The whole FIRE thing is great in theory… but sometimes you have to have some sort of guidance on how to put that theory into practice!
There are a few great series on blogs like Millennial Revolution or JLCollins detailing the theory and reasoning behind investing in index funds. However, for expats or non-Americans it becomes less clear. For example, Vanguard’s presence where we live does not extend to offering accounts and mutual funds. Thus, many of the guides and how-to’s were not relevant to our situation. Many expats will find themselves in a similar situation. Fortunately, work by people like Andrew Hallam makes this more straightforward… but often it’s finding this information that’s so difficult.
I figured I would lay out our approach on the off-chance it may be useful to someone.
Brokerages
I heard about index funds many years ago and understood the benefits of this form of investing over stock picking. Following up on this, if we were still living in the UK it would have been easy – just go open an account at Vanguard UK and have at it! The problem we faced was that we have been resident in Asia for quite some time and so this was not really an option for us.
So where do you actually buy these index funds??
This was a question that plagued me for a while and resulted in us making our first major financial misstep. I’m sure we’ll write about that in a future post.
The Vanguard website suggested that its funds were available as ETF’s – effectively the fund packaged as an individual share and bought and sold on a stock exchange.
Okay, so where can you buy an ETF? You need a brokerage account, my man!
Choosing a brokerage account took us about a month – we compared lots of different companies and tried to predict how our future behaviour (e.g. how often we would be purchasing ETFs, what currencies we might need and that sort of thing) might incur fees.
We eventually settled on Interactive Brokers, partially on a recommendation.
Things we like:
– No fee just to maintain an account (I can’t believe that this is actually a thing)
– Low ForEx fees
– Low trading fees
– A $10 USD monthly charge below a $100,000 USD account balance. Any fees from trades are subtracted from this charge. The charge also only seemed to begin after three months. We are targeting above $100,000 USD in the account this year and so this doesn’t really bother us.
– Pretty easy to set up. Support was fine.
Things we don’t like:
– The interface is not simple..at all.
– Adding a bank account for deposits & withdrawals required a surprisingly steep initial transfer sum. It was steep enough for it to be notable to anyone opening an account to be aware of.
– That’s probably about it!
We could have used our bank accounts but found understanding the fees difficult. We figured that if it’s not straightforward to understand there was likely going to be an issue in the future.
Now we had our account open… what next?
ETFs
The next nugget of vital knowledge was which forms of ETF’s to buy. I was surprised just how aggressive the US tax system is to foreign ownership of US assets. Essentially it becomes dangerous to own anything over $60,000 USD in assets in the USA as a foreigner as the IRS can seize this if you die. Additionally, a 30% tax is applied to gains and dividends. That’s how I understand it anyway. The Bogleheads site has more information. Even if I’ve misunderstood that… no US-domiciled funds for this couple!
Luckily, there are alternatives – UCITS ETF’s. These funds are domiciled in Ireland and only charge a 15% withholding tax. They sometimes have slightly higher fees than their US-domiciled counterparts, but the lower tax rate ensures that they are still attractive investment instruments. I think the fee difference between the Vanguard S&P500 UCITS and US-domiciled ETF’s is 0.03% to 0.07% at the moment. Given that fees are an area of competition between ETF providers, I would expect that these would continue to drop in the future anyway.
You can use justetf.com to compare different instruments and ETF providers. We wanted dividend-paying equity and bond funds, which we’ll explain in a later post. Largely it doesn’t seem to matter much if you choose an accumulating or distributing fund in terms of performance. If you’re only going to reinvest the dividends paid anyway, it is usually better to go with the accumulating version of the fund. That said, we are reinvesting the dividends paid but still went with distributing versions.
Taxes
Our last consideration was tax (one of the two certainties in life). The UK has a great many problems but working out income tax for individuals is probably not one of them. The Pay As You Earn (PAYE) system automatically takes money out of your paycheque so you don’t have to fill in annual tax returns. Thus, fresh-off-the-boat UK expats in a foreign land immediately become extremely nervous when presented with their first tax returns to fill out. I have annoyed HR several times taking my form for double and triple checking. In my defence, it’s not like tax authorities are famously peppy in their messaging related to getting your returns submitted accurately and on time.
“Why don’t you just photocopy this form so you can use it for next year?”
You have a point Judy in HR, but I am definitely going to lose that photocopy by then. Try to understand, the British government has trained this lack of ability into me. Blame them.
We were worried about how our funds might cost us in this regard… until we realised that we lived in a country with no capital gains or dividends tax. All hail rampant capitalism!
Obviously, this is absolutely useless to anyone reading this from a locale which does institute taxes on gains and dividends. I’m sorry I can’t tell you more… but we don’t live there.
We’re not entirely sure how this might affect us if we move somewhere else (which is pretty likely), but perhaps we will take inspiration from lists like this.
Conclusion & time to find some investment instruments!
So that’s the rough path we followed! We’ll save asset allocation, currencies and the ETF criteria we looked at for another post.