Make your own simple hands-off investment with limited funds available?

[ExpatBill]

I'm new to investing, and I have limited funds available to invest, but i'd like to get started as I've been putting it off / analyzing for ages and that's costing me money.

Since I don't have a lot of time/money available, something like Betterment would be perfect, unfortunately I'm an ex-pat living in Japan and so things like that are unavailable to me. In-fact my options are pretty limited as I can't open accounts in many places in the UK. I have some money sitting in UK current accounts and a cash ISA, but these days the interest rates are terrible and the ISA is no longer tax free for me. I'm 41.

After doing some research, it seems to me that the best option would be something like this:
- Open an account at one of the 2/3 low cost traders that accepts non-uk-residents. (I'm leaning towards Degiro for ease)
- Buy general ETF funds something like Vanguard Total Market, S&P 500 or similar. 80% ish?
- Buy general Bond ETFs similar to the above. 20% ish?
- Basically set and forget, but pay in small amounts as regularly as possible.
- Maybe once a year rebalance to 80/20?

Does that sound reasonable? Would it lead to relatively similar results? Is it doing/missing anything dumb?
It'd miss out on some of the things like tax-loss-harvesting, which I half understand, but oh well.

I must admit to being a bit confused about tax and currencies.
As I kinda understand it, buying ETFs managed in Ireland, but listed on the UK stock market would mean avoiding UK tax issues (cos Ireland) and maybe avoiding currency exchange fees (cos UK market = denominated in GBP?)
(I'd still end up paying tax on it here in Japan, but AFAIK that's almost unavoidable, so we'll forget that).

My gut still tells me that investing in ETFs in other markets/currencies (eg: the US) would carry a risk due to currency fluctuations, but I've been told it's not really something to worry about.

Does anyone have any general thoughts on whether it'd be best to focus on Global Markets, UK Markets, Japanese Markets or something in the US like the S&P 500? (As a beginner, most of the funds I've heard/read about online seem to be US based, but that may be because most of the blogs are too).
I don't know where I'll end up living/retiring in the future, so I kind of want to hedge my bets.

Thanks in advance!

[todthedog]

While in Sweden I used Degiro with no issues.

One fund Vanguard Life Strategy at what ever ratio of bonds to funds that fits your risk profile.

2 fund
VWRL global equity
Vanguard Global bond index (hedged gbp)

Either way simple and cheap.

[Alaric]

As I kinda understand it, buying ETFs managed in Ireland, but listed on the UK stock market would mean avoiding UK tax issues (cos Ireland) and maybe avoiding currency exchange fees (cos UK market = denominated in GBP?)

That UK ETFs are based in Dublin is possibly an historic accident. The original motivation would have been to avoid UK Stamp Duty, but that's the only relevant UK tax and I believe that has now been abolished for ETFs. There's no UK withholding tax on dividends or gains, so it's only your local taxation in Japan.

If you buy ETFs which track US markets, wherever they are based, US withholding tax will become an issue. I don't know whether non-US residents can reduce this on ETFs with the appropriate paperwork, as they can with individual shares.

[TedSwippet]

As I kinda understand it, buying ETFs managed in Ireland, but listed on the UK stock market would mean avoiding UK tax issues (cos Ireland) and maybe avoiding currency exchange fees (cos UK market = denominated in GBP?)

If you buy ETFs which track US markets, wherever they are based, US withholding tax will become an issue. I don't know whether non-US residents can reduce this on ETFs with the appropriate paperwork, as they can with individual shares.

Yes and no. And yes, they can.

If a non-US investor buys VUSD, Vanguard's Ireland domiciled S&P500 tracker ETF, they don't have to tangle with US withholding tax at all. The ETF will internally pay US dividend withholding tax, and pay all the remainder to the investor with no other tax interference. The US's standard dividend withholding rate is 30%, but the ETF will pay the US/Ireland treaty rate of 15%. That gives investors in countries without a US tax treaty a bit of a leg-up, since by using this ETF they get to use a treaty anyway. Because VUSD is not 'US situs', no issue with US estate taxes either.

