Investment makeover for 35 year old living abroad

H

He-Man

Registered User
Messages
84
Statement: I'll soon be investing 20k euros in ETFs for the long-term and adding at least 1000 euros per month thereafter.

Time to Grow: 30 years

Broker: Saxo

Base currency of Saxo account: Euro

Sources of Information and Advice: Self directed learning using the following resources:

  • Andrew Hallam's blog and his book, "Millionaire Teacher"
  • ETF Database
  • ETF Channel
  • "Millionaire Next Door"
  • "The Intelligent Investor"

Strategy:
  • Broad ETFs
  • Geographical diversification
  • Currency diversification
  • Use of bonds a portfolio proportion approximately equal to my age (32)
  • Dollar cost averaging and throwing cash into markets during exceptional crashes

Proposed ETFs & Portfolio Allocation:
  • VUSA (Vanguard S&P 500 bought off Amsterdam exchange); 40%
  • VEUR (Vanguard developed Europe bought off Amsterdam exchange) 30%
  • BND (Vanguard Total Bond Market bought off NYSE); 30%

Other Milestones to Achieve:
  • To acquire an investment property as a source of income during retirement. I am keeping 30k euros in cash to avail of the next housing bubble burst, be it in Australia or closer to home, such as Madrid, if its low-price situation persists.
  • Keeping 20k euros in cash as an emergency fund
  • To acquire a home, where I know not. I'm an expat in the Middle East so am not sure where I'll end up, though I am Irish.
  • To seriously consider investing in a property in the Philippines
  • Possibly retire in Belize, Panama, or Spain

Thoughts?
I'd love to make this a big thread on ETFs and portfolio planning, so if anyone wants to join in, please do.
 
Reactions: jim
Well for a start you have about 50k to invest of which you are proposing to but 30K in property, that is about 10 fold higher that what a portfolio of this size should have.... Before doing any trading I would suggest you spend time reading up on asset allocation and the significance in plays in build wealth and avoiding risk. As it stands your portfolio is structurally very different to those that achieve say 6% to 8% pa over a 30 year period, as it is carrying significantly more risk. Furthermore give the high property weighting my expectation would be returns of around 3% to 4% pa.
 
Hi Jim,

Thanks for your perspective. I'm also a little concerned about over allocating to property as I know it is not a liquid asset and it is a high risk one in several respects.

However, given that I do not have a home, what would you suggest?


Also, in order to sustain an income of 40k in retirement, I would need to have a substantial income per month from stocks. But if I have an investment property bought at a burst-bubble price, it should yield 1k per month in the long run, reducing the pressure to build up such a large sum in equities.

Given that you seem to be averse to a large property weighting in a portfolio, what would you propose for someone like me who does not yet have a home? Property is expensive, but necessary for living, so unless someone has several million, how can property in the average portfolio ever be lower than, say, 20%?
 
You are putting 40% in foreign developed markets (note just one market) and 30% into domestic (i.e Eurozone) developed markets. You’re keeping some cash, which should lower overall portfolio volatility and you have an emergency fund. I’d say this is a well worked out investment policy.

But why are you buying a bond fund and in particular a USD-denominated bond fund? Do you really need income now and why are you taking on currency risk (assuming your base currency is the EUR)? If, as an EUR investor, you invest only in USD bonds you presumably believe that EUR bonds have a higher credit risk than USD bonds and that this outweighs the currency risk of holding a USD denominated asset.

Also, if your investment horizon is 30 years, should you not be going for riskier assets than bonds (e.g. emerging market equities, commodities, timber, absolute return strategies, non-correlated returns, etc.) now and leave investing in debt markets until retirement beckons?

You say you’ll put something into an investment property at a later date. You probably regard this as a separate (leveraged) project, but if you believe ‘money is money’ it means you maybe overweighted in property relative to your other investments.

