US biased investing literature. What can a non-american investor do?

[johnbroker]

We are trying to figure out the structure of our portfolio and, since I started researching the options, I have found that all the literature is very (too) US centered and I wonder to what point it can apply to us. I am looking for a "simple" not very dynamic portfolio. Of course, the idea of permanent portfolios is very attractive and one of the main options. However, if we go for that , should we follow the so US centered versions or should we redesign them because of our location? Right now, we own zero US and a quite large portfolio.

EDIT: We live in Spain, and are not planning in going anywhere.

[FBeyer]

What is your specific problem with the US-centricity? (I made a word...)
Whenever you read the word Total Stock market think: US stocks and consider the idea of foreign stocks to be anything isn't the US.

Besides that I haven't yet been truly stumped by the US focus. Maybe you're reading within too narrow a field of investing? Are you only reading Bogleheads-like guides?

[johnbroker]

What is your specific problem with the US-centricity? (I made a word...)
Whenever you read the word Total Stock market think: US stocks and consider the idea of foreign stocks to be anything isn't the US.

My question is: The exposure to the US market should be same for us and for an american?

Besides that I haven't yet been truly stumped by the US focus. Maybe you're reading within too narrow a field of investing? Are you only reading Bogleheads-like guides?

I am looking for a simple and non-time consuming portfolio, so yes, I guess that you can say a boglehead approach (o permanent portfolio) could be an option (in an agressive form). Actually, thinking again, it is what I want to set up for a large part of my portfolio. I want to forget about trading in the short-medium term because I do not want to spend time on it (and I use to get obsesed). I have a dividend portfolio (spanish stocks) that I will maintain.

[FBeyer]

What is your specific problem with the US-centricity? (I made a word...)
Whenever you read the word Total Stock market think: US stocks and consider the idea of foreign stocks to be anything isn't the US.

My question is: The exposure to the US market should be same for us and for an american?

It depends... doesn't it?
Living in the US and being invested in the US seems like a bad idea to me. Living in the EU and being invested in the US seems like a better idea, but given the correlation of the stock markets I'm not sure you're very much on the safe side there either. If you lose your job due to a recession, your portfolio might also go down. Being invested in the exact same economy that pays your wages seems to be a bad idea to me. Maybe you're feeling different about it.

Why aren't you looking to build a global portfolio instead of worrying about your actual exposure to the US? It seems to be to be the ultimate in lazy investing. Ignore markets, sectors, and so on, and try to emulate the total global growth over all investable assets.
If the world as a whole keeps trucking along, so does your portfolio... (given you're not drowning in expenses to emulate the world).

[johnbroker]

The weigth of the US market in such global portafolio is still around 41%. Is that adequate for a non american investor? I would be mainly invested in an economy I don't live in, in a currency I dont use... It is clearly the simplest option and one I look up to, but I was looking forward your opinions.

Stated in a different way, would you all operate the way you currently do if you lived in another country?

[IlliniDave]

Perhaps rather than looking at research published in the US by US-based authors, explore research materials written by/for people in similar circumstances to those you are in. If you want to keep it super simple you could go with a total world stock index fund and a total word bond index fund, if there is such a fund, or if there's not, a split proportional split between a US Bond index and an ex-US bond index. Of course that's assuming you want to hold stocks and bonds. The approach would make you essentially market neutral as you'd be invested in basically all markets proportional to their size.

[jacob]

@iDave - +1 to the world indexes and going with an oldschool bond allocation (age based).

This would solve most country specific problems including taking the currently popular (in the US and on pf blogs) TSM+4% mindset and applying it willy-nilly everywhere else. For example, in Spain, it would be more of a 2% rule.

https://retirementresearcher.com/the-sh ... he-4-rule/

[BlueNote]

What's your tax situation? Spanish resident, expat, some weird combo?

The reason I ask is that many counties take a very protectionist stance on the taxation of foreign investments. Pre-tax returns on a world index may look great, and target a larger market for books sales, but try to get an idea of what the post tax returns will be. Moreover there are often major tax advantages to be found in local investments. For example in Canada we have the dividend tax credit, in Australia they do something called "franking" and there are similar arrangements in other countries. These arrangements reduce or avoid double taxation of dividends which comes in handy if you're investing in high dividend stocks and preferred shares where much of the return is from disbursals.

Most of the movement of an unhedged bond fund is going to be due to currency fluctuations. I personally would try to go with a currency hedged world bond fund or a local currency bond fund for my fixed income. I consider currency to be speculative because it doesn't throw off cash flows and can't be valued with a discounted cash flow analysis.

