# Three Fund Portfolio - Advice Needed



## LingoPhil (22 Aug 2017)

Country of Residence: Ireland
Age: 24
Desired Asset allocation: 80% stocks / 20% bonds
Desired International allocation: 40% of stocks


Hello, this is my first post here so hopefully I have followed the correct format!

I recently opened an account with DeGiro and am looking to start investing following the Boglehead investing principles, in particular the three fund portfolio strategy. This entails investing a set amount of income each month into three different, diverse, low cost ETFs. 

However, I am struggling to determine which EFTs would be most appropriate. I also want to consider tax efficiency and FX risk when choosing the EFTs.

The Boglehead website recommends a three fund portfolio such as 1-3 below. However, I am not certain if this would be suitable for an Irish investor.

Vanguard Total Stock ETF (VTI)
Vanguard Total International Stock ETF (VXUS)
Vanguard Total Bond Market ETF (BND)

Advice on and a sample three fund portfolio strategy for an Irish investor would be much appreciated!

Many thanks


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## Boyd (22 Aug 2017)

Hi, have you searched on this forum for existing threads on ETFs? There are loads of threads discussing ETFs, tax, UCIT vs US domiciled, FX risk - all of this has been discussed ad nauseam to be honest e.g.

https://www.askaboutmoney.com/threads/portfolio-please-comment-review-0.204067/

https://www.askaboutmoney.com/threads/investment-portfolio-split.200394

https://www.askaboutmoney.com/threads/the-tax-treatment-of-etfs-for-irish-residents.199443/

https://www.askaboutmoney.com/threads/combined-ucits-us-etf-strategy.198909/

https://www.askaboutmoney.com/threads/is-it-better-stick-to-euro-based-stocks.204485/

https://www.askaboutmoney.com/threa...ded-index-funds-etf-low-cost-strategy.197216/

etc.


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## AJAM (24 Aug 2017)

LingoPhil VXUS is a Mutual Fund and as such, subject to 41% Exit tax for Irish citizens.
You should replace it with VEA (or VEU) which are ETFs that do the same thing (except are only subject to 33% CGT).

Be aware that BND is a dollar hedged Bond ETF. Also the majority of return from Bond funds comes from the dividends (which in Ireland is taxed as income at your marginal rate). In my opinion, the whole point of a Bond fund is to reduce the risk of your equity portfolio. Holding a US dollar hedged bond fund throws a whole lot of unwanted currency risk your way.

Ideally you want a Euro denominated (or Euro hedged) Bond, that is accumulating instead of distributing (assuming you're in the highest tax bracket). These exist but only in Europe, so they will be subject to the 41% tax, which is not great.

Although in my opinion, at 24 you should ignore bonds completely, until you're closer to 40.
Good luck.


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## Sarenco (24 Aug 2017)

AJAM said:


> LingoPhil VXUS is a Mutual Fund and as such, subject to 41% Exit tax for Irish citizens.


No, VXUS is not subject to 41% exit tax - it's a US domiciled ETF.  A holding in its mutual fund equivalent (VGTSX) would be subject to the same Irish taxes.


AJAM said:


> You should replace it with VEA (or VEU) which are ETFs that do the same thing (except are only subject to 33% CGT).


You are ignoring taxes on dividends.  Again, it is nowhere near as clear cut as you keep insisting that US funds/ETFs are always more tax efficient for an Irish resident than Irish/EU domiciled funds/ETFs.


AJAM said:


> Be aware that BND is a dollar hedged Bond ETF.


No, BND is not a US dollar hedged ETF.


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## cremeegg (24 Aug 2017)

LingoPhil said:


> Desired International allocation: 40% of stocks



Is this an American strategy ?

What does 40% international allocation mean.

I would suggest that a lot less than 60% of your money should go into Irish stocks.


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## PMU (24 Aug 2017)

LingoPhil said:


> Country of Residence: Ireland
> Age: 24
> The Boglehead website recommends a three fund portfolio such as 1-3 below. However, I am not certain if this would be suitable for an Irish investor.
> 
> ...



If you follow this strategy you are allocating to (a) foreign developed market equities (i.e. Global Stocks ex-US (VXUS) and US total market index (VTI)) and (b) non-eurozone fixed income (i.e. US bonds (BND)). I see no explicit allocation to (a) domestic (i.e. eurozone) equities and (b) emerging market equities. So you might consider these. 
VTI  VXUS does have an allocation to Eurozone equities, but it's mostly to Japan, UK, Canada, etc. (i.e. foreign developed markets).

Personally, I'm not a friend of fixed income investing (i.e. bonds), unless you need income, so why not look at other asset classes that have a low/non correlation with equities? i.e. property; commodities; timber, etc. If you want to reduce volatility you could consider an allocation to absolute return strategies.


