Portfolio - Inflation Hedge Needed? and Expat Banking Solution

For investors outside the US. Personal investments, personal finance, investing news and theory.
Sister forums: Canada, Spain (en español)
---------------
Post Reply
Topic Author
ExpatWhereDoINext
Posts: 5
Joined: Fri May 07, 2021 11:34 pm

Portfolio - Inflation Hedge Needed? and Expat Banking Solution

Post by ExpatWhereDoINext »

Good day Bogleheads Community,

I am a long-term lurker on this forum. So, first I would like to thank the community for its advice. It has been extremely helpful.

Citizenship: EU

Country of Residence: UAE

International Lifestyle: Left my home country 6 years ago. We have now been in the UAE for 1.5 year. Planning to stay here for 1-2 years. Unlikely that we go back to the EU after that, at this point in time we are not planning to retire in the EU.

Currency: USD

Emergency funds: 1+ year, if we cut back we should be fine for 2-3 years. My job is always unstable that is why we have a large emergency fund.

Debt: No debt

Age: 32

Current Asset allocation:
I have around $90k invested (at DEGIRO and Interactive Brokers) with the following AA:
80% - Vanguard FTSE All-World UCITS ETF USD
Combination of Distributing (VWRL) at the GIRO and Accumulating (VWRA) at IB.
20% - iShares Core Gl Aggregate Bd UCITS ETF USD Dis (AGGG)

Contributing around $3k every month.

Two questions.
1. Any suggestions to improve my portfolio? I would love some small cap exposure but the UCITS options are not great. I am concerned that the money press in the EU and US will result in high inflation rates, which will drive interest rates up and bonds down. For my own peace of mind I am considering a 10-15% allocation in gold or commodities as inflation hedge. Open to other suggestions (not interest in crypto at this moment).

2. For other UAE expats (or other expats), any suggestions on expat banking solutions? I have a local bank account, which is fine, but I don’t want to have the majority of my money here. I still have a bank account in my home country as well as a Barclays International Bank Account (leftover from when I worked in the UK). Both are not great. Any recommendations for good banking for expats, I am looking for an around $100k deposit.

Thank you in advance.
User avatar
galeno
Posts: 2312
Joined: Fri Dec 21, 2007 12:06 pm

Re: Portfolio - Inflation Hedge Needed? and Expat Banking Solution

Post by galeno »

IMO you should keep it simple.

80% VWRA and split the remaining 20% between VAGU (or AGGU) and your emergency CASH.

You are accumulating. You should use accumulating UCITS ETFs. The UCITS ETFs can reinvest the interest and dividend USD CASH income far more cheaply than you can.

Lastly, stop watching or reading the FUD (fear uncertainty doom) news if it has you thinking about adjusting your port to accomodate YOUR FUD.

Don't fear inflation. You are 80% equities. You are already 80% hedged. And don't forget. You are a Boglehead.

We (wife and I) are retired. Our port: 50% VWRD + 45% AGGG + 5% CASH. We use only one broker IBKR (USA IB).
KISS & STC.
Topic Author
ExpatWhereDoINext
Posts: 5
Joined: Fri May 07, 2021 11:34 pm

Re: Portfolio - Inflation Hedge Needed? and Expat Banking Solution

Post by ExpatWhereDoINext »

Thanks for the advice, Galeno. I will stay the course, I did manage during the Apr-May 2020 drop. But I am not a machine, I really have to fight my own doubts every month to put additional money into record high indexes in the middle of pandemic. The same holds for the bonds, the interest rates have been super low for a long time, so, common sense can only expect the interest rate to raise and the bond prices to drop at some point soon...

