggested in the Wiki suggested portfolios.

Summary of non-US domiciles
The non-US sections of Wiki contain information which applies to all non-US investors, and also some which is specific to a few individual countries.

The Outline of non-US domiciles is essential reading for new non-US investors. It details many of the key issues facing the non-US and the EU-based investor, and covers areas such as domicile, tax, and currency.

Articles listed by this outline include:
 * EU investing (describes Bogleheads portfolios specifically for EU investors)
 * EU non-habitual residence (describes tax regimes available in Europe that may be advantageous for retirees and others)
 * Cash equivalents for EU investors (examines the cash equivalents available in the EU for retail investors)
 * Bond basics for Non-US investors (examines the suitability of the fixed income side of the portfolio, for all non-US investors)
 * Stock asset allocation for non-US investors (discusses questions related to the stock asset allocation, for all non-US investors)

The outline article also provides links to some individual country articles. These help you to understand the key issues for each country.

Boglehead portfolio
The original Two-fund portfolio and Three-fund portfolio are both built specifically for US investors, and many US Bogleheads stick fairly carefully to this basic formula (notwithstanding many almost endless debates about whether to include non-US stocks).

The two-fund portfolio uses entirely US assets, while three-fund portfolio includes some international equities. In addition, Vanguard and Blackrock include international bonds in some of their bond funds.

Given this simplicity, you might be tempted to simply copy these US two-fund and three-fund portfolios. However, the problem for many non-US investors is that US tax rules can make it extremely tax-inefficient to do this. The US tax rules for a non-US investor are entirely different to those of a US investor. Non-US investors are liable for US tax on dividends from US domiciled funds, and also risk significant US estate taxes.

Because of US taxes, most non-US investors should generally avoid US domiciled funds and ETFs, and instead use non-US domiciled equivalents.

Basic parameters of constructing a Boglehead portfolio
A portfolio is a grouping of financial assets such as equities (including stocks), fixed income (including bonds) and cash. You should design your portfolio based on your own risk tolerance, time frame and investment goals.

You can hold a portfolio directly, or have it held and managed by financial professionals. Typical building blocks are mutual funds (including index funds) and exchange-traded funds (ETFs), but some investors also use individual stocks. Once you have built your portfolio, you still need regular monitoring and maintenance to make sure that the portfolio is meeting your objectives, and to deal with any life events or changes in your circumstances. The key to this process is to follow an Investment policy statement.

Bogleheads® investment philosophy for non-US investors gives a basic outline of how to build a simple Boglehead portfolio. The key steps are:

Original Boglehead fund choice
The original Boglehead Three-fund portfolio uses the following ETFs:
 * Vanguard Total Stock ETF (VTI)
 * Vanguard Total International Stock ETF (VXUS)
 * Vanguard Total Bond Market ETF (BND)

John Bogle and others were very clear that they considered this simplified approach to one that would reward patient US investors over time. Our question is how to replicate this approach outside the US, but without copying it directly. Using these same investments could lead to unwanted US tax drag and entanglements.

Creating an EU version of the Boglehead portfolio
The Wiki for EU investors includes some suggested portfolios suitable for the Boglehead approach to investing. In addition, the individual country Wiki articles offer various suggested portfolios.

This wiki section provides a clear and logical path for any new EU investor into the world of Boglehead investing, one that avoids some well known pitfalls. For EU investors, the fundamental Boglehead principles are the same as for US investors, but the building blocks, the construction process for their portfolio, and its implementation, are all different from those used by US investors.

The section provides links and references to the more detailed notes on important underlying subjects. These should help you to link the technical aspects with their investment aims. It also helps to explain the construction of the current Wiki suggested portfolios for EU investors.

By following a considered step by step process, you can construct a portfolio that take into consideration all the technical requirements of investing in the EU. The information in this wiki section may also be useful to other non-US retail investors.

You should carefully research all potential investments, and seek professional investment advice, prior to making any investments.

Portfolio construction process for other non-US investors
The general advice contained in the Wiki for the creation of a simple Bogleheads portfolio is entirely relevant to non-US non-EU investors. You can follow this guidance carefully, get comfortable with their risk appetite, prepare an investment policy statement based upon these principles, and stick to it.

Vanguard offers an excellent guide to the process of building a portfolio. You can find it here: Vanguard’s framework for constructing diversified portfolios. (Archive copy of the original.)

This Vanguard guide provides high level information on how to create a portfolio. However, it does not provide any guidance on how to choose specific funds. This information is key to building a real portfolio. Before you build your non-US portfolio, review how the process differs for a non-US investor.