If a non-US investor buys VOO, Vanguard's US domiciled S&P500 tracker ETF, then they have to tangle with US withholding tax. The ETF pays no US tax internally, but the broker will withhold 30% to the US on all dividends paid by the ETF. If the investor's country has a tax treaty, filing a W-8BEN form with the broker will reduce this to the applicable treaty rate. Investors in countries that lack a US estate tax treaty also risk losing up to 40% of everything above a stingy $60,000 allowance to US estate tax. Only 15 countries have US estate tax treaties.

Most US tax treaties have a 15% dividend tax rate. A few have a 25%, and a few 10%. Japan is one of those with a 10% rate, and it also has a US estate tax treaty that would protect assets up to $11MM from US estate tax. So for a Japanese investor, holding US domiciled ETFs is actually the route with the least tax-drag on investment return. Japan is actually a unique case, being the only country on the planet to have both a US dividend tax treaty rate that undercuts Ireland's and a usable US estate tax treaty.

That said, if there are any plans to move out of Japan in future, holding UCITS ETFs such as VUSD and VWRL (Ireland domiciled all-world tracker ETF) could make sense anyway. Or just if it's simpler overall. The 5% tax saving on US dividends is useful but not life-changing, not least because that drops to a 3% benefit on VWRL since 40% of that is non-US. 3% of a 2% dividend equates to an added 0.06% annual drag on investments overall if using VWRL over VT (US domiciled all-world tracker ETF). Check into Japanese tax law to understand the circumstances under which dividend tax paid to another country can be credited against local tax. That might colour the decision further.

As for brokers, consider Interactive Brokers, these people are good for international investors and multiple currencies. Also maybe Saxo or Internaxx. Buying US domiciled ETFs will mean you need access to US exchanges. Note that an EU regulation known as PRIIPs has effectively made US domiciled ETFs un-purchasable for EU residents.

TL;DR -- The OP's plan looks solid enough to me and two-fund is entirely possible, simple and cheap. Feel free to select US domiciled ETFs rather than the UCITS ones we generally use in the UK if they make sense for your personal situation.

[tjh290633]

At 41 I would forget about bonds. With low interest rates there is a lot of potential to lose capital for not much income.

My choice would be one of the global investment trusts, F&C, Witan or Alliance. They have long records of beating the indices and of dividends which outpace inflation. With trackers you can only expect to underperform the market, because of fees and costs.

TJH

[DrBunsenHoneydew]

Perhaps ExpatBill is using Bonds not for their income but as part of an Optimal Risk Portfolio (where the Sharpe Ratio Capital Allocation Line tangents onto the Efficient Frontier).

[Hariseldon58]

I would suggest the important thing is doing something, the exact details are no where near as important as doing something !

Low costs are very important, with fund management/expenses but any platform costs and any avoidable tax issues. ( perhaps a post on the Ex Pat Investing Board)

TJH's suggestion of a generalist Investment Trust such as F&C Investment Trust would work fine as would an All World Passive ETF eg Vanguard VWRL.

TJHs point about no bonds at age 41 is the viewpoint that I took at that age, it worked out fine ( in hindsight the bonds would have worked well out too...) Bonds will reduce volatility, make you feel better when markets are having a hard time and provide some fire power to buy into depressed equity markets.

I would favour the ETF route rather than the investment trust route, as the performance is around the same, Investment Trust gearing can offset the higher costs but occasionally even good trusts like F&C IT can go off piste.... eg they flirted with Private Equity etc a few years back when it was all the rage, they allowed costs to rise significantly from a very low level at one point, although they seemed to have reversed those trends now.

Its interesting to look back at the decisions that many Investment Trusts took in the late 80's onwards, they took on long term gearing, that some still have now , decades later at double digit rates of interest, assuming that they could continue to generate larger gains for decades to come, that was overconfidence and dumb and the chickens came home to roost. The passive ETF will not make those calls.

[ExpatBill]

Thanks everyone. This was all very useful info. I'll see what I can set up and pop back with questions if I run into any issues.

[tikunetih]

I'm new to investing

With no prior investment experience, how do you think you'll feel (and I mean this in the literal sense, as in your emotional state) when you see your new investment pot fall by 10%? Or 20%? Or 35? Or 50%?

Will you sleep soundly at night, happy to be given the chance to invest new money at lower prices, or will you be deeply worried, wishing you'd kept it all in cash, and tempted to bale out to protect what you have?

It's very hard to know these things in advance but it's something you need to get a handle on.