All things equal I would prefer accumulating ETFs as well but as long as you make monthly contributions it is not a big deal, right? You could actually say a distributing fund helps with rebalancing. VWRL is distributing quarterly and AGGG semi-annually. The reason I selected AGGG over AGGU or VAGU is that it not hedged. There are no transaction cost for VWRL at the DEGIRO.
Astones
Posts: 322
Joined: Mon Apr 12, 2021 12:48 pm

Re: Portfolio - Inflation Hedge Needed? and Expat Banking Solution

Post by Astones »

ExpatWhereDoINext wrote: Fri May 07, 2021 11:53 pm
Two questions.
1. Any suggestions to improve my portfolio? I would love some small cap exposure but the UCITS options are not great. I am concerned that the money press in the EU and US will result in high inflation rates, which will drive interest rates up and bonds down. For my own peace of mind I am considering a 10-15% allocation in gold or commodities as inflation hedge. Open to other suggestions (not interest in crypto at this moment).

2. For other UAE expats (or other expats), any suggestions on expat banking solutions? I have a local bank account, which is fine, but I don’t want to have the majority of my money here. I still have a bank account in my home country as well as a Barclays International Bank Account (leftover from when I worked in the UK). Both are not great. Any recommendations for good banking for expats, I am looking for an around $100k deposit.

Thank you in advance.
-- With DeGiro, is it custody of basic ? If it's custody, I think accumulating is better there.

-- My situation is very similar to yours and for small cap I have been considering adding the iShares MSCI world small cap (WSML). I'm still unsure.

-- For the rest, I intend to do about the same you just did.

Btw why do you need IB ?
tomsense76
Posts: 424
Joined: Wed Oct 14, 2020 1:52 am

Re: Portfolio - Inflation Hedge Needed? and Expat Banking Solution

Post by tomsense76 »

+1 What galeno said. Stocks are the inflation hedge.

To add to that stocks are most of the time at all time highs. So getting comfortable investing at all time highs is part of the game. Though it is worth asking if your portfolio is to stock heavy and maybe could use more bonds?

On the bank point, why not just hold cash at IB? They have support for holding different currencies. Also have a debit card. Can setup margin to cover overdrafts at very low rates. Is there actually a need for a bank given that? Are there some particular transactions that you are wanting to do that couldn't already be done at IB?
"Anyone who claims to understand quantum theory is either lying or crazy" -- Richard Feynman
User avatar
galeno
Posts: 2312
Joined: Fri Dec 21, 2007 12:06 pm

Re: Portfolio - Inflation Hedge Needed? and Expat Banking Solution

Post by galeno »

We've been thru 4 equity bear markets.

1987. New young investors. Port 100% equities. Equities revovered before Jan. No rebalancing needed.

2000-2003. Port 80/20. Not yet Bogleheads. Used a concentrated equity port of 12-16 stocks. Rebalanced back to 80/20 during 3 years. Made us SICK. Felt like we were burning our future. Wife freaked out. Wanted to sell everything. I held tough. Port recuperated in 2005. We started investing like Bogleheads. Almost a religious conversion. Port now 60/40. Boglehead style. Starting in Jan 2006.

2008. Port 60/40. Over rebalanced to 70/30. Port recuperated in a year.. Back to 60/40.

2020. Port 40/60. Over rebalanced to 55/45. Port recuperated very quickly. Cut back to 50/50. This is where we sit today.

For future bear markets we will just rebalance to 50/50. Once per year. As always. We wll not over rebalance.

I see bear markets as an opportunity to buy more stocks on the cheap. I actually LIKE them now.
KISS & STC.
Topic Author
ExpatWhereDoINext
Posts: 5
Joined: Fri May 07, 2021 11:34 pm

Re: Portfolio - Inflation Hedge Needed? and Expat Banking Solution

Post by ExpatWhereDoINext »

Astones wrote: Sat May 08, 2021 2:00 pm -- With DeGiro, is it custody of basic ? If it's custody, I think accumulating is better there.

-- My situation is very similar to yours and for small cap I have been considering adding the iShares MSCI world small cap (WSML). I'm still unsure.

-- For the rest, I intend to do about the same you just did.