Also, assuming you take out a mortgage to buy the property, why would you invest in a bond fund? When you take out a mortgage you are in effect issuing a personal bond and if you have bond fund you are buying them. So why are you doing this? You need to think this out.
[Disclaimer: The above is comment / observation only and is not a recommendation to follow any particular investment strategy or to buy / not buy any particular fund or stock.][/B][/B]
 
He-Man said:
Also, in order to sustain an income of 40k in retirement, I would need to have a substantial income per month from stocks.
Click to expand...

Some back of a napkin calculations: You need to have assets sufficient to by buy an annuity of 40K at retirement, so about say 900K. But starting with 50K, adding 12K a year for 30 years with an expected return of say 6% to 8% would give you around 1.3M to 2M. There is every change that you will be able to buy a suitable home on retirement in cash and provide an adequate pension as well without having to use a high risk strategy.

He-Man said:
Property is expensive, but necessary for living, so unless someone has several million, how can property in the average portfolio ever be lower than, say, 20%?
Click to expand...

From an investment point of view, never buy property if you can rent, because when you do you break every rule of conservative investing - Over weight a portfolio with a risky asset class, you fail to diversify that asset class and you borrow to do so. The recent crisis is typical of what happens to investors that overweight their portfolio in a property - equity style investors, typically middle Europeans, say the value of their portfolio slashed by about 35%, but after three or four years they had recovered their value and even gained ground, while property investors are still in negative equity and carrying lots of debt.

If you do want to add property to your investments, then you are far better with a REIT that an actual property, assuming of course you choose a well diversified REIT of course. Remember REITs will also come down when a property bubble bursts.
 
Thanks for the comments!
I'm buying a bond ETF because that is the approach advocated by Graham in The Intelligent Investor and also by Andrew Hallam on his website. Hallam in particular has a whole chapter in his book on bonds and the role they play in a portfolio. I am still trying to decide which bond to go for. I want one that will hold the line and yield a modest percentage. BND (offered by Vanguard) looks very diversified, but I agree with you, it would be better to have one in euro. I am having trouble identifying a suitable European total bond market ETF.

ETFs have a high risk associated with them (according to factsheets on Vanguard and iShares websites). Emerging markets oscillate widely, but have not outperformed first world ETFs. However, in due course I might allocate around 5% of my portfolio to emerging markets. But right now, the emerging middle class in those markets are soaking up western goods, meaning that European and North American companies that comprise the broadest indexes look set to prosper.
Also, on average, most amateurs like myself, and most financial advisers too, simply cannot beat an index in terms of average return over 15-20 year periods. I realize this is all debatable, but the charts at least don't lie.


Noted. Based on this, Jim's, and my own perspective, I'm starting to seriously reappraise my plans for property.
 
Hi Jim,

I'm intrigued by several aspects of your post.

Jim2007 said:
Some back of a napkin calculations: You need to have assets sufficient to by buy an annuity of 40K at retirement, so about say 900K.
Click to expand...
I'm curious as to why you haven't factored inflation into your figures there (at least, you don't seem to have). 40k in today's money would mean that 900k would be an adequate pension pot. But if we consider an average inflation rate of 2.5% over the next 30 years, it seems to me that it would be very inadequate.


My instinct is actually anti-property, or at least it was until it occurred to me that 10k per month coming in from a rental property thirty years from now means that my portfolio would not have to generate 100% of the desired 40k annuity. It would only have to generate 75% of it.

Do you really think that there's a hole in that logic, especially if the mortgage was effectively being paid by the tenant? In addition, is property not a good inflation beater in such a scenario? I'm genuinely curious.


This makes perfect sense to me. But given that inflation does not seem to be factored into the calculation at the top of your post above, it may well be that I cannot afford a home out of my pension pot. I'm curious as to whether you have bought a home or an investment property for yourself and, if not, how you see your own living situation evolving when you retire.

I am "anti-debt", however, and for that reason I agree, the idea of a mortgage horrifies me. For that reason, I would have hoped to have a tenant pay the mortgage of the investment property (or a good deal of it anyway) through rent, and I would have been prepared to consider the purchase of my own home down the line as a purchase rather than an investment. I suppose the idea of not having property is so culturally counter-intuitive that it requires some time to come around to looking at the subject from a different perspective.