[JohnnyFactor]

If you are talking about the Harry Browne Permanent Portfolio, it can be designed for non-US investors. I have a Canadian version.

Stocks should be sector diversified (Tech, Commodities, Health Care, Financials, etc). In Canada, We are heavily weighted towards Financials and Commodities so it's prudent to expand the stock portion to include the US (and even globally). I split mine into 50% Canadian, 50% Cap-weighted Global. That means it's made up of 45% US and 55% all other countries. This provides lots of diversity across all sectors.

Bonds should be long-term government treasuries (20+ years) from your home country, unless your country has currency risk or you think it might in the near future. If you have confidence in your country honoring their treasury debts and not defaulting, then stay local. Otherwise, go with the TLT ETF on the Nasdaq exchange or a Total Global Bond Fund. Whether you want to hedge the currency is up to you. Keep in mind the US dollar is not just the worlds most popular currency, it's also the worlds reserve currency. That won't be changing soon.

Gold should be physical bullion if possible, but a lot of people choose gold ETFs because it's much easier to deal with. Just remember that you want to avoid party risk as much as possible. Make sure the ETF provider isn't going to run off with your gold or default on their obligations. Google 'MF Global' for an example of what that looks like. If you want near 100% protection of your gold portion, consider opening an account at the Perth Mint in Australia. You buy gold directly from them and it goes straight into their vaults. Your government can't confiscate it without going through the Australian government first. You can also claim the physical gold any time you like.

Cash should be very short term (one year or less) government treasuries or bank deposit certificates. Again, this depends on how much you trust your banks or government to honor their debts to you. If hyper-inflation is a concern, you always have gold to protect you because it's priced in a different currency. Google 'Iceland 2008' to see how that could play out.

Decide how much you want to invest in the Permanent Portfolio and then split it into four pieces (25% each, stocks, bonds, gold, cash). The over-riding theme here is you want to be invested in the country you live in and buy groceries in, unless the economy is very troubled or your investment options are limited.

[johnbroker]

Perhaps rather than looking at research published in the US by US-based authors, explore research materials written by/for people in similar circumstances to those you are in.

I have revised the literature and found nothing that wasnt a translation of the typical ideas and examples based on the american market, Vanguard, etc. I guess that many authors are too lazy too run their own statistics with non-US data and reusing what's done is much easier. And not only that, the results must be much more attractive with the SP500 than with the IBEX35 or Eurostoxx50. The math with the typical net worth accumulation but a 2% SWR is much slower.

[johnbroker]

What's your tax situation? Spanish resident, expat, some weird combo?

The reason I ask is that many counties take a very protectionist stance on the taxation of foreign investments. Pre-tax returns on a world index may look great, and target a larger market for books sales, but try to get an idea of what the post tax returns will be. Moreover there are often major tax advantages to be found in local investments. For example in Canada we have the dividend tax credit, in Australia they do something called "franking" and there are similar arrangements in other countries. These arrangements reduce or avoid double taxation of dividends which comes in handy if you're investing in high dividend stocks and preferred shares where much of the return is from disbursals.

We are spanish citizens/residents. We dont have many tax breaks here. In our area the first 1500€ from dividends are tax-exempt but that's pretty much it. No advantageous retirement plans etc, so I can skip a lot of reading material. I havent faced double taxation yet (I only own spanish stocks) but I am lazy about it because I would lose at least another ~10% to taxes (for US stocks) and havent made up my mind on it yet.

If you are talking about the Harry Browne Permanent Portfolio, it can be designed for non-US investors. I have a Canadian version.

Stocks should be sector diversified (Tech, Commodities, Health Care, Financials, etc). In Canada, We are heavily weighted towards Financials and Commodities so it's prudent to expand the stock portion to include the US (and even globally). I split mine into 50% Canadian, 50% Cap-weighted Global. That means it's made up of 45% US and 55% all other countries. This provides lots of diversity across all sectors.

Regarding stocks you then own more or less 50% Canada, 25% US, 25% rest of the world, right?

Decide how much you want to invest in the Permanent Portfolio and then split it into four pieces (25% each, stocks, bonds, gold, cash). The over-riding theme here is you want to be invested in the country you live in and buy groceries in, unless the economy is very troubled or your investment options are limited.

That over-riding theme is what I suspect is behind all-american portfolios that are "sold" to all of us despite living in different economis. A global portfolio is for an american what your portfolio is for you. I don't think that economy in Spain is more troubled than any other despite the efforts of politicians to bring it down to ashes.

