Please help me get started (late) but on the right foot! Help with AA and Portfolio.

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victoruwaifo
Posts: 2
Joined: Tue Mar 30, 2021 6:00 am

Please help me get started (late) but on the right foot! Help with AA and Portfolio.

Post by victoruwaifo »

I apologize for the lengthy post. Thank you ALL for the life-changing work that you are doing.

I am 35 with no investments. I hope to make up for it by being diligently-bogleheaded.

Country of Residence: Middle Eastern Country (no income or capital gains taxes, similar to UAE). No US Nationality but my wife is a European and American citizen and so is my daughter. My wife files taxes separately in both places. She owns a house that she rents out and a small portfolio that she inherited. We currently rent and have not lived anywhere long enough to buy.

International Lifestyle: I will likely move to Europe or the US for work in the future. A low-tax destination in Europe is more likely.

Personality: Impulsive so I aspire to make automatic contributions in line with the final asset allocation and re-balance once a year. My outlook is 25 years +. I have a toddler and I am trying to save and invest more for her.

Currency: I currently earn my salary in USD but I spend it in both USD and EUR as I travel frequently to Europe where my wife is from. I will definitely retire in Europe and if I do that, I will spend EUR.

Savings: I have no liquid holdings except for $5000 in Bitcoin - which I bought for 10% of that many years ago. I also have $150K in sweat equity invested in company projects (should get 1.5x my money in a few years, it cost me nothing).

I am not entitled to any state or company pensions to speak of.


Funds:

  • Emergency funds: $60,000 - should last a year if we make some lifestyle changes.
  • Down Payment on a rental investment: $70,000 - Rationale: I can possibly get a low-interest fixed mortgage in Europe and make a 4-7% Yield with possible capital appreciation. I would like to build a small portfolio of yielding properties.
  • Money set aside for side hustle: $50,000. Will not touch additional savings.
Debt: I have no debt but I currently support my father with a monthly payment for the rest of this life. I am his retirement plan, around $1,800 per month. If I get fired, I can squeeze this.

Income : I make around $144K a year net of taxes, not including bonuses which vary. Have equity in my company and guaranteed job security. May quit one day though.

Desired Asset allocation:
  • I will invest $50,000 immediately and make monthly contributions going forward of 40% of my income (minimum).
  • I have tried to go for un-hedged options in order to have exposure to both USD and Euros. I am assuming that buying the actual unhedged ETFs in USD is the same as buying in Euros. Please correct me if I am wrong.
  • I have tried to go for accumulating instead of distributing ETFs but some of the ones I found did not have an accumulating option. It should be OK from a tax perspective as I am not taxed on dividends.
Below is my proposed asset allocation based on my reading of Bogleheads and the forum. I have no home country bias, so I am OK with exposure to the whole world but weighted towards USD and Euro.

Bonds:
  • Developed Country Bonds: 12% - AGGG SW (DIST, USD, 0.1%)
  • EM Bonds:3% - JPEA (ACC, USD, 0.45%!!)
Stocks:

  • Developed World Stocks: 60% - SWDA LN (ACC, USD, 0.2%)
  • EM Stocks - including small caps: 15% - EIMI LN (ACC, USD, 0.18%)
  • Developed World Small Caps: 5% - WSML LN (ACC, USD, 0.35%)
  • US REITs:3% - IUSP SW (DIST, USD, 0.4%)
  • EU REITs: 3% - IPRP SW (DIST, EUR, 0.4%)
Gambling
  • I will do some dollar cost averaging of Crypto on a monthly basis - buy it and forget it.
    I may also invest a small amount in niche startups - through an angel network. I have $10k for those now.

Questions:
  • Is there any replication in my asset allocation? Is it a wise allocation?
  • Is there a better way to get exposure to both US and EUR?
  • Are the ETFs I selected the right ones to go for? They seem to have high fees? I would love to go with a better suggestion.
  • FOMO - Would love more exposure to the video game industry, marijuana, and petcare. Don’t use/have either of these but I see what is going on around me. Should I have small ETF holdings or just forget it.
Last edited by victoruwaifo on Sat Apr 03, 2021 4:28 am, edited 1 time in total.
jg12345
Posts: 427
Joined: Fri Dec 11, 2020 12:03 pm

Re: Please help me get started (late) but on the right foot! Help with AA and Portfolio.

Post by jg12345 »

Hi OP,
thanks for all the info.
Welcome to the forum! for starters, please give a look at bogleheads wikipedia page, answers to your questions may be already there.

There's probably more knowledgeable people but I'd give a first stab of comments:

1- Your proposed AA is 88 stocks-12 bonds (EM bonds are high-yield so more correlated with stocks), without considering the bitcoins, RE, emergency funds, etc. Just clarifying this so you're aware. As I'll say below, other things you mention in your post should or may be counted into your portfolio AA (asset allocation). I suggest you think of an AA first (120 to 100 minus age are usual ways to think about it). 70-30 or 80-20 are most plausible candidates given your age and the risk appetite implied by what you write, 90-10 if you can stomach the risk and want to take more of it.

2- For the bonds part, I would sell EM bonds and get AGGH. Why? sell EM bonds because of what said in point 1. AGGH because you mention you will definitely retire in Europe. This means your bonds should be hedged to EUR.

