The Lemon Fool

Hi all

I moving from a legacy set of OEIC and other bits n pieces.
I am 56 and probably won't draw anything for a 2-3 years.
Have a small final salary too.

Thinking of going total return based on 75% equity and rest in cash/bonds/maybe other diversifiers.
Have decided to go for small home bias and a Hale type value and small tilt. Trying to balance flexibilty with not getting over complicated.
That said my old advised porfolio I'm moving from has 22 ish lines.
What do you think of this allocation:

UK 23.00%
USA 13.00%
EM 10.00%
Europe -ex UK 10.00%
APAC 4.00%
Japan 5.00%
Global Value 5.00%
Global small 5.00%

Was thinking of china line but figure now in EM so not sure if it's worth doing a seperate line for a very small %

Any thoughts very welcome.

Goal is an SWR of around 3.5% which I can be flexibile with in bad years etc.

If you want simple I would go for core plus tilts - so for your equity allocation 90% VWRL plus 5% global small and 5% global value (what ETFs have you found covering those classes?)
What are you going to use for the other 25%?

thanks for your response.

The small and value I was looking at are as follows:

ishare MSCI World Small Cap UCITS ETF USD WSML
Vanguard Value VVAL

I was considering the one stop shop core. My only slight resistance to it is that I feel I should keep some home bias which of course that doesn't have.
I suppose I could work out how much home bias simply buy an all share or perhaps a UK income ETF for the added exposure.

Other 25% - I am thinking a mix of govt bonds and cash. I might also go for some commercial property. I am already quite exposed to "real" UK property.

Personally I’d avoid country / area specific funds and go for a global track plus your UK and other tilts.

global tracker could be ex-UK or including UK and just take that into account when sizing your additional UK tilt.

Advantages of less funds in portfolio:
- simpler
- less trading costs required to setup and (if relevant) rebalance

Disadvantages:
- likely marginally higher ongoing costs
- harder to distribute funds across suppliers (if you think that is important to mitigate the risk of a supplier crashing / stalling).

Hope that helps,

SDN

Thank you that's helpful.
My only other thought/reservation of just going global is that I was as you will see from the allocation suggestions going to underweight the US so wasn't sure how I could achieve that given that as I understand apart from the ex UK etc most of the globals will be market cap

Why do you want any home bias? e.g. is it on valuation grounds?

thedukewood wrote:Thank you that's helpful.
My only other thought/reservation of just going global is that I was as you will see from the allocation suggestions going to underweight the US so wasn't sure how I could achieve that given that as I understand apart from the ex UK etc most of the globals will be market cap

I’m sorry, I missed that, in that case your setup makes sense to me. Personally I’m not confident enough to weigh any geographic region other than the UK (in the belief that will shelter me from some currency risk).

SDN

Thanks all

Home bias was really from legacy advised portfolio and a combination of currency risk not wanted to be over exposed to US

Im tyding up 20+ years of stuff into 3 ETF's

Part of the prompt is the foolish plan to migrate to the USA. Taxation in the USA is horrendous.

Last I read/saw USA was 41% of global cap weighting in stocks. So the plan is 60/40 International/US dividend stocks for income.
With a little in cash for spending/emergencies and a little left from selling the house in a broad global ETF for balanced growth/income.

Ive had very good results from some stocks, Fundsmith will also be sorely missed. If I was staying Id probably roll some more into there.

But to support what others have said, I think as globally diversified as you can go is the way to go. Avoid home bias. If you want to reduce US exposure, just up the international.. Im tending towards 66/34 myself for valuation reasons.

runnygum wrote:Part of the prompt is the foolish plan to migrate to the USA. Taxation in the USA is horrendous.

Can you describe why you think that? It certainly can be the equivalent to UK taxation if you are in a high tax State like NY, CT, MA, IL or CA. But on the other hand there are States with no state income tax (and also with no state sales tax) and as a retiree there you would presumably be able to choose a low tax state.

Looking at the base and highest rates of tax in the US versus the UK, I'd make the following observations about federal taxes:

Income tax - lower in the US
VAT - doesn't exist in the US
IHT - same, at 40%, but the nil rate band is much higher
CGT - about the same, swings and roudabouts, but with no annual CGT-free allowance and no indexation
Property/Council taxes - generally higher but a lot more is covered e.g. funds local education, and it is tax-deductible (mostly)
Excise duty - lower in the US (so petrol and wine are much cheaper, for instance)
Airport passenger taxes - lower in the US

runnygum wrote:Im tyding up 20+ years of stuff into 3 ETF's ... Part of the prompt is the foolish plan to migrate to the USA. Taxation in the USA is horrendous.

Which ETFs? Note that once you become a US resident, holding any non-US domiciled funds or ETFs is a usurious living nightmare, one that can over time consume 100% of your gains in US tax:

Why Americans Should Never Own Shares in a Non-US Mutual Fund (PFIC)

All the normal UCITS ETFs you might hold here in the UK will be PFICs. And you will have trouble buying US domiciled ETFs before you become a US resident due to EU PRIIPs rules. Transfer everything to your US accounts as cash when you go, and invest it once you get there. Anything else will leave you envying the dead come 'tax season'. The US tax system detests anything foreign.

Lootman wrote:

runnygum wrote:Part of the prompt is the foolish plan to migrate to the USA. Taxation in the USA is horrendous.

Can you describe why you think that?

I know you didn't ask me(!), but if you had my answer would be a) the PFIC nonsense alluded to above, b) outrageous penalties for simple paperwork foot-faults such as forgetting to include some 'information-only' form, and c) general complexity. While I lived there, my annual US tax returns regularly reached 100 pages. Much of this was down to having to include a bunch of non-US stuff in ridiculous and minute detail (and in places repeated multiple times too, because 'why ask for information once when two or three times will do' is the IRS's motto).

Living in CA was just tax return insult added to federal return injury. Add in quarterly estimated tax and separate foreign account reporting, and one UK return, and you find yourself doing ten tax-return-like things every year. It never seemed to end, largely because it did never end!

Also, the IRS can dog you like a jilted lover even after you leave. It is now almost exactly eleven years since I departed the US and ditched the green card, and still I have to correspond with them annually. On the plus side, my US tax return is now a mere dozen or so pages, and invariably ends with a big fat zero, so purely a waste of time and effort for both them and me. Has to be done though, otherwise multiple $10k fines for non-filing.

Yes correct, the Byzantian filing requirements, the global citizen-based taxation, the Alternative Minimum tax, the capital gains short term vs long term, no tax-advantaged accounts available if you have no PAYE income, etc, etc.

Strange if you formally gave up your green card following IRS requirements Form 8854? There is also I-407 that does to DHS etc. So yeah total mess.

So the 3x ETF are VYMI, VYM and VT all US reporting/domiciled.

Roughly equivalent to VHYL and VWRL in the UK.

You want US reporting stuff so your dividends are taxed at long term capital gains rates. This also applies to normal listed stocks on countries covered by tax treaties. So holding normal stocks is fine, but no trusts, funds or etf's etc.
Its just easier to hold US ETF's. Otherwise you have to fill in more FBAR forms to report more foreign accounts etc, etc. See previous comment re nightmare

So plan is KISS just a few US ETF's = a few lines in the return rather than my current 20 year eclectic collection of stuff.

PFIC is indeed a horror story. Its a separate IRS form per fund, then you get taxed at marginal income tax rates for all gains dividends+gains annually irrespective if you actually received anything! (Assuming mark to market reporting) No adjustment for inflation, currency movements and losses can only be carried to other PFIC's not used elsewhere, plus they are non refundable credits.. etc.