The Best Index Fund Portfolio Mix For Non-US Investors

I hear a lot of references to Warren Buffett whenever I look at investment methodologies and techniques, e.g. “Follow how Buffett Invests” or “This is what Buffett would have done”, but it’s never what Buffett has specifically said so himself. Except for this:

“There are a few investment managers, of course, who are very good – though in the short run, it’s difficult to determine whether a great record is due to luck or talent. Most advisors, however, are far better at generating high fees than they are at generating high returns. In truth, their core competence is salesmanship. Rather than listen to their siren songs, investors – large and small – should instead read Jack Bogle’s The Little Book of Common Sense Investing.”

– Warren Buffett, Chairman of Berkshire Hathaway, 2014 Annual Shareholder Letter, page 19.

For those interested, the book can be found on Amazon: The Little Book of Common Sense Investing: The Only Way to Guarantee Your Fair Share of Stock Market Returns.

The premise is simple: instead of picking individual stocks, just buy the entire stock market. There’s nothing more efficient and optimised than a low-cost Exchange-Traded Fund (ETF). For US investors, the US has plenty of US-domiciled ETFs that are great. For non-US investors, buying ETFs domiciled in the US has several disadvantages that make it a pretty lousy deal:

  1. Dividends are taxed. For Singaporeans, it’s going to be 30%.
  2. If you own a total of more than USD60,000 of US assets (stocks, ETFs, properties, etc), you’ll face an estate tax. For Singaporeans, it’ll be a fixed sum PLUS around 18% to 35% of your assets. Just as a fun piece of trivia: if you are a US national, your limit is not USD60,000, but around USD5,000,000.

Here’s a snapshot of 2012’s gift and estate tax rates for foreign nationals in the US:

us foreign foreigner gift estate tax rates

From: US Taxation of Foreign Nationals

So where do we start?

You’re going to be wanting a portfolio of index funds, or otherwise known as a lazy portfolio. Make no mistake though, it’s not a bad thing to be lazy in this case. What you’re going to get is something that is easy, cheap, quick to implement, and more profitable than most other things that you can invest in.

There is an entire encyclopedia of information about the various portfolios that you can use that you’ll be able to find on Google, but I like things simple – so I’m keeping it to as little funds as necessary.

For non-US investors, ETFs on the London Stock Exchange (LSE) are typically domiciled in Luxembourg or Ireland, and are attractive because:

  1. No capital gains tax
  2. No dividend withholding tax for you (however, dividends will still be taxed at source, and is between the UK and wherever the fund’s component lie.)
  3. High estate/inheritance tax limit (currently £325,000)
  4. No stamp duty

And what is the recommend portfolio?

I was previously buying VWRD, until I started questioning the efficiency of collecting dividends. I didn’t like the fact that VWRD issued dividends, because I would have to figure out what to do with the dividends. Typically, I’d need to hold on to them for a while until I was next ready to buy more of VWRD. If you think about it, that meant I’d have to incur a commission when I used the dividends to buy more of VWRD, and very possibly had to incur a dividends tax at source too.

If you like receiving dividends (VWRD has around 2+% dividend yield a year), VWRD is great. However, I have discovered that iShares has an ETF, the iShares Core MSCI World UCITS ETF (IWDA), that is benchmarked on the MSCI World Index, and more importantly, accumulates instead of distributing its dividends. This means that if IWDA were to be giving a 1 cent dividend, it would automatically be accumulated into the ETF, raising its price by 1 cent instead. As a long-term investor, I found this to be very appealing.

The only drawback is that IWDA does not contain any emerging markets, which VWRD has. To complete IWDA, you’ll need another ETF, the iShares Core MSCI Emerging Markets IMI USD (EIMI). Both IWDA and EIMI trade on the LSE, and in USD.

Conclusion

Go for ETFs on the LSE. VWRD if you’d like to receive dividend payouts, or IWDA + EIMI if you prefer to have your dividends automatically reinvested for you.

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Alvin Poh lives in Singapore, and is interested in marketing, techy stuff, and likes to just figure out how the two can work with each other. He can also be found on Google+.

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