Author Topic: international stock exposure for a semi-nomadic American  (Read 5280 times)

George Rivers

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international stock exposure for a semi-nomadic American
« on: April 16, 2018, 11:21:40 AM »
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!

gocurrycracker

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Re: international stock exposure for a semi-nomadic American
« Reply #1 on: April 17, 2018, 08:10:35 AM »
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.)
https://www.bogleheads.org/forum/viewtopic.php?f=10&t=161722&newpost=2785900

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

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Re: international stock exposure for a semi-nomadic American
« Reply #2 on: April 18, 2018, 12:33:24 AM »
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 ;-).

gocurrycracker

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Re: international stock exposure for a semi-nomadic American
« Reply #3 on: April 18, 2018, 10:39:17 PM »
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%
https://advisors.vanguard.com/VGApp/iip/advisor/csa/investments/taxcenter/articles?file=TaxTotalIntlStockFund2017

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%.)
https://www.gocurrycracker.com/tax-reform-early-retiree/

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

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Re: international stock exposure for a semi-nomadic American
« Reply #4 on: April 18, 2018, 11:31:25 PM »
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.

George Rivers

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Re: international stock exposure for a semi-nomadic American
« Reply #5 on: April 19, 2018, 11:00:23 AM »
Hmmm... I'm still swirling this around in my head-- old habits die hard.  Let me take the contrarian position for a second-- mostly because I'm trying to convince myself :).

I just read Vanguard's take on international exposure:
https://personal.vanguard.com/pdf/icriecr.pdf

If I understand correctly, the sweet spot is around 30-40% (75 basis points), but likely 30% because it captures 84% of the maximum benefit (63 basis points) without incurring higher expense ratios, etc.  That *sounds* like a lot but 63 basis points is 0.63% or 0.0063 in less volatility.  Unless I'm misreading something, 0.63% sounds like a fart in the grand scheme of things.  For a 1M portfolio that's $6,300.  I think we can do better by relocating to Thailand for that year ;-).

Also, although I'm interested in currency risk, the truth is that an international index has exposure to many currencies which all act independently.  So if I'm living in Vietnam and inflation flares up as you mentioned, the likelihood that the international index has a significant exposure to the Vietnamese Dong to make my 25% international stocks make a difference is slim.  And I'm not just picking on the Dong, Europe can't fare that much better if my actual portfolio has 25% of my 90% of stocks (22.5%).  How much of that actual 22% is hedging the dollar against the euro?  Will it make any measurable difference?

Ughhh... I think I've just sunk enough time into this that I can no longer say I'm passively investing :-/.  This definitely takes more time than my previous approach of 2 funds, go to sleep.

I'm not entirely convinced either way, but I think that as you have said, ultimately the best hedge is being flexible and having a low withdrawal rate.  Being able to move and spend less is likely to benefit us far more than 63 basis points.  In the meantime I'm doing some minor rebalancing in my tax advantaged accounts-- as I said, not convinced either way :).

p.s. I'm anxiously awaiting your international investing blog post.  I'm sure it'll blow my mind.

gocurrycracker

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Re: international stock exposure for a semi-nomadic American
« Reply #6 on: April 19, 2018, 08:37:01 PM »

If I understand correctly, the sweet spot is around 30-40% (75 basis points), but likely 30% because it captures 84% of the maximum benefit (63 basis points) without incurring higher expense ratios, etc. 

Assuming there is a sweet spot. The ideal allocation will vary depending on when you pick your starting and end dates for the analysis. This analysis is also from the perspective of somebody living and spending in USD.

True, the international stock fund is in many currencies. If the Euro is your future, you probably want more of a Euro centric fund, e.g. VGK, or a combination.

To quote my younger self:
But how much? And what is the best way to do that? I dunno.

Often times people make this currency commitment through real estate, e.g. buying a house. Or purchasing an annuity hedged for a specific currency. Or as we have been discussing, holding other assets (stocks, bonds) in the target currency.

But there is also location flexibility. If you are committed to life in Spain (for example) with family, kids in school, long term housing, etc... then you might make a stronger commitment than if you are ready to up and move to Vietnam if the Euro gets too expensive for awhile.

In our case, although we have essentially setup Taiwan as a home base, I have no intention of moving funds into TWD or transferring assets here. If things go crazy we'll leave.

re: passive investing
If you were following the index approach philosophy in it's purity, you would hold all assets at market weight. So you would hold roughly 50% of equities as International. It's possible to passively have home bias or passively have poor asset allocation.


re: our asset allocation
I think I pulled the 75/25 target for our US/Intl equities from this chart (or related)
https://www.bogleheads.org/wiki/File:US-International.png#filehistory

George Rivers

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Re: international stock exposure for a semi-nomadic American
« Reply #7 on: April 19, 2018, 11:53:09 PM »
Dude, pure gold, pure gold!  I'm loving all this awesome advice.

I've migrated what I could in my tax advantaged accounts, and will use upcoming funds to reach an allocation of 20-25% over the next year or so.

Thanks so much for the feedback.