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## Sarenco (24 Aug 2017)

PMU said:


> foreign developed market equities (i.e. Global Stocks ex-US (VXUS) and US total market index (VTI))


Actually, VXUS tracks the FTSE Global All Cap ex US Index, which includes emerging markets.  VEA tracks the FTSE Developed All Cap ex US Index.


PMU said:


> VTI does have an allocation to Eurozone equities, but it's mostly to Japan, UK, Canada, etc. (i.e. foreign developed markets).


VTI tracks the CRSP US Total Market Index - it doesn't have any allocation to non-US securities.


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## PMU (24 Aug 2017)

Sarenco said:


> Actually, VXUS tracks the FTSE Global All Cap ex US Index, which includes emerging markets.


 Ok I stand corrected and I've amended the original post.  The point being that the OP has asked for obs on a strategy developed from the perspective of a US investor.  The OP is IE based so I would have expected an explicit allocation to domestic, i.e. eurozone stocks as the primary asset class, and then allocate as appropriate to other asset classes.  It's preferable that the OP works out an asset allocation strategy based on his age; risk profile, etc. and then looks for appropriate investment vehicles to fulfill this strategy.


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## LingoPhil (24 Aug 2017)

Thanks everyone for the responses. It is much appreciated!



cremeegg said:


> Is this an American strategy ?
> 
> What does 40% international allocation mean.
> 
> I would suggest that a lot less than 60% of your money should go into Irish stocks.



Sorry, I wasn't very clear. Yes, this is an American strategy. 40% to US Stocks, 40% to International Stocks (i.e, non-US stocks), and 20% to bonds.



In terms of the other points discussed above, my understanding is that investing largely in Vanguard Total Stock ETF (VTI) and Vanguard Total International Stock ETF (VXUS) will give me fairly diverse coverage of US stocks, developed non-US and some emerging markets. I should also consider investing in other asset classes (perhaps a REIT of  Commodities ETF?) instead of bonds (My understanding is that bond dividends are taxed extremely heavily in Ireland). 

So perhaps a compact portfolio such as the following will be sufficiently aggressive at my age of 24, while still not bearing too much unnecessary risk:


40% - Vanguard Total Stock ETF (VTI)
40% - Vanguard Total International Stock ETF (VXUS)
10% - Vanguard Materials ETF (VAW) or other Property EFT (any recommendations on possible accumulating REITs?)


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## Sarenco (24 Aug 2017)

PMU said:


> The OP is IE based so I would have expected an explicit allocation to domestic, i.e. eurozone stocks as the primary asset class, and then allocate as appropriate to other asset classes.


Well, personally I would just invest at market weights (which could be achieved by holding equal amounts of VTI and VXUS - or just holding VT) but reasonable people can disagree on this point.


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## Sarenco (24 Aug 2017)

Hi LingoPhil

Bond coupons (or distributions from US domiciled bond funds/EFTs) are subject to same Irish taxes as any other unearned income.  Overweighting any particular stock sector (such as REITs or companies in the raw materials sector) doesn't necessarily further diversify your portfolio.

Take a step back for a second and ask yourself a few questions:-

Are you you carrying any debt?
Do you own your home (or do you have any ambitions to own your own home)?
Are you contributing to a pension scheme?
What are you investing for?
How long are you prepared to put your money away for?
Would you be comfortable seeing the value of your portfolio fall by 50%+ in a single year?
Are you comfortable with the headache of preparing tax returns, etc.?

You really need understand the basics before diving into the minutiae of different investment vehicles/strategies.


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## LingoPhil (25 Aug 2017)

Hi Sarenco,

Thanks for your response. In reference to the questions:

Not carrying any debt
Not a home owner, and currently no plans in the next 5 years to purchase a home
Yes, currently making pension contributions
Wouldn't be ideal losing 50%, but I understand the risks. - I am looking for a way to mitigate the chances of this happening
Yes, prepared to address the tax return paperwork

What strategies might you recommend to help diversify my portfolio if reits/ commodities would lead to an overweighing of one stock sector? If you have any direction to point me in, I am happy to research it further 

Many thanks


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## Sarenco (25 Aug 2017)

To be honest, I think most people that are early in their careers should probably just keep their after-tax savings on deposit until their future plans are more certain.  That allows for maximum short-term flexibility and bear in mind that your pension contributions should be largely (or even wholly) invested in equities at your age.

However, if you are confident that you will keep your after-tax savings invested over the long-term, I think your basic idea of investing in global equities in accordance with their capital weighting is perfectly sound.  Buying VTI and VXUS in equal proportions would certainly achieve that objective.

That would give you a small stake in practically every publicly traded company on the planet.  That's already highly diversified – I wouldn't bother adding any other asset classes.

Bear in mind that bank deposits are a type of fixed-income investment and even instant access deposit accounts currently yield more than 5-year Irish government bonds!  If you want to dilute the risk of investing in equities, I would suggest you just keep a chunk of your savings on deposit.