Btw why do you need IB ?
Thanks for the advice. My holdings (or actually only one ETF: VWRL) at the DEGIRO are leftovers from my time in Europe. The DEGIRO is not to happy with non-EU resident investors and I assume that a some point in the future I have to close my brokerage account. When outside Europe, I believe the only two real choices out there are IB and SwissQuote. I have to say that I am relatively satisfied with IB.
tomsense76 wrote: Sat May 08, 2021 2:15 pm On the bank point, why not just hold cash at IB? They have support for holding different currencies. Also have a debit card. Can setup margin to cover overdrafts at very low rates. Is there actually a need for a bank given that? Are there some particular transactions that you are wanting to do that couldn't already be done at IB?
Thanks, estate tax is my first response...But that said, I would be able to deposit 50k there. I will definitely look into that.
galeno wrote: Sat May 08, 2021 7:08 pm We've been thru 4 equity bear markets.

1987. New young investors. Port 100% equities. Equities revovered before Jan. No rebalancing needed.

2000-2003. Port 80/20. Not yet Bogleheads. Used a concentrated equity port of 12-16 stocks. Rebalanced back to 80/20 during 3 years. Made us SICK. Felt like we were burning our future. Wife freaked out. Wanted to sell everything. I held tough. Port recuperated in 2005. We started investing like Bogleheads. Almost a religious conversion. Port now 60/40. Boglehead style. Starting in Jan 2006.

2008. Port 60/40. Over rebalanced to 70/30. Port recuperated in a year.. Back to 60/40.

2020. Port 40/60. Over rebalanced to 55/45. Port recuperated very quickly. Cut back to 50/50. This is where we sit today.

For future bear markets we will just rebalance to 50/50. Once per year. As always. We wll not over rebalance.

I see bear markets as an opportunity to buy more stocks on the cheap. I actually LIKE them now.
Thanks, Galeno. Always good to get some reassurance from someone who lived through several bear markets.
Astones
Posts: 322
Joined: Mon Apr 12, 2021 12:48 pm

Re: Portfolio - Inflation Hedge Needed? and Expat Banking Solution

Post by Astones »

ExpatWhereDoINext wrote: Sat May 08, 2021 9:45 pm
Thanks for the advice. My holdings (or actually only one ETF: VWRL) at the DEGIRO are leftovers from my time in Europe. The DEGIRO is not to happy with non-EU resident investors and I assume that a some point in the future I have to close my brokerage account. When outside Europe, I believe the only two real choices out there are IB and SwissQuote. I have to say that I am relatively satisfied with IB.
I see. If this is the case, VWRL + AGGG sounds like a perfect plan. I would just leave it like that.

I might go with that as well, but with VWRA, the accumulating version of VWRL.

If I'll really want to complicate my life, I might replace VWRA with

iShares MSCI world +
iShares MSCI EM +
iShares MSCI small cap

weighting everything proportionally to the market cap. The main reason why I'd do it is that I'd get a broader diversification and I'd get a small exposure to small cap, which is generally considered a good idea for young investors. People tend to celebrate simplicity here, so I believe that most posters here would just prefer VWRA alone, and they might have a point.

Good luck!
AlohaJoe
Posts: 5982
Joined: Mon Nov 26, 2007 2:00 pm
Location: Saigon, Vietnam

Re: Portfolio - Inflation Hedge Needed? and Expat Banking Solution

Post by AlohaJoe »

galeno wrote: Sat May 08, 2021 7:47 am Don't fear inflation. You are 80% equities. You are already 80% hedged. And don't forget. You are a Boglehead.
To add to galeno's excellent point, all you need to do is Google around and see lots of people writing on this concept. Here's one I found in a few seconds:

https://medium.com/@hsauers5/examining- ... 184f32104b
From 1872–2020, there have been no meaningful correlations between trailing inflation and forward stock market returns or forward inflation and forward stock returns. This implies two things:

That the stock market efficiently prices in realized inflation.
That the stock market efficiently prices in unknown (unrealized) inflation.