It's normal for big falls in the value of your investments to feel uncomfortable. Over time, as investment experience is gained, it's common to become progressively desensitized to this and be somewhat sanguine (or even excited if you're unusually/fortuitously wired), but in the earlier years you will probably not feel that way.

It's important that you do not expose yourself to more volatility than you'll be able to cope with. As mentioned, with no prior experience you won't know your tolerance, so it's tricky. The worst consequence of overestimating your volatility tolerance is that you sell out during or following very steep market falls, causing a large and permanent destruction of your capital that you can't recover from due to your limited working life remaining, putting you off investing ever again after "having your fingers burned", and impacting you financially for the rest of your life. This happens to plenty of people and you really want to ensure you're not one of them.

Due to the asymmetric consequences, it's far better to underestimate your volatility tolerance than overestimate it. Underestimating it means you would likely (but not certain to) achieve lower investment returns than you might have achieved, but that's something that can be tweaked as you go along and gain more experience.

Think about this very carefully.

There are very few new investors, starting out in their 40s, for whom a high risk 100% equity portfolio would be appropriate.

[tjh290633]

There are very few new investors, starting out in their 40s, for whom a high risk 100% equity portfolio would be appropriate.

It's the only way they will learn. When you have been through a few bear markets, you become immune to the rises and falls. You soon learn that each time there is a fall in the market it is followed by a recovery. That doesn't mean that they should have every thing in an equity portfolio. They must have a cash reserve fund as well. They can reduce the risk with collective investments, if they wish.

And yes. I know all about the peak in 1999 from which it took 18 years to recover. That shows the uselessness of index tracker funds. A better diversified portfolio recovered very quickly, as my own record shows:

Year to      Unit Value   Div/Unit
21-Apr-87          1.00       0.00
05-Apr-88          0.92       2.87
05-Apr-89          1.19       2.75
05-Apr-90          1.24       4.33
05-Apr-91          1.42       5.75
05-Apr-92          1.38       7.97
05-Apr-93          1.60       7.33
05-Apr-94          1.81       6.65
05-Apr-95          1.75       7.93
05-Apr-96          2.07       7.81
05-Apr-97          2.29       8.90
05-Apr-98          3.48      10.52
05-Apr-99          3.62       8.91
05-Apr-00          3.51      11.96
05-Apr-01          3.48      13.15
05-Apr-02          3.57      13.82
05-Apr-03          2.45      12.95
05-Apr-04          3.14      14.37
05-Apr-05          3.72      14.02
05-Apr-06          4.62      18.70
05-Apr-07          5.27      20.84
05-Apr-08          4.44      26.09
05-Apr-09          2.45      22.76
05-Apr-10          3.94      11.91
05-Apr-11          4.61      16.71
05-Apr-12          4.74      19.09
05-Apr-13          5.27      22.91
05-Apr-14          5.61      24.19
05-Apr-15          6.21      26.23
05-Apr-16          5.92      23.81
05-Apr-17          6.62      26.21
05-Apr-18          6.12      33.19
05-Apr-19          6.35      31.25

Unit value is in GBP, dividend per unit is in GBp. Note the two minima in 2003 and 2009 and the performance of the dividend per unit.

TJH

[tikunetih]

I know that you mean well, but nonetheless some of your advice is poor IMO.

Sensible investing for individuals is rarely about achieving maximum returns; instead it's about meeting personal financial goals with the minimum of risk.

One of - if the not the - primary risks for novice investors is themselves: the possibility for them to make poor decisions that severely impact returns. One of the poorest but most common mistakes is to buy high and sell low.

Large falls in markets, which occur periodically and are "guaranteed" to come along during any reasonable investment time horizon, are one of the most dangerous times for novices. At those times plenty of investors become fearful and wish to sell; it's the severe imbalance between those investors desiring to sell and those desiring to buy which causes those dramatic price falls. Price discovery 101. Novice investors with limited prior experience are often to be found near the front of the queues of those desiring to sell. Plenty do, with their tail between their legs, only they tend not to hang out on investment forums sharing their experiences...

This site has a good number of successful very long term investors, each with decades of experience under their belts, each having lived through many significant market falls and bear markets and come through the other side, wealthier, more psychologically resilient and more experienced as a result. The survivorship bias of posters here is immense, and not acknowledging this is an error.