I don't yet know where my wife and I will end up, so I am in no rush to buy - but if I am to buy a property, I'd like to do it during a bubble-burst period.

If you do want to add property to your investments, then you are far better with a REIT that an actual property, assuming of course you choose a well diversified REIT of course. Remember REITs will also come down when a property bubble bursts.
Click to expand...

I have been considering this too, based on some guidance outlined in a recent edition of The Intelligent Investor. In that book, a small REIT allocation in one's portfolio is recommended as a protection against inflation. Vanguard have to REIT ETFs: a US one and a world one. The US one seems more stable; which one would you be inclined to go for yourself?

Thanks very much for all your points. Very much appreciated.
 
Tax tax tax tax tax and tax

This strategy might be all well and good if you live in the USA but Ireland, forget it.
 
I live in a tax-free country at the moment and hope to stay for many more years.
But if I move back to Ireland then yes, tax will be an issue. But surely it would only be an issue regarding dividends and realized capital gains? Is there something I'm missing?
 
Marc said:
Tax tax tax tax tax and tax

This strategy might be all well and good if you live in the USA but Ireland, forget it.
Click to expand...

The joys of live in a country where the gains for investing are tax free!!!
 

The are called back of a napkin figures for a reason - they are not intended to be accurate! On the other hand they are good enough for our purposes. Inflation is not discriminative, it will impact both sides of the equation so it is just as handy to ignore it.

Now this may sound flippant, but the truth is that I've spend over twenty years working on financial models and the bottom line is that most complex models seldom do better that simple models because the more parameters you bring in the more likely you are to get it wrong! So I'm more than comfortable to go with the model as I have it.


There are two phases to your strategy, first how to generate the maximum wealth over the investing period and second using that wealth to generate an income there after. In all probability a portfolio with a low property element will generate a higher return over the investing period, but there is nothing stopping you taking part that point and buying a rental property as part of the means to generate your retirement income.

He-Man said:
Do you really think that there's a hole in that logic, especially if the mortgage was effectively being paid by the tenant? In addition, is property not a good inflation beater in such a scenario? I'm genuinely curious.
Click to expand...

Well the historic performance figures for the various assets classes includes times of both high and low inflation and property did not do very well as an asset class....

That said, you have to keeping mind that the property figures used in such studies are closer to a REIT style of investing rather than the purchase of an individual property. Buying an individual property as many addition risks and opportunities involved in it that simply as a defence against inflation.

If you are concerned about inflation that much then the best idea would be to add a small amount of precious metals plus a REIT to the mix.

He-Man said:
I'm curious as to whether you have bought a home or an investment property for yourself and, if not, how you see your own living situation evolving when you retire.
Click to expand...

Well things are a bit different over here, we do not have a choice when it comes to pensions - they are by law required to be mainly inline with the strategy we have been discussing, for the very reasons I've outlined. By law you start contributing about 6% of your salary, which is matched by your employer, from aged 25 and it scales up over your working life until you reach my age where I'm contributing almost 15%, which is again matched by the employer. The objective and it is usually achieved is to deliver a pension equal to about 60% of your annual salary on retirement.

Another 20% is expected to come from the state pension and the rest by personal savings for which you are allowed to contribute 6K pa tax free into a fund which is also run on the same basis as already stated.

That said, most professional Swiss could afford to buy a house as well but choose to invest in equities instead because investing in property is considered to be foolish! Something to do if you have money to spare.... The result is that it is not at all unusual to fined a Swiss couple heading into retirement with a pension of 80% plus another 200K - 500K in investments.

For the most part, I'd say houses tend to be inherited rather than being bought and when it does come to buying foreigners account plus holiday homes account for a large part of it

On retirement we will most likely rent or buy (for cash) something in the Italian speaking part of Switzerland outside one of the main cities such as Lugano or Locarno. As the winters are short and no so severe, plus of course we like the region.

He-Man said:
suppose the idea of not having property is so culturally counter-intuitive that it requires some time to come around to looking at the subject from a different perspective.
Click to expand...

