Building a non-US Boglehead portfolio

 provides information on building a Bogleheads investment portfolio from jurisdictions outside of the US. It sets out at high level the steps needed to build such a portfolio, and provides suggestions on the funds that can be used.

The article includes a discussion on the main differences for a non-US investor to the approach that a US Boglehead investor would have. There are some special considerations for European Union (EU) investors.

Challenges
Bogleheads originated in the US and is backed up by a deep knowledge base that is mainly oriented towards US retail investors, in the form of Bogleheads Wiki. Attempting to gather together information aimed at retail investors outside the US is a vast undertaking, because of the disparate details of investing from these other jurisdictions. There are fundamental differences 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 presents a barrier for investors for whom English is not a primary language. Although, some Boglehead forums use other languages, for example Spanish for Bogleheads investing from Spain.

Aside from these more obvious differences though, the basic Boglehead principles remain consistent with investing anywhere, after accounting for any difficulties introduced by local taxes and laws. The principle benefits of asset allocation remain universal.

The section below entitled Outline of non-US domiciles provides a great deal of information and data sources relevant to many jurisdictions. 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 and what is applicable to the non-US and the EU retail investor. It may also help investors who want to adjust their portfolio by including funds other than those suggested in the Wiki portfolios.

Outline of non-US domiciles
The non-US sections of Wiki contain information which is both universal to non-US investors and which is also specific to particular jurisdictions. Outline of non-US domiciles is essential reading for the new non-US investor. It provides content on many of the key technical issues facing the non-US and the EU-based investor, and acts as a base for understanding the complexities of:


 * Domicile
 * Tax
 * Currency

These issues are set out carefully there, and can be further researched.

This outline also contains links to the various individual country profiles. These help the investor to understand the key issues for each individual jurisdiction listed. It includes links to pages offering material specific to jurisdictions that are outside of the US. The section also contains references to pages covering important issues such as:


 * 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)

Boglehead portfolio
Strictly speaking, the original and still entirely relevant two or three-fund Boglehead portfolio is a US-centric construction, and many US Bogleheads stick fairly carefully to the original formula, notwithstanding the long debate about the introduction of international (non-US) elements to the equities side of the equation.

The two-fund version uses entirely US assets, and the later three-fund version includes some international equities. In addition Vanguard and Blackrock now include international bonds in their bond fund offerings, for investors who wish to diversify further.

Ordinarily a non-US investor might consider simply copying the US two-fund and three-fund portfolios presented elsewhere in the Wiki. However, the problem for 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. For this reason, 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. Portfolios are generally designed according to the investor's risk tolerance, time frame and investment objectives.

Portfolios are held directly by investors and/or managed by financial professionals. Mutual funds (including index funds) and exchange-traded funds (ETFs) are typical portfolio building blocks; more advanced investors might choose to select individual securities within the main asset classes. Once a portfolio has been constructed, there is still a need for ongoing monitoring and maintenance to ensure that the portfolio objectives are being met, and to deal with any life events or changes in circumstances. The outcome of this process should be the basis for your investment policy statement.

The basic parameters for the creation of a simple Boglehead portfolio are found here: Bogleheads® investment philosophy for non-US investors. The key steps are:

Original Boglehead fund choice
The original Boglehead portfolio is now based upon the following ETFs:


 * Vanguard Total Stock ETF (VTI)
 * Vanguard Total International Stock ETF (VXUS)
 * Vanguard Total Bond Market ETF (BND)

The original Boglehead portfolio is included here as Jack Bogle and others were very clear that they considered this simplified approach to be best, and would reward the patient US investor over time. Our conundrum 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 that are considered appropriate for the Boglehead approach in investing. In addition various suggested portfolios are presented under some of the individual country Wiki pages.

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 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 investors 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, investors can construct their portfolios while taking 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.

Investors 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. These investors 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 provides an excellent guide to the process of building a portfolio. It can be accessed here: Vanguard’s framework for constructing diversified portfolios.

This Vanguard guide provides high level information on the process for the creation of a portfolio. However, it does not provide any guidance on the choice of specific funds for an non-US investor. This information is key to the implementation phase of building a portfolio. Before building your non-US portfolio, review what aspects of the process differ for a non-US investor.

Various suggested portfolios are presented under some of the individual country Wiki pages. For example the Investing from the UK page has various suggested portfolios and links to Vanguard target funds.

Non-US aspects of approach to portfolio construction
Some aspects of constructing a Bogleheads portfolio cannot be easily applied to and adopted by the non-US DIY ("Do It Yourself") retail investor. The new DIY investor needs to be aware of these differences to the original Boglehead approach before starting their investment journey. 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, 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 and/or global government hedged bond ETFs as the basis for building a Boglehead style portfolio. These suggestions are not strictly in conformance with the original Boglehead portfolio, particularly as expressed in the US-centric two or three-fund portfolios.

The reasoning for why these differences between a US and a non-US portfolio exist is outlined below. Some or all of these topics are covered in more detail elsewhere in the appropriate Wiki section.