It is a mistake, therefore, to say to novice investors: "this worked for me and should work for you". The advice may well contain a good amount of wisdom, but coupled with poor advice.

They are not "you" and they are not me: they may well not have the same fortitude to hold through a 25-50% drawdown in their investment pot; plenty of investors don't and sell low during panicky periods, causing a permanent loss of capital. For someone only commencing investing in their 40s, with limited future earnings compared to someone in their 20s, this may well be a mistake that it's impossible for them to ever financially recover from. This very real risk needs acknowledging and addressing.

I've read the thread on the pleasing returns from Scottish Mortgage over 35 years. My track record spans "only" 25 years, but the returns exceed those of SMT over that period. Despite that, I don't spend any time suggesting to other investors - particularly those setting out for the first time - that they "do as I did", despite what I did working out so well for me personally. They are not me, nor will the opportunity set available to them in the future be anything like that available to me in the past.

Instead, I try to suggest they do the most "sensible" thing: take a pragmatic approach which maximises their likelihood of investment success; maximises their chances of meeting their long term financial goals, while minimising their chances of experiencing really bad outcomes. Hence I repeat, there are very few new investors, starting out in their 40s, for whom a high risk 100% equity portfolio would be appropriate.

[hiriskpaul]

I'm new to investing, and I have limited funds available to invest, but i'd like to get started as I've been putting it off / analyzing for ages and that's costing me money.

Since I don't have a lot of time/money available, something like Betterment would be perfect, unfortunately I'm an ex-pat living in Japan and so things like that are unavailable to me. In-fact my options are pretty limited as I can't open accounts in many places in the UK. I have some money sitting in UK current accounts and a cash ISA, but these days the interest rates are terrible and the ISA is no longer tax free for me. I'm 41.

After doing some research, it seems to me that the best option would be something like this:
- Open an account at one of the 2/3 low cost traders that accepts non-uk-residents. (I'm leaning towards Degiro for ease)
- Buy general ETF funds something like Vanguard Total Market, S&P 500 or similar. 80% ish?
- Buy general Bond ETFs similar to the above. 20% ish?
- Basically set and forget, but pay in small amounts as regularly as possible.
- Maybe once a year rebalance to 80/20?

Does that sound reasonable? Would it lead to relatively similar results? Is it doing/missing anything dumb?
It'd miss out on some of the things like tax-loss-harvesting, which I half understand, but oh well.

I must admit to being a bit confused about tax and currencies.
As I kinda understand it, buying ETFs managed in Ireland, but listed on the UK stock market would mean avoiding UK tax issues (cos Ireland) and maybe avoiding currency exchange fees (cos UK market = denominated in GBP?)
(I'd still end up paying tax on it here in Japan, but AFAIK that's almost unavoidable, so we'll forget that).

My gut still tells me that investing in ETFs in other markets/currencies (eg: the US) would carry a risk due to currency fluctuations, but I've been told it's not really something to worry about.

Does anyone have any general thoughts on whether it'd be best to focus on Global Markets, UK Markets, Japanese Markets or something in the US like the S&P 500? (As a beginner, most of the funds I've heard/read about online seem to be US based, but that may be because most of the blogs are too).
I don't know where I'll end up living/retiring in the future, so I kind of want to hedge my bets.

Thanks in advance!

I agree with everything tikunetih has said, so will not repeat any of that. On the how to invest aspect, i would have thought you would be best to invest in a NISA with a Japanese broker. Why are you not going down that route?

If not using a NISA, you need to properly consider all the tax considerations before choosing where to invest. For example, if investing in say a US listed S&P 500 fund, it is my understanding* that you will only pay a 10% dividend withholding tax due to the Japan/US tax treaty and that 10% tax can be used to offset your Japanese income tax. OTOH, if you invested in an Irish domiciled S&P 500 ETF, the fund itself would lose 15% tax and you would still be liable to the full Japanese income tax. Don't let the tax tail wag the dog, but don't ignore taxes completely either.

Don't worry too much about the currency aspects if investing globally in ETFs or tracker funds. Once invested, it does not matter whether the funds you buy are denominated in Dollars, pounds, euros, Yen, etc. The only area in which you may experience some additional charges is if dividends are paid to you in a different currency to your investment currency. In this case you will typically have to pay a fee to convert dividends to the correct currency for reinvestment. The fee may be hidden, but you will still pay it somewhere!