This is very true and many of my Swiss friend can not begin to understand what went wrong in Ireland - how did so many people get taken in by the property boom... Typically the conversation starts with something like: The Irish are northerners (all northern countries are sensible to the Swiss way of thinking) so why did they going buying property? And then the ultimate sin as the Swiss are concerned - borrowing to do it!!


He-Man said:
Vanguard have to REIT ETFs: a US one and a world one. The US one seems more stable; which one would you be inclined to go for yourself?
Click to expand...

For me that would be too much exposure to the dollar for a start. I will be retiring in Europe so I tend to stick to Euroland and CH for the most part.
 
Jim, thanks very much for your response (especially on a Saturday morning!). Plenty for me to chew on there.
As well as being very important, at a personal level I also find this general subject fascinating. There's lots to learn and consider.
 
Hi He man

A very interesting case study. I will repeat some of the points others make.


Your objective needs to be general, maximising and protecting wealth. At 35, it's pretty meaningless to have an objective of "40k income in retirement". So don't bother with any calculations which purport to show how you might achieve this.

If you continue to save and invest, you will accumulate wealth over the next 25 years. You should not borrow to invest as it dramatically increases risks. You do not need to take these sort of risks.


At your age, almost all of your investments should be in equities. You should derive much higher returns than other classes, and you can handle the short and medium term volatility.

Be really conscious of costs. You can keep them to an absolute minimum by buying shares directly rather than investing through ETFs. While the costs of ETFs are low, they do still eat into your returns.

As you don't know where you will end up, all your investments should be relatively liquid. Therefore, no property as an "investment". Property is an actively managed business and not a passive investment. The chances that you could identify a suitable property in Belize and manage it from a distance profitably are very low indeed.

With a good income, and plenty of liquid investments, you do not need a €20,000 emergency fund. If you are mainly invested in equities, you can convert them to cash quickly if you need to.

Tax is a serious consideration which again argues against property. It may be useful for you to realise all your capital gains before you move to a tax paying jurisdiction. A property might be difficult to sell in that timeframe.

It's almost impossible to time equity or housing markets. While you are invested in equities, it's quite possible that you will be participating in a bubble at some time during your 30 year holding period. To exploit the bubble, you will have to sell towards the top and buy in again towards the bottom. Very, very difficult to do, and probably not worth trying.
 
I don't yet know where my wife and I will end up, so I am in no rush to buy - but if I am to buy a property, I'd like to do it during a bubble-burst period.
Click to expand...
As I have said, I don't think you should invest in property.
You certainly should not borrow to invest in property.

When you know where you will be living, I think you would be right to buy property there at that time.

I don't agree with Jim's suggestion that you should rent instead of buying.

But it could depend on where you live. In Ireland, there are huge tax advantages in owning your own home.

But as well as the financial advantages, there are many other advantages, such as security of tenure, a better sense of home, freedom to extend and decorate it as you wish. In Switzerland, where the culture and law supports it, renting may be find. But in many other places, it's not.

Of course, these advantages do not apply to you at present, where renting is much better as you will be moving from place to place.

But, come back to Askaboutmoney in 20 years when you have decided where you want to settle and decide at that stage if it's a good idea to rent or buy.
 

Interesting. This is contrary to several sources of info I've read so far, but it does have merit, and I am a bit of a generalist by nature. Basically, work hard, save and invest, exploit opportunities, be frugal, and it will work out. I'll accept that

If you continue to save and invest, you will accumulate wealth over the next 25 years. You should not borrow to invest as it dramatically increases risks. You do not need to take these sort of risks.
Click to expand...

I accept the logic of this absolutely. But it does beg the following question for me: If I don't borrow, how will I ever be able to afford a home? I just don't see it happening without borrowing, unless I continue to live in the Middle East for many more years. In my case, this is possible, but unlikely. I have a feeling that my job here won't last much beyond another 2 or 3 years. If that happens, my plan would be to seek a similar role in Singapore or another Middle East country. Only as a last resort would I move back to Europe for work.