The individual country Wiki pages contains some suggested portfolios for investors in those countries. For example Investing from the UK contains an assortment of suggested portfolios, including links to specific fund details.

Non-US aspects of approach to portfolio construction
Some aspects of constructing a Bogleheads portfolio are difficult for non-US investors to apply or adapt. You need to be aware of these differences to the original Boglehead approach before starting. This will help to avoid costly mistakes, delays, and unnecessary complexity. One important difference would be the choice of funds based upon geography and currency. Equity risk affects all investors in stocks, but non-US investors face currency risk over and above what the average US investor in the original Boglehead style may face.

For non-US investors, the Wiki suggested portfolios use global aggregate equity ETFs, and global aggregate or global government hedged bond ETFs, as the basis for building a Boglehead style portfolio. These suggestions do not fully match the original Boglehead Two-fund portfolio and Three-fund portfolio.

The following section gives the rationale for this. (The appropriate Wiki section covers these in more detail.)

Currency risk
If you choose US assets only, you have an immediate and obvious additional concentration and currency risks.

To mitigate these risks, the non-US portfolios include a more diversified range of assets. (It is difficult for retail investors to access the evidence for the comparison of this approach and the original Boglehead portfolio.)

Where possible, the non-US portfolios hedge their bond elements back to the investor's local currency. This will help to remove additional currency volatility from global bonds. Although it reduces volatility, this hedging has a cost that will slightly reduce your returns from the bond fund.

The general advice to include or base the fixed income side of your portfolio on bonds from your country might lead you to include only government or aggregate local bonds in your portfolio. Depending on the country, this approach may introduce bias, lower diversity, and could lead to lower returns in the long run.

Geographical spread
The geographical spread of the global funds is entirely different to the original Two-fund portfolio and Three-fund portfolio.

On one hand, relying heaving on only US equities, such as the US total stock market fund, exposes you to additional risks. On the other hand, overweighting your allocation to your home country introduces a different bias that may also lead to reduced returns.

Non-US investors who choose a global aggregate asset avoid bias to either the US market or to another country. This is different to the situation for a US investor, who can perhaps concentrate on the largest market in the world and still feel comfortable.

European Union
The EU consists of 27 different countries with different legal and regulatory systems. The savings and investment industries are not aligned, and the taxation, level of costs and the quality of services is often quite different.

Pension systems across the EU are distinct, and the take-up of the existing pension schemes varies. This results in varying levels of interest in DIY investing. In addition, pension legislation across the EU is under revision, although this process will take many years, and in the meantime the differences in access to DIY investing across the EU continue. One example of this situation is the UK's tax-free Individual Savings Account (ISA); similar accounts are not available consistently across the EU countries.

Other non-US countries
Every country has its own legal and regulatory system. Some may align relatively well with the US system, but others are entirely different. Non-US investors cannot reliably use any information that is specific to US tax or other US financial regulations.

Tax issues
As noted above, each non-US country, both within and outside the EU, has its own distinct tax regime. This presents investors with a range of differences to the US approach (the tax issues are set out here: Outline of non-US domiciles).

One immediately obvious difference is that non-US investors can use accumulating versions of the same funds that are available only in distributing versions in the US. This means that non-US suggested Boglehead portfolios can offer two versions, accumulating and distributing. You can choose between these for best results under your local tax laws, or just for preference.

You need to be acutely aware of the tax implications of investing from your own country, as this can affect the choice of assets or funds. Any choice you make may of course affect your returns.

To avoid discriminatory US tax laws, non-US investors should generally prefer non-US domiciled assets.

European Union legislation
EU-wide investment legislation (see this section: EU legislation : UCITS, MiFID II and PRIIPs) creates significant hurdles for EU and UK investors who might wish to access to US domiciled funds.

Weak support for understanding the non-US investors portfolio strategy
So what, you might ask? Without evidence, there is nothing to demonstrate that the non-US versions of these portfolios are equal to or better than the original versions. How do non-US investors' portfolios perform in comparison to the US Boglehead approach?

Information supporting the basis for the construction of non-US portfolios following the Boglehead philosophy, and information on their subsequent performance, is not readily available or accessible for the non-US investor, with the exception of Canada (and perhaps to a lesser extent Australia), where Vanguard sells products directly to customers.

Outline of investing
Bogleheads® investing start-up kit for non-US investors is designed to help you start your investing journey. It explains the principles of Risk tolerance and Asset allocation.

Bogleheads investment philosophy
The Bogleheads® investment philosophy for non-US investors explains the basic approach.