Unless you have some particular reason to allocate differently, eg you are very bullish about Japanese shares or you have exposure to something via a pension scheme, you are better off remaining market neutral and sticking to a global fund, or a set of funds weighted according to the global market.

For the bond allocation, as you don't know where you may eventually settle, again stick with an unhedged highly diversified global bond fund.

A single global equities ETF and single global bond ETF would definitely be a good place to start and could well be all you ever need. Annual rebalancing is fine, but only rebalance if the cost to rebalance (fees and taxes) is immaterial, otherwise just direct savings and dividends to whichever fund is underweight.

* please don't take my word about Japanese taxes, I have very limited knowledge! Definitely do your own research.

[SalvorHardin]

One of - if the not the - primary risks for novice investors is themselves: the possibility for them to make poor decisions that severely impact returns. One of the poorest but most common mistakes is to buy high and sell low.

Large falls in markets, which occur periodically and are "guaranteed" to come along during any reasonable investment time horizon, are one of the most dangerous times for novices. At those times plenty of investors become fearful and wish to sell; it's the severe imbalance between those investors desiring to sell and those desiring to buy which causes those dramatic price falls. Price discovery 101. Novice investors with limited prior experience are often to be found near the front of the queues of those desiring to sell. Plenty do, with their tail between their legs, only they tend not to hang out on investment forums sharing their experiences...

This site has a good number of successful very long term investors, each with decades of experience under their belts, each having lived through many significant market falls and bear markets and come through the other side, wealthier, more psychologically resilient and more experienced as a result. The survivorship bias of posters here is immense, and not acknowledging this is an error.

Exactly. There is a lot of survivorship bias on TLF, reinforced by many investors dropping out with the switch from TMF. Lots of us on here are the grizzled old timers who've been there, done it and got the T-shirt

Most new investors don't realise how much actual losses can hurt until they've experienced losing real money. Over many years of investing I've seen quite a few newcomers to the market start out by saying that they aren't bothered by losses, only to metaphorically wet themselves and sell up for good when their shares fall by a mere 5%. To me a 5% loss is little more than market noise.

I made enough on the stockmarket to retire at a young age by following two very different strategies. The one that I consider to be suitable for all investors at all times (unless they require a high income today) is to follow Warren Buffett's "economic moat" criteria. Buy shares in businesses with intrinsic advantages (e.g. very strong brands, patents, network effects) which prevent their products from being commoditised. Then combine this with long term buy and hold (but watch carefully for moats failing).

https://www.investopedia.com/ask/answer ... icmoat.asp

The second was small oil explorer shares during the period from 2000-2007. At the time the market had seriously underpriced an entire sector for several years (especially those companies with reserves in the ground) and was very negative at the time about the future outlook. Meanwhile economic growth in the newly industrialised nations clearly meant that the global demand for oil was going to rise. That was a strategy which worked very well then, but which required nerves of steel and the ability to take big losses with barely a raised eyebrow. Many investors who were on TMF know the name "Soco International", which funded quite a few early retirements, very well.

But I wouldn't follow this strategy today (very different economic and political conditions nowadays). I sold my last oil share in 2017, having mostly been out of the sector since 2009). I was pretty much scared out of the sector by the massive losses incurred in 2008; switching the proceeds into my "moated" shares has worked well since then.

[Lootman]

This site has a good number of successful very long term investors, each with decades of experience under their belts, each having lived through many significant market falls and bear markets and come through the other side, wealthier, more psychologically resilient and more experienced as a result. The survivorship bias of posters here is immense, and not acknowledging this is an error. Lots of us on here are the grizzled old timers who've been there, done it and got the T-shirt

There is a lot of survivorship bias on TLF, reinforced by many investors dropping out with the switch from TMF.

I will second this. There were those on TMF who promoted themselves, like Pyad/Bland and Luniversal. Usually with some variation of "buy the share with the biggest yield".

Then there were the folks who really knew their stuff. And many of them did not make it over to TLF. To name a few, Courant, Speso, Terrapin. Where are they now?

I actually do not recall you from that place but your head is totally screwed on on these topics.

[SalvorHardin]

I will second this. There were those on TMF who promoted themselves, like Pyad/Bland and Luniversal. Usually with some variation of "buy the share with the biggest yield".