This is evidenced by the materially positive correlations between (1) realized inflation and the S&P 500 earnings yield and (2) unrealized inflation and the earnings yield. These correlations are extremely statistically significant (p-value of 0), and suggest that the broad market is largely efficient at pricing in inflation, as a higher earnings yield means investors are demanding more return for the risk they take on.
All the fear about stocks not hedging inflation and maybe should we buy gold is entirely about short-term effects. Even in hyperinflationary places like Weimar Germany stocks (eventually) did fine. I mean, kinda how could they not? For stocks not to hedge inflation over the medium term really means "complete economic collapse of the entire financial system".

For someone who is 32 inflation is a fairly pointless thing to worry about. If you were 70 and heavily invested in bonds maybe there would be more merit in worrying about it.
DJN
Posts: 834
Joined: Mon Nov 20, 2017 12:30 am

Re: Portfolio - Inflation Hedge Needed? and Expat Banking Solution

Post by DJN »

Hi,
you have been given some really sound advice already. Some random points:
DeGiro will force you to change your account when and if you return to Europe.
You mention that you come from EU, this isn't a country and you cannot be a citizen and it doesn't have a tax regime (thank the gods), when you return to Europe you will be subject to the local tax regime and you should sell all your assets and re-buy as soon as you land, (applies to most jurisdictions).
On the banking side ADCB do an offshore account in Jersey I think, which gives a very good interest rate. You have of course to close your accounts after you leave (eventually) and offshore UAE bank accounts have to be closed as you leave.
Keep your cash pile offshore in European bank or HSBC etc. I use Lloyds bank in the Isle of Man, they have multiple currency accounts.
DJN
Yah shure. | Have a look at the Bogleheads Wiki in the first instance.
Valuethinker
Posts: 42645
Joined: Fri May 11, 2007 11:07 am

Re: Portfolio - Inflation Hedge Needed? and Expat Banking Solution

Post by Valuethinker »

AlohaJoe wrote: Sat May 08, 2021 10:07 pm
galeno wrote: Sat May 08, 2021 7:47 am Don't fear inflation. You are 80% equities. You are already 80% hedged. And don't forget. You are a Boglehead.
To add to galeno's excellent point, all you need to do is Google around and see lots of people writing on this concept. Here's one I found in a few seconds:

https://medium.com/@hsauers5/examining- ... 184f32104b
From 1872–2020, there have been no meaningful correlations between trailing inflation and forward stock market returns or forward inflation and forward stock returns. This implies two things:

That the stock market efficiently prices in realized inflation.
That the stock market efficiently prices in unknown (unrealized) inflation.

This is evidenced by the materially positive correlations between (1) realized inflation and the S&P 500 earnings yield and (2) unrealized inflation and the earnings yield. These correlations are extremely statistically significant (p-value of 0), and suggest that the broad market is largely efficient at pricing in inflation, as a higher earnings yield means investors are demanding more return for the risk they take on.
All the fear about stocks not hedging inflation and maybe should we buy gold is entirely about short-term effects. Even in hyperinflationary places like Weimar Germany stocks (eventually) did fine. I mean, kinda how could they not? For stocks not to hedge inflation over the medium term really means "complete economic collapse of the entire financial system".

For someone who is 32 inflation is a fairly pointless thing to worry about. If you were 70 and heavily invested in bonds maybe there would be more merit in worrying about it.
On the other hand, 1966-1980 was quite a long time to wait for stocks to outperform inflation - real returns around -40%? And had you unfortunately invested at the top of the market in 1966, your actual return to a breakeven return would have been something like 1985?

The UK market fell c 80% in real terms c 1973-75 (over about 18 months). Had you invested in 1973 you certainly did not see a real return on your investment until the mid 1980s. Japan if you bought in 1989 you are still waiting for that positive real return.

