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international stock exposure for a semi-nomadic American

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George Rivers:
Hi.  I'm considering pulling the plug on gainful employment, and am thinking that perhaps my overly simplistic asset allocation is not ideally suited for my semi-nomadic lifestyle.  I'm an American living abroad, and doubt that the rest of my life will include permanently living in the US.  Never say never, but perhaps a 50/50 geographic distribution, at best, would be more like it.

Currently my extremely boring portfolio is: 85% Vanguard Total Stock and 15% Vanguard Total Bond.

What international percentage would you recommend for my stocks?  25% as you do?  Would this percentage vary if one plans to live more/less time in the US?

I'm just worried that if I plan to spend a significant amount of time in non-dollar currency places, that I'm taking undue risk.

As usual, thanks!

I've been meaning to write a blog post about this for a long time... but it is a big topic and I haven't gotten around to investing that much time.

There are some good threads on bogleheads that you should read. Maybe this one (a random one I had bookmarked.)

This is written from the perspective of US people, living in the US, spending US dollars. But the conversation is worth reading through.

I believe they conclude (accurately) that there is no way of knowing if international allocation will help in any way, but diversification is a good thing so you should probably have some international.

How much international? Nobody knows that either. Jack Bogle says zero, market weighting says 50%, I say 25% based on past volatility/return and my personal experience with working closing with non-US corporations.

You and I have a unique risk that US residents do not, that the currency we spend may shift radically from current valuations. I knew American expats working in Europe when the Europe gained 25% and they were getting paid in dollars. I had coffee with a guy who was working in Japan and his rent doubled because of currency shifts, not sure when that was the 80s maybe. Also heard about people living in SE Asia for 30 years with inflation of double digits and US dollar couldn't keep up.... anyway, point being that we have currency risk. So some amount of additional exposure to that currency would be in order.

But how much? And what is the best way to do that? I dunno.

But I think our allocation combined with a low withdrawal rate is a strong contender to thrive regardless of what happens. I sleep well. I can't think of anything that I would do differently.

George Rivers:
Alright, I'm convinced.  I definitely need more than 0 if I'll be living a big chunk of time outside of the US.

My problem though is that, having come to this international party so late, I have very little wiggle room to rebalance in my 401k.  My 401k is only 23% of my assets, and contains mostly bonds.  If I were to move the small amount of stocks in it into an international holding, I would only get up to 11% of my stocks being international.  I guess I could complicate things by shuffling my HSA and ROTH, to get to a total of 14%.  My taxable accounts OTOH, have pretty sizable capital gains that I've had to pay tax on if I were to rebalance.

I'm wondering if such a tiny amount (11-14%) is worth shuffling everything around in my tax advantaged accounts.

The other alternative would be using the excess money from the remaining time while employed to purchase international holdings in my taxable account. 

Which brings me to my last question... is holding international indices in taxable accounts recommended?  AFAICT, only 66% of dividends in Vanguard's Total International Index were qualified in 2017.  That means that 34% of them are taxed at my marginal rate (28% instead of the tax favored 15%).  I suppose that at current international yields (2.7%), that equates to an additional tax of 2.7% * 34% * (28% - 15%) = 0.119%.  This would be an additional tax of $119 per $100k invested, part of which would be offset by the foreign tax paid by the fund (can't find how much that is).

Hmmm... I guess I could call that 0.119% international insurance?  I'm not entirely convinced.  What do you think?

p.s. Presumably that 0.119% excess tax would be irrelevant when I retire and am in the lower brackets, so I can take it as a tax on being employed ;-).

Generally it is better to hold international funds in a taxable account, as you can't claim the foreign tax credit for tax paid if held in a 401k/IRA.

The foreign tax paid on distributions last year was about 6.5%

Holding in taxable has downsides from the nonqualified dividends, even if you aren't working. It reduces dollar for dollar the amount we can Roth convert tax free, for example.

That 28% tax rate is now 24% (or maybe even 22%.)

The tax challenge you have with rebalancing happens any time you decide to change asset allocation. It's one of the main reasons to pick an allocation and stick with it.

Using new funds is a good way to change allocation over time. You can also do it in phases post-retirement when you have some 0% capital gain space to work with.

George Rivers:
6.5% foreign tax paid?  We have a deal!

For 100k of the Vanguard International Index Fund, the dividends paid are $2700.  6.5% of that is a $175 credit, which more than offsets the excess tax paid at a marginal rate of 24% ($2700 * 34% * (24% - 15%) = $82).

I'm convinced.  Thanks a bunch!

What I'll do is shuffle my tax advantaged accounts to get what I can now, and use new funds to slowly build up my international stash in my taxable account.  Then, when I retire, I can slowly rebalance taking advantage of 0% capital gains.

Sweet.  Thanks again.


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