At your age, almost all of your investments should be in equities. You should derive much higher returns than other classes, and you can handle the short and medium term volatility.
Click to expand...

I've been persuaded by you and Jim (and other sources) that this is correct for me.


Noted. Again, I've been persuaded. I am not interested in actively managing a business, especially not from home. WRT Belize, I had that more in a mind as a place where I'd buy a little house when 60 years old or so. For an investment property right now, I had been thinking Cork, Madrid, or somewhere in the Philippines (diverse, I know). Cork because I know it and because I think you could always fill a 2-bed apartment there; Madrid because it's a capital city with a lot going for it in the long-run and currently at decent prices; and the Philippines because my wife is from there, prices are cheap, and some places in Makati (which is the opulent quarter of Manila) or the student districts look set for a bright future.

But yes, you're right: Too difficult to manage given I don't know where we will be living 5 years from now. So equities will be the plan.

With a good income, and plenty of liquid investments, you do not need a €20,000 emergency fund. If you are mainly invested in equities, you can convert them to cash quickly if you need to.
Click to expand...

Right now I have 22k euros sitting in a bank and it's doing nothing but wasting away slowly. This is a little sickening on the one hand, but on the other I do derive a lot of comfort from knowing it's there. In a worst-case scenario, wifey and me would have to move back to Ireland in two years' time, in which case we would have to rent a place, buy a car (possibly 2), wait ages for her to find a decent-paying job (accountant), and on top of all that, my net earnings would drop from 71k euro per year to 38k euro per year. Ouch! Now, wifey and I are pretty frugal, and we don't need or spend 71k currently; but what we save from it is our future-wealth-generator. This investable surplus will be gone if we have to move back to Ireland.

Also, if we go back to Ireland on a vastly reduced income, we certainly won't be able to buy a home and may well be condemned to renting long-term out of necessity. I would rather not convert whatever investments we have made to cash unless it is expedient to do so, because those investments are really to be locked away for 30 years.

So my general plan up to the end of 2015 is to keep 30k in cash to cover the drastic changes that would occur were we to move back to Ireland at a non-optimal time (this would allow for the retention of an emergency fund + a potential deposit *in case* for whatever reason we wanted to buy a place); and also, to have invested 70k euros in the stock market.

I'm curious if your advice would change with regard to keeping cash following the above explanation. I am very eager to hear your opinions as my fears may be unfounded.

Tax is a serious consideration which again argues against property. It may be useful for you to realise all your capital gains before you move to a tax paying jurisdiction. A property might be difficult to sell in that timeframe.
Click to expand...

It is difficult to know what the tax situation would be were we to move back. My understanding is that capital gains on anything received before repatriating would be exempted; but all future capital gains would be taxable. This is indeed a serious concern - and frankly it's one of several reasons why I would be likely to go to Singapore if my Middle East career dried up.


Fully agree with this -- this has been reiterated by the likes of Graham, Munger, Buffet and others and I do not doubt my inability to time peak markets, so I won't try. However, if prices tumble but long-term prospects look decent, then I would hope to be in a position to seize the opportunity. I think you need a bit of cash to do so, but we'll see.
 

So, just so I'm clear, your advice here would be to (a) not buy an investment property anywhere given my present situation and (b) only consider buying a home if I am in a stable location and it would be advantageous to do so. I'm inclined to agree (and would struggle to disagree). If I do end up in a place like Germany or Switzerland (this is possible) then Jim's advice would probably be optimal for me.

I should point out that another book I'm reading carefully at the moment is Millionaire Next Door. It does emphasize that homes should be modest, not in the most upmarket areas, and not costing more than double one's annual realized income. These are precepts I will follow if I do eventually buy a home.

But, come back to Askaboutmoney in 20 years when you have decided where you want to settle and decide at that stage if it's a good idea to rent or buy.
Click to expand...
I hope to stick around Askaboutmoney between now and then. Fantastic forum.
 
Basically, work hard, save and invest, exploit opportunities, be frugal, and it will work out.
Click to expand...
I think you need to balance these various issues. I think that many people are too frugal. Make sure you are saving enough for your retirement, but don't live on the breadline, so you can die a millionaire.
If I don't borrow, how will I ever be able to afford a home?
Click to expand...
Don't borrow to invest. It is ok to borrow for your home.