Stocks are a real asset, representing a claim on real cash flows. Rising inflation brings distortions to the taxation of companies profits (depreciation understated) and also may lead to higher interest rates - higher real rates are definitely bad for stocks (depending on cause ie in an economic recovery higher interest rates may be a response to a stronger economy and thus higher earnings).

It's not wise to assume that stocks will compensate the investor for inflation in the sort of time periods that many of us have to invest. If you are 30 it is probably an OK bet for when you are 65, but not if you are 55 or older. Which I think is more or less what you are saying?

Unfortunately right now the price of inflation protection is high (the yields available on inflation linked bonds are quite low).

I would put it this way:

"Stocks are an asset based on the real cash flows of the underlying companies being eventually distributed to shareholders.

They are an asset which pays (historically at least) very high returns. But the long run record of those returns is extremely volatile.

Thus they do serve in the long run as an inflation hedge - and as a real asset (as opposed to a nominal one like ordinary bonds) they do beat inflation. But that's because they pay high returns, not because they are inherently an inflation hedge over the time horizons of individual investors)."
Last edited by Valuethinker on Mon May 10, 2021 5:57 am, edited 1 time in total.
Topic Author
ExpatWhereDoINext
Posts: 5
Joined: Fri May 07, 2021 11:34 pm

Re: Portfolio - Inflation Hedge Needed? and Expat Banking Solution

Post by ExpatWhereDoINext »

DJN wrote: Sun May 09, 2021 4:54 am Hi,
you have been given some really sound advice already. Some random points:
DeGiro will force you to change your account when and if you return to Europe.
You mention that you come from EU, this isn't a country and you cannot be a citizen and it doesn't have a tax regime (thank the gods), when you return to Europe you will be subject to the local tax regime and you should sell all your assets and re-buy as soon as you land, (applies to most jurisdictions).
On the banking side ADCB do an offshore account in Jersey I think, which gives a very good interest rate. You have of course to close your accounts after you leave (eventually) and offshore UAE bank accounts have to be closed as you leave.
Keep your cash pile offshore in European bank or HSBC etc. I use Lloyds bank in the Isle of Man, they have multiple currency accounts.
DJN
Thanks, this is helpful. I am aware that the DEGIRO will be troublesome. Couple of follow-up questions if you don't mind.
1. What would be the benefit of selling all assets before you go back? Savings are less taxed than investments?
2. Why did you choose Lloyds in IoM? You were with Lloyds before?
DJN
Posts: 834
Joined: Mon Nov 20, 2017 12:30 am

Re: Portfolio - Inflation Hedge Needed? and Expat Banking Solution

Post by DJN »

Hi,
1. When you sell all your stocks and bond funds then you cannot be back taxed by your new tax authority on any previous gains. It depends upon the new jurisdiction and its tax regime.
2. I had an onshore account with Lloyds and the new offshore account was convenient and it is efficient.
DJN
Yah shure. | Have a look at the Bogleheads Wiki in the first instance.
tomsense76
Posts: 424
Joined: Wed Oct 14, 2020 1:52 am

Re: Portfolio - Inflation Hedge Needed? and Expat Banking Solution

Post by tomsense76 »

ExpatWhereDoINext wrote: Sat May 08, 2021 9:45 pm
tomsense76 wrote: Sat May 08, 2021 2:15 pm On the bank point, why not just hold cash at IB? They have support for holding different currencies. Also have a debit card. Can setup margin to cover overdrafts at very low rates. Is there actually a need for a bank given that? Are there some particular transactions that you are wanting to do that couldn't already be done at IB?
Thanks, estate tax is my first response...But that said, I would be able to deposit 50k there. I will definitely look into that.
I see. Would it work with Bill Pay? IBKR has that. So may be an option worth checking out.

Alternatively could look into getting an IBRK debit card if you don't already have one to pay it that way.

Though admittedly IDK how estate tax is handled in your home country.
"Anyone who claims to understand quantum theory is either lying or crazy" -- Richard Feynman
Post Reply