Currency risk
For a non-US investor who chooses US assets only, there are immediate and obvious additional concentration and currency risks. To mitigate these risks, the non-US portfolios include a more diversified range of assets. (Evidence for the comparison of this approach and the original Boglehead portfolio is difficult to access for the retail investor.)

Where possible, the bond elements which form the basis for the ballast side of the portfolio are generally hedged back to the investors local currency. This will help to remove additional currency volatility where a global aggregate or global government fund is used. Although it reduces volatility, this hedging has a cost will also slightly reduce the returns of the bond fund.

The general advice to include or base the fixed income side of your portfolio on bonds from your country can lead investors to include only government or aggregate local bonds in their portfolios. 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 and three-fund approach.

On one hand, over-reliance on US equities, such as the total stock market fund of the original Boglehead two or three-fund approach, exposes the non-US investor to additional risks. On the other hand, over-emphasis in the allocation to a non-US investor's home country introduces a different bias that may also lead to reduced returns.

Non-US investors who choose a global aggregate asset can avoid bias to either the US market or to an individual country preference. 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. In addition the savings and investment industries are not aligned, and the taxation, level of costs and the quality of services can be quite different.

Pension systems across the EU are different 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 ISA system; a similar facility is 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's system; others will be entirely different. Non-US investors cannot reliably use any information that is specific to US tax or other 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 the investor 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 access and use accumulating versions of the same funds that are available only in distributing versions in the US. For this reason, the non-US suggested Boglehead portfolios come in two versions, accumulating and distributing, and can be chosen to suit the local tax laws, or investor preference.

Individual investors need to be aware of the tax implications of investing from their own country, and this will affect the choice of assets or funds. These choices may of course affect investor returns.

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

European Union legislation
The introduction of 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. It also introduced complexity around other various investment matters, including taxation.

Weak support for understanding the non-US investors portfolio strategy
So what, you might ask? Without empirical evidence to demonstrate the quality of the returns, it is not certain that the non-US versions are equal to or superior to the original versions. How do the non-US investors' portfolios perform in comparison to the US Boglehead approach?

Sources of information supporting the basis for the construction of non-US portfolios following the Boglehead philosophy or their subsequent performance are 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 the non-US investor on the steps in their investing journey. The steps laid out in the these pages help the investor to understand the principles of Risk tolerance and Asset allocation.

Bogleheads investment philosophy
At the earliest point read the Bogleheads® investment philosophy for non-US investors, to fully understand the approach underpinning your investment decisions.

In addition, the section on The twelve pillars of wisdom provides a good introduction to the investment philosophy of John Bogle. The text itself is here: The twelve pillars of wisdom.

Sample portfolios
Two main approaches to investing for non-US retail investors are considered:


 * Simple portfolios
 * Complex portfolios

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 sophisticated investors may wish to move 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 different circumstances of the non-US investor compared to the US investor using the three-fund portfolio are already described above. The following guidelines show how the sample portfolios are built:


 * Index funds - The sample funds are constructed holding all the index securities in the same weight as the index chosen. Either (replicating) or using an optimised subset of index securities (sampling) in order 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 within the global market. AGGH for example has an ongoing charges figures of 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 hedging by a fund will reduce the returns by the hedging costs.
 * Tax efficiency - The sample funds are all ETFs domiciled in Ireland or Luxembourg. This avoids any unwanted entanglements with disproportionate 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 without the benefit of a small cap fund).

Fund selection options
Tables showing various funds are included below as providing examples of the funds appropriate for selection for a non-US version of a Boglehead portfolio. Both of the tables include a selection of bond ETFs and a selection of stock ETFs. Which particular fund to choose depends upon the investor's tax regime, and their approach to costs, diversity and complexity.

Accumulating and distributing
Countries differ in how they tax dividend income, and this can add complexity to the choice of funds or ETFs to use.

The suggested portfolios divide into two general categories. The first table shows accumulating fund suggestions, and the second table shows distributing fund suggestions. Investors can to choose the most appropriate version depending upon their jurisdiction. For more, see: Accumulating (or capitalizing) and distributing ETF share classes

Individual country portfolios
In addition, some countries may offer or permit specific and tax-free or tax-efficient investment products. The individual country pages that are included in 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 non-US investors where their home country taxation policy does not require annual declaration of dividend income. For accumulating ETFs, the fund manager automatically reinvests the dividends so that the investor captures the gains. 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 a country requires the investor to declare dividend income annually, 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.


 * Value
 * Small cap

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

Boglehead compliance
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 within the parameters of Boglehead style investing, and that your returns should reflect the indices your individual portfolio assets are following (after the drag of costs).

For these Boglehead portfolio suggestions, unlike our US based friends we have little or no ability to compare the performance of our Boglehead style portfolios for non-US investors, because this information is not available, and because and the bases for comparison are as wide and varied as pointed out in the Non-US aspects of approach section above. Even anecdotal evidence is not readily available, although individuals can assess these returns for themselves.