3- for the stock part, I would simplify to either MSCI world Eur Acc+MSCI world EM eur (Eimi) or even one ETF out of MSCI Acwi and vanguard Ftse all world (developed +EM stocks in one ETF). Why? Simplicity and most importantly less chances of behavioral mishaps. it appears from your post ("I am impulsive") that rebalancing may be prone to human / behavioral issues (it is for so many of us, the discipline required is significant) so i would keep that into account.

I do understand you feel like "where are small caps?" and in fact they are not in any of the above option (except EIMI), but the substantial higher cost (not only financial, also admin/managerial/behavioral) is probably not worth.

Note that I would buy VWRL (or similar ETF combination) in EUR for the same point at n. 2

4- Acc better than dist. reinvestment (acc) in general preferred: less admin, less cost of repurchasing, automatic so no chance of behavioral mishaps.

5- I'd suggest writing an investing personal statement to help staying the course (it helped me, at least)

6- FOMO ideas: I'd suggest to leave all those ideas. that presumes you know better than the market, which has professionals who studied finance for years, work 60-120h per week, plenty of money for creating sophisticated models and buying the information that goes into those models. No one here knows better, hence I (and the vast majority of people here) would suggest to stick to the ETF suggested i.e. Ftse All world or MSCI ACWI or developed+EM ETFs.

7- Bitcoin: they are FOMO too. also, they should be considered as part of your portfolio... and I would suggest to not hold them. There is no 100% consensus on this though. see viewtopic.php?f=22&t=341598
Small note: if you really can't do without bitcoin or other FOMO, do it with a very small amount.

8- Some people put emergency funds in the bond allocation part of their portfolio. here there's a discussion about it. once you decide, put in your IPS. viewtopic.php?t=311588

9- Good job on supporting your dad, it is outstanding. and sorry to hear about the lack of old age social protection measures (i.e. pensions) in your country. typical things many people often give for granted but are major benefits of being in Europe.

I cannot comment on private investments in "side hustles" or private RE. More knowledgeable people here may do that, although I suppose that at least you'll need to state the location of the property(ies) in question for private RE investments.

[edited the ETF names, to avoid confusion, and added possible AA]
Topic Author
victoruwaifo
Posts: 2
Joined: Tue Mar 30, 2021 6:00 am

Re: Please help me get started (late) but on the right foot! Help with AA and Portfolio.

Post by victoruwaifo »

JG,

Thank you for your valuable input and the effort that went into it. I truly appreciate it. More than anything, it made me research and reflect more. I will solidify my IPS.

Some decisions:

- I will lump my income-producing real estate investment and entrepreneurial efforts into one-time allocation capped at $70K. It will be either or, not both. Owning income-producing RE is a business not an investment.

- Point taken about crypto, I will limit it to a very small amount.

- FOMO: Point taken as well, will stick to the broad ETFs

- Will go for ACC only to avoid having to re-invest.

- Hedging to Euro makes sense for the bonds - I will do that. Wise advice.

- I will go for VWRL for the stock component and keep things simple as you suggested.

Do you think it makes sense to hedge stocks to EUR? Should I not allow for the natural hedging that happens in a holding of multiple currencies? Also would it not make sense to hold in USD as I am earning in USD now, so I would avoid conversion costs every month?


Below is another attempt at an AA

Discretionary: 3%
Bonds: 20% AGGH
Stocks: 77% VWRA or SSAC

I will take the next few days to do more research on small caps. My logic says the more diversification the better, don't you think?
jg12345
Posts: 427
Joined: Fri Dec 11, 2020 12:03 pm

Re: Please help me get started (late) but on the right foot! Help with AA and Portfolio.

Post by jg12345 »

Hi Victor,
Good progress and thanks for the fast reply.

1) on small caps... You'd be more diversified in terms of cap size but ... is that good diversification? not so much, because small caps are highly correlated to large and mid caps. So you'll get little to no additional return, for a significantly higher fee -> not really great. at least this is my understanding. if there was an ETF in EUR that would have all world all caps at 0.2% ter, I'd take it, but I don't think there is one. there are 2 or more discussion in the forum, do look them up. note that small caps are ~10% of total market cap.

[edit]
here a comparison of MSCI ACWI (large and mid) and MSCI ACWI IMI (large mid and small). over 10 years, the difference in returns is 0.02 (9.45 ACWI, 9.43 ACWI IMI) => past is not indicative of the future, but it seems to me is not worth the admin, psychological, and TER costs
https://www.msci.com/documents/10199/42 ... d36472a703
https://www.msci.com/documents/10199/8d ... 2942e3adeb


2) if the commission is in %, ceteris paribus, it doesn't matter to change now or later (you can see this on an excel file). my feeling is that changing right away is the right thing to do as 1- your base currency is EUR, and 2- doing it later would mean timing the currency market. With all that said, I have to admit I don't know much about currency markets, maybe asking a separate question would help.

3) The general advice for stocks is to not hedge them, especially if your time horizon is 10+ years and hedging incur additional fees. The opposite is true for bonds (hence AGGH). The other point is that since you're already hedging your bonds to EUR you may not want to peg yourself too much to it. On the other hand you do earn in US$ and you may want to consider to what currency is your salary more correlated with. to keep things simple, i would not currency hedge. However, I think there is no full consensus on this and hedging a part of your portfolio would not be a terrible idea. you would do EUR-hedge, with an ETF that should have same TER as MSCI ACWI/Ftse all world. if you don't have access to an all world stocks ETF, hedged, that is as cheap as the unhedged version... then I'd say the additional cost is not worth.

viewtopic.php?t=280887 <- on currency hedging, but there's more!

I hope this helps, good luck
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