In addition, The twelve pillars of wisdom provides a good introduction to the investment philosophy of John Bogle.

Simple portfolios
The simplest portfolios use index funds (where these are easily available) or the corresponding ETFs to build a low-cost structure with a small number of funds, generally five or fewer, that are easy to re-balance and follow the spirit of the Bogleheads approach.

Complex portfolios
More complex portfolios go beyond simple three, four or five-fund portfolios, and either include additional components, slice and dice existing components, or purchase individual stocks and bonds.

How do these sample portfolios fit in with the Boglehead philosopy?
The non-US investor's circumstances are different to those of a US investor using the three-fund portfolio. The following guidelines show how the sample non-US portfolios are built:


 * Index funds - The sample funds hold hold all the index securities in the same weight as the index itself, either (replicating) or using an optimised subset of index securities (sampling), to efficiently track the performance of the index.
 * Passively managed - The sample funds are all passively managed by well known asset managers such as Vanguard or Blackrock.
 * Low cost - The sample funds are all competitively priced. For example, AGGH's ongoing charges figure is 0.10%.
 * Diversified - The sample funds follow specific global or regional indices. They are globally diversified rather than just following the US market with additional non-US tilts. For example, with a global aggregate bond fund the assets are weighted to the proportion of developed world countries (including the US), in proportion to the individual market capitalisations, and contain both government and corporate investment grade assets.
 * Hedged - The base currency of the fixed income funds are dollars where they are global funds and they are hedged back to the Euro or Sterling dependent upon the spending currency of the investor (US investors holding a total US bond market fund do not require hedging). Currency hedging by a fund will slightly reduce the fund's returns.
 * Tax efficiency - The sample funds are all ETFs domiciled in Ireland or Luxembourg. This avoids any unwanted problems from discriminatory US taxes for non-US investors.
 * Simplicity - The lists of non-US domiciled funds given below are appropriate for simple two or three-fund portfolios (distributing currently lacks a small cap fund).

Fund selection options
The tables below showing various funds that you can use to create a non-US version of a Boglehead portfolio. Both include a selection of bond ETFs and a selection of stock ETFs. Which particular fund you might choose depends on your tax regime, and your approach to costs, diversification, and complexity.

Accumulating and distributing
Countries differ in how they tax dividend income. This can add complexity to your choice of funds or ETFs.

The suggested portfolios divide into two categories. The first table shows accumulating fund suggestions, and the second table shows distributing fund suggestions. You can choose the most appropriate version for you. For more, see: Accumulating (or capitalizing) and distributing ETF share classes

Individual country portfolios
Some countries have special tax-free or tax-efficient investment products. The individual country pages in the Wiki may suggest alternative products, whether wrapped funds or ETFs. See here: Outline of non-US domiciles

Funds for accumulating versions
Accumulating ETFs can be useful to you if your home country's tax rules do not require you to pay tax on undistributed dividends. For accumulating ETFs, the fund manager automatically reinvests the dividends. Some countries do not tax dividend income that is accumulated this way. The accumulating table includes an emerging market ETF.

Funds for distributing versions
Where your country requires you to pay tax on all dividends annually, both distributed and undistributed, distributing ETFs may be more appropriate. Here, a single world ETF is listed; this ETF contains emerging market stocks.

Fixed income
The bond selection includes both world government bonds and global aggregate bonds. The aggregate bond fund includes investment grade corporate bonds.

Hedging
Some of the bond ETFs are hedged back to the users currency; either to Euros or to Sterling.

Equities
The stock selection provides a global developed market ETF that includes both large and mid cap stocks.

Emerging markets
Emerging market assets are included in both accumulating and distributing stock ETF choices.

Small cap
A world small cap option is included for those who want to include that category. No small cap ETF is currently available for the distributing category.

Tilting
Other ETFs can be added to the core holding stock ETF by the investor who wants to amend or "tilt" their selection. For example, value stocks or small cap stocks.

For a discussion of value tilting, see: Value tilting - stock

Boglehead principles
The sample portfolios follow the principles of the Boglehead approach, already outlined above.

Some of these principles cover behavioural issues. However, it is a good idea to check any proposed purchase of an asset against these criteria, in order to reassure yourself that you are acting in a Boglehead way, and that your returns will match the indices your individual portfolio assets track (after the drag of costs).

For these Boglehead portfolio suggestions, it is difficult or even impossible to compare the relative performance of non-US Boglehead style portfolios in the same way a US investors can, because this information is not available, and because the bases for comparison are wide and varied, as described in the Non-US aspects of approach section above. Even anecdotal evidence is not readily available.