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sanity check first portfolio

Bogleheads • View forum - Investing - Help with Personal Investments - www.bogleheads.org
I made a New Year's resolution to start investing.

Actually, it has been several years in a row since I first made that resolution. This year I discovered Bogleheads and I appreciate the logic and simplicity to the investing philosophy. Since then, I have been trying to educate myself from the wiki and reading list. One thing that is apparent is that there are many pitfalls so I hope some experienced investors can look over my first investment plan and make sure I am on the right track.

As a background I am from the UK, but working overseas. This creates complications but also has benefits. The main issue is restrictions on opening accounts with overseas banks or brokers, which can reduce options. Currency exchanges and international banking is also a hassle. On the other hand, the country I am working in does not tax capital gains and dividends so there are no messing with backdoor doo-dahs. I can live with the trade-off!

Emergency funds: sufficient

Debt: none

Tax filing status: non-US person, only file taxes locally

Tax rate: local taxes have 0% on capital gains and dividends/interest, which is nice

Age: mid-30s

Desired asset allocation: 80% stocks / 20% bonds

Desired international allocation: at global market ratio

General plan is to have a two or three fund portfolio that I can regularly contribute to, but otherwise leave to do its own thing until I am ready to retire. As a non-US person I am looking at using Irish-domiciled ETFs traded on the LSE.

A. Fixed income component

Probably most confusing part for me is choice of bond fund. There are several threads about this, and my takeaway message from that was to choose intermediate term bonds in the currency that the retirement spending will be in. In my case I have no idea where I will be in 5 years, let alone 30, so my thinking had been either:

(i) USD, since that is the largest bond market, is most international currency, has okay yields and and the local currency I earn in has historically tracked it fairly well. Suitable funds could be

(a) iShares US Aggregate Bond UCITS ETF (IUAG/SUAG) (0.25% ER) - tracks Bloomberg Barclays US Aggregate Bond Index, average maturity 7.9 years, or

(b) Vanguard USD Treasury Bond UCITS ETF (VDTY/VUTY) (0.12% ER) - tracks Bloomberg Barclays Global Aggregate US Treasury Float Adjusted Index, average maturity 7.6 years.

(ii) GBP, since it's my native currency and moving back to UK is a default future option. Possible funds are

(a) Vanguard U.K. Gilt UCITS ETF (VGOV) (0.12% ER) - tracks Bloomberg Barclays Sterling Gilt Float Adjusted Index, average maturity 17.5 years.

(b) SPDR Barclays 1-5 Year Gilt UCITS ETF (GLTS) (0.15% ER) tracks Barclays UK Gilt 1-5 Year Index, average maturity 2.98

(c) iShares UK Gilts 0-5yr UCITS ETF (IGLS) (0.2% ER) - tracks FTSE Gilts Up to 5 Yr TR GBP, average maturity 2.55 years

The first seems to have rather a long duration and the other two rather short.

(iii) Go global with a mix of bonds from developed countries. For example

iShares Global Govt Bond UCITS ETF (IGLO/SGLO) (0.20% ER) - tracks Citigroup Group-of-Seven (G7) Index, average maturity 9.6 years.

The global bond fund has a large amount of Japan and Eurozone bonds which have a very low yield and are not relevant to me, so going the USD/GBP route seems more attractive. Since I can not decide between them, is there any reason not to split the allocation between the two? Anything else I might want to consider?

B. Equities component

I can't think of a reason to weight my international allocation other than at global market ratios. This means I can keep things simple with a single fund. I plan on regular rebalancing by purchasing more funds, so I there is not much advantage to an accumulating fund. This distributing fund has been highly recommended:

Vanguard FTSE All-World UCITS (VWRL/VWRD) (0.25% ER) - tracks the FTSE All-World Index.

Something I wonder about is that this fund (as well the bond funds above) have an option to buy in either GBP (VWRL) or USD (VWRD). I've read that the purchase currency should not matter, as the value will reflect the currency of the underlying assets. Buying in GBP has lower transaction fees, so seems like the preferred option.

However, for the underlying assets, about half are from the US, while UK comprises only 6%. This gives the appearance that there is more volatility in the price when denominated in GBP as opposed to USD. Is this anything to be concerned about? Any other recommendations?

C. Cash

When I was living in the UK I contributed to a cash ISA, which is the UK government's tax-free saving account. Each year the banks love to make new kinds of ISA accounts with bonus interest rates, while dropping the rates on the old accounts to almost nothing. It's a way to fleece savers who are not attentive enough to transfer each year. Unfortunately, as a non-resident it is problematic to transfer it; in theory it is allowed, but in practise most banks will not cooperate.

I've been wondering what the best thing to do with this money is. There is no penalty to withdraw, but I will not be able to put it back if I do. However, the interest rate is bad and UK tax-sheltering has no benefit for me right now. On the other hand, if there was somewhere I could invest it usefully while keeping the tax-free status then that could be an advantage if I return to the UK.

Is there something smarter I can do with this ISA money other than withdraw it and invest it elsewhere?

Thanks for working through this long post!


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