Then there were the folks who really knew their stuff. And many of them did not make it over to TLF. To name a few, Courant, Speso, Terrapin. Where are they now?

I actually do not recall you from that place but your head is totally screwed on on these topics.

Yes. Buy the biggest yield or buy this back-tested strategy did get a lot of promotion.

I didn't post that much (roughly 3,000 posts in eighteen years). I've always been busier on TMF USA and later Seeking Alpha. For a few years I stopped posting as I was occasionally writing for TMF USA and TMF UK (I adopted a different user name back then).

Roughly 50% of my posts were on LoST and most of my investment posts were on the oil and gas boards (especially Soco), Bert's and the value shares board. My peak was in the early 2000s when we oily investors were pointing out how wrong the NAVs of small oils were, only to be called heretics in a similar manner to how HYP disputes often end up here).

I'm the person whose lengthy post on Dragon Oil at 12p (it peaked at 740p six years later) got pulled because it offended the priesthood who took issue with my NAV calculations (I ignored the accounts and instead valued the oil in the ground based on recent trade sales of similar oilfields). Their loss

I also cut my posting quite drastically, as did quite a few others, after several jealous posters (with the help of some who should have known better) drove emptyend and a few of the oil investors from TMF.

Quite a lot of the oily investors, notably emptyend, ended up on ADVFN. Stockopedia is popular with many because paulypilot moved there.

[LooseCannon101]

F&C Investment Trust (FCIT) has been mentioned. I have been investing in this trust for over 20 years through thick and thin, buying monthly and re-investing dividends. Their savings plan is excellent and cheap, though I am not sure it is available for ex-pats.

Returns have averaged 8.5% per annum with dividends re-invested. It has not been a smooth ride, with many bumps along the way which occur at unexpected times. £10k invested at the start is now worth over £50k.

IMHO, investing in a world equity fund, like FCIT, is best carried out in a boring, robotic manner especially for those with many years until retirement. Cash is also important as an insurance policy so that one is never a forced seller.

[ExpatBill]

On the how to invest aspect, i would have thought you would be best to invest in a NISA with a Japanese broker. Why are you not going down that route?

If not using a NISA, you need to properly consider all the tax considerations before choosing where to invest. For example, if investing in say a US listed S&P 500 fund, it is my understanding* that you will only pay a 10% dividend withholding tax due to the Japan/US tax treaty and that 10% tax can be used to offset your Japanese income tax. OTOH, if you invested in an Irish domiciled S&P 500 ETF, the fund itself would lose 15% tax and you would still be liable to the full Japanese income tax. Don't let the tax tail wag the dog, but don't ignore taxes completely either.

Don't worry too much about the currency aspects if investing globally in ETFs or tracker funds...

Unless you have some particular reason to allocate differently, eg you are very bullish about Japanese shares or you have exposure to something via a pension scheme, you are better off remaining market neutral and sticking to a global fund, or a set of funds weighted according to the global market.

For the bond allocation, as you don't know where you may eventually settle, again stick with an unhedged highly diversified global bond fund.

A single global equities ETF and single global bond ETF would definitely be a good place to start and could well be all you ever need. Annual rebalancing is fine, but only rebalance if the cost to rebalance (fees and taxes) is immaterial, otherwise just direct savings and dividends to whichever fund is underweight.

I'm looking into a NISA, but the language issue, plus the fact that most of my current savings are in the UK, makes the UK/EU option much simpler at least. I may well look into opening a NISA at some point as well, but it seemed much simpler to just get started with something I can do right away.

Thanks for the info about currencies, global markets and bonds/balancing. That's all kind of what I was thinking, but it's good to have it confirmed.

[77ss]

F&C Investment Trust (FCIT) has been mentioned. I have been investing in this trust for over 20 years through thick and thin, buying monthly and re-investing dividends. Their savings plan is excellent and cheap, though I am not sure it is available for ex-pats.

Returns have averaged 8.5% per annum with dividends re-invested. It has not been a smooth ride, with many bumps along the way which occur at unexpected times. £10k invested at the start is now worth over £50k.....

I would echo this. Bought in 1994-1996 as part of my early pension planning. My first active investment.

£10K is now worth £60K (with dividends reinvested until 2015). Solid stuff.