[steveo73]

The weigth of the US market in such global portafolio is still around 41%. Is that adequate for a non american investor? I would be mainly invested in an economy I don't live in, in a currency I dont use... It is clearly the simplest option and one I look up to, but I was looking forward your opinions.

Stated in a different way, would you all operate the way you currently do if you lived in another country?

It's pretty simple to me. The best portfolio is probably and this is an opinion total world index and a bonds/cash position probably in your own currency. You choose your bonds/cash position based on how agressive or not you are.

I don't do this though. I put 50% in my domestic portfolio, 25% international and 25% bonds. I don't think what I do is right but there are tax benefits to having a domestic portfolio in Australia.

I also have old man money and that is on a basis of 90% growth (stocks & other) and 10% income (bonds/cash). The growth component is split evenly between domestic and international.

I honestly think though that there is no need to even worry about US biased investment literature. I don't see the issue.

[steveo73]

Perhaps rather than looking at research published in the US by US-based authors, explore research materials written by/for people in similar circumstances to those you are in.

I have revised the literature and found nothing that wasnt a translation of the typical ideas and examples based on the american market, Vanguard, etc. I guess that many authors are too lazy too run their own statistics with non-US data and reusing what's done is much easier. And not only that, the results must be much more attractive with the SP500 than with the IBEX35 or Eurostoxx50. The math with the typical net worth accumulation but a 2% SWR is much slower.

I honestly don't think it matters. All portfolio theory does is give you solid principles to invest by. You cannot pick what will work in the future. If it was 2% in the past that might mean it will be 10% in the future. Diversify, invest in low cost options, sit back and adjust if required.

[Seppia]

@iDave - +1 to the world indexes and going with an oldschool bond allocation (age based).

This would solve most country specific problems including taking the currently popular (in the US and on pf blogs) TSM+4% mindset and applying it willy-nilly everywhere else. For example, in Spain, it would be more of a 2% rule.

https://retirementresearcher.com/the-sh ... he-4-rule/

I don't know how much this Pfau analisys tells us honestly.
It assumes mutual funds have zero expenses, and no taxation.
On the other hand, it doesn't talk* about dividends, and those are a big part of the picture here in old Europe.
At today's valuation, the vanguard ETF tracking developed Europe has a yearly dividend yield of 3.3%
Altogether, more accurate info could definitely swing the SWR and Safemax percentages by a lot.

*i should say: I can't find any info

[jacob]

@Seppia - See the original paper for more info. Dividends are included in the portfolio (total return) and the safemax, etc. concern the withdrawals from the portfolio. Fees are not included because they could be anything from high (traditional mutual funds, to low, modern index funds, to practically zero, DIY indexing). Taxes are not included for the same reason.

[BlueNote]

I've considered inflation indexed annuities because of the international variability in stock/bond portfolio safe withdrawal rates. However I can't even find an annuity quote that goes below the age of 50. The next best thing would be a portfolio of inflation adjusted government bonds at the longest possible term, but YTM is so low right now that it would require too much principal. I think some people don't think too much about those types of options because they're betting the worst case won't happen to them. I think if you can live happily on 3-4% of principal then it makes sense to lock that down if at all possible. However I can't figure out a way to lock down those types of real returns so the next best things is a diversified portfolio with diversified income streams.

[Seppia]

Thanks Jacob

[johnbroker]

I've considered inflation indexed annuities because of the international variability in stock/bond portfolio safe withdrawal rates. However I can't even find an annuity quote that goes below the age of 50. The next best thing would be a portfolio of inflation adjusted government bonds at the longest possible term, but YTM is so low right now that it would require too much principal. I think some people don't think too much about those types of options because they're betting the worst case won't happen to them. I think if you can live happily on 3-4% of principal then it makes sense to lock that down if at all possible. However I can't figure out a way to lock down those types of real returns so the next best things is a diversified portfolio with diversified income streams.

I totally agree. Also, as it was mentioned somewhere in this forum/blog, I think that an ERE follower can get rid of a good part of the inflation via concious expending.The market basket used for CPI is probably not the one people around here buy...

[Seppia]

I never understood how frugal people think they can magically escape inflation (unless you manage to be completely self sufficient).
You might be able to fight its effects better and more efficiently, but if prices rise say 3% you are paying 3% more for whatever you're buying.

[jacob]

@Seppia - Prices don't rise uniformly for all consumer goods. For example, IIRC, in the US, much of the CPI is driven by quickly rising health care and educational costs. Whereas technology has become a lot cheaper. And so on. YMOYL discusses the impact of inflation in fair detail.