If you don't borrow to buy a home, you will be paying rent. Interest is just the rent for money borrowed.

Sorry, this does not make any sense to me. If you move back to Ireland or if you need the cash for any other reasons, you can sell part of your investments. You probably need to adjust your mindset a bit in this regard. For example, if you move back to Ireland and need to cash all your investments to buy a home, then you should be prepared to do so. You will save the repayments on the mortgage so you can use them to begin investing again. In Ireland at least, owning your own home is very tax-efficient. No Capital Gains Tax and no tax on the benefit of not paying rent. If you have €200k invested and you rent a house, the investment income will be taxed and you get no tax relief for the rent.

Andrew Hallam's blog and his book, "Millionaire Teacher"

I should point out that another book I'm reading carefully at the moment is Millionaire Next Door.
Click to expand...
I don't know these guys or their books, but I am suspicious of books or schemes with titles such as these.

homes should be modest, not in the most upmarket areas, and not costing more than double one's annual realized income.
Click to expand...
Again, it's a question of balance. A lot of people are in financial trouble today because they bought trophy homes which they could not afford. But you accumulate wealth to enjoy it, not to just count it. If a home costs you three times your income but is close to where you work and your family lives, then this would be better than buying a home for twice your income which requires two hours of commuting every day.

By all means, read these books. As with these comments on askaboutmoney, treat the ideas in them as ideas, worth thinking about. There are very few absolute rules.
 

Noted -- and thanks for opening my mind to new options that I hadn't considered.

I don't know these guys or their books, but I am suspicious of books or schemes with titles such as these.
Click to expand...
On these books, I agree the titles aren't the best, but the content is very good.

Millionaire Next Door actually arose out of an academic study done on a large number of American decamillionaires. It profiles their spending habits and general attitudes to finance and is intriguing because it explodes the myth of the high-flying, high-consumption millionaire. The book also explores second and third generation millionaires, noting that family fortunes usually run dry by the end of the third generation. It's a very enlightening book and is well worth a read. The book does not advocate a get rich quick policy; it really is just a study of millionaire spending and domestic budgeting habits, contrasting them with high-earning people who like to spend lots on designer clothes, luxury cars, big houses, etc, but who at the end of the day have a relatively low net worth due to hyper-consumption.

Millionaire Teacher is written by a Canadian expat high-school English teacher who became a millionaire on a teacher's salary from investing prudently by following Graham's and Buffet's advice. Of course the fact that he lives in Singapore helped too!
The book and the author's website tackle the expat financial planning industry head-on and is against high-fee "investment" plans offered by Zurich International, Friends Provident, Royal Scandia et al. In fact, I found the website only because I had almost been suckered into opening a whole-of-life-insurance / savings plan from a snakeoil salesman in the Middle East.
The author advocates a balanced portfolio of low-fee, highly diversified ETFs and adheres to the precepts of The Intelligent Investor. The book really cleared the fog of ignorance from my mind about investing and for that, I consider it one of my best ever purchases. I does not, however, discuss property and concentrates exclusively on bonds and ETFs, and controlled consumer spending.
 


you are quite correct that over time most investors will fail to beat index funds

i made big money in 2013 on bank of ireland and groupon , two high risk stocks , ive since lost nearly everything i gained on groupon , im still up since 2012 due to success with glanbia , kerry and bmw but had i simply put all my money in an s+p etf , i would have done better due to the money saved on trades

i think the cleverest investor is the one that admits they are not smart enough to outwit the broad market , luck only lasts so long , on top of that , i think a lot of people can develop into a gambler by seeking out " ten baggers "



i wouldnt be shy about putting 10 or 15% in emerging markets today , emerging markets have performed horribley this past four years and as these things are cyclical ,their cheap valuations should make for significant returns ,i think DEM is the best emerging markets ETF
 
You must log in or register to reply here.
Menu
Log in
Register