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## rekhib (31 Aug 2017)

Hi LingoPhil,

I wanted to add a couple of suggestions for a "lazy" (not necessarily "3") fund portfolio. First of all, there are a few wikis on Bogleheads aimed squarely at those investing from the EU so definitely digest those to see what others are doing.

Secondly, great that you're starting in your 20s, the effects of compounded reinvested dividends will be superb down through the years.

Below is a sample portfolio that you could adopt. This is just for the stock position; I'm yet to find an appealing bond fund that is broad, with a decent exposure to EUR, that has a tolerable yield and that doesn't behave like a stock in times of crisis - so I don't hold bonds currently but I appreciate that strategy isn't for everyone. Like AJAM said, if it were me, I would ignore bonds for a decade or so.

Suggested portfolio:

IWDA - iShares Core MSCI World UCITS ETF USD (Acc) - 40%
EIMI - iShares Core MSCI EM IMI UCITS ETF USD (Acc) - 25%
IMEA - iShares MSCI Europe UCITS ETF EUR (Acc) - 25%
WDSC - SPDR MSCI World Small Cap UCITS ETF (Acc) - 10%

In terms of exposure, you're at about 30% US, 20% Europe (Euro), 10% Europe (non-Euro), 10% UK, 5% Japan with a sprinkling of exposure to smaller developed markets like Canada, Australia and emerging markets like China, India, Russia &c. In terms of company size, about 80% of the portfolio is large cap, 15% mid cap and 5% small cap. In terms of the underlying securities, you have exposure to about 6,000 companies - not quite as rich in diversity as the original Bogleheads portfolio but not bad. Currency exposure is anyone's guess (as it depends on the exposure of each underlying security) but for a EUR investor, there's substantially less currency risk attached to this portfolio than the original 3-fund portfolio - largely due to the MSCI Europe holding. In any event, a good reason to hold equities in the first place is if your home currency tanks, you still retain some purchasing power - so avoid trying to mitigate currency risk completely.

I've avoided adding property into the mix as most of us here in Ireland tend to be sufficiently exposed. The portfolio also skips commodities which I'm not wild about - if you want to go down that route, best go after the commodity producers instead. But, as you've identified yourself, a simpler portfolio is easier to manage and you're already exposed to materials/industrials through the above holdings.

One final point, the above are all domiciled in Ireland and are accumulating ETFs (meaning they don't distribute dividends - our one huge advantage over US investors). There's a wealth of information out there pointing Irish investors to US listed funds to minimise the tax impact; I tend to disagree with this advice based on a few points:

- When you invest in US securities, you have to complete your W-8BEN form regularly, an additional hassle that isn't present with the above portfolio.

- Even though the currency exposure of the underlying companies rather than the holding currency affects your wealth, I think it makes everything a bit more transparent holding EUR exposed equities in EUR, USD exposed equities in USD - as much as is feasible.

- If you hold more than $60k in US domiciled equities at the time of your death, your spouse/partner will get hit for US estate taxes.

- Even though CGT on US listed equities is 33% and exit tax on the above is 41%, you may end up with more money in your pocket with accumulating ETFs. Consider a very basic example: You buy 2 lots of a nominal amount worth of ETFs (1 accumulating based in Ireland and 1 distributing based in US) with annual share price growth and dividend growth of 5% over an 8 year period. Because your dividends are getting re-invested instead of paying 41% tax on them when they're distributed, even with the higher "disposal" tax, you'll end up ahead with the "Acc" ETFs. There are downsides of course, i.e. you can't offset losses on 1 ETF against gains on another but by keeping the number of ETFs in the portfolio small and holding for an extended period, you reduce this risk somewhat.

- Finally, the legislation governing the tax treatment of ETFs in Ireland pre-dates the invention of ETFs (except the very earliest "spiders"). Call me an optimist but I just can't see how the current legislation can persist over your investment lifetime. The US and UK have fantastic tax-sheltered facilities for retail investors to provide for their own retirement (401k, Roth IRA, ISA etc) - we just need a visionary Minister for Finance to provision something similar for Irish investors.

All the best.


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## Pejayy (1 Sep 2017)

Hi Rekhi,
Irish domiciled UCITS ETF's have an 8 year 'deemed disposal' requirement which also must be considered. If you google 'deemed disposal on ucits etf' you will see the link to the revenue guidance note on etf's. Basically your capital gain will be taxed at 41% every 8 yrs & you get a credit to offset liability when you do eventually sell.


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## settlement (2 Sep 2017)

Pejayy said:


> Hi Rekhi,
> Irish domiciled UCITS ETF's have an 8 year 'deemed disposal' requirement which also must be considered. If you google 'deemed disposal on ucits etf' you will see the link to the revenue guidance note on etf's. Basically your capital gain will be taxed at 41% every 8 yrs & you get a credit to offset liability when you do eventually sell.



So what is the nett result of the tax given you have a credit to offset liability when you sell?


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