Author Topic: My FIRE Case Study  (Read 2529 times)

Realist35

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My FIRE Case Study
« on: July 14, 2017, 09:45:19 PM »
Hi guys,

I'd love to hear your thoughts on my case study. My partner and I recently bought two properties (1.1M, 88% LVR). We also invested 100k in Australian listed investment companies and will regularly (quarterly) be buying shares over the next 15 years. In the attached spreadsheet I have tried to outline our circumstances with future predicted savings, expenses and mortgage repayments.

I am 36 and we want retire in the next 15 years in Europe as the living costs in my home country are so much cheaper than in Australia, plus I have a family home overthere. Target inflation adjusted capital is 1M AUD. Our plan is to sell properties in Australia in 15 yrs and buy more shares. We will pay around 25% capital growth tax on sale. With 1M in shares eventually, I work on 4% withdrawal rate. Further I'll have to pay 9% tax on dividends in my home country which leaves me with 2k euros per month in 15 years (inflation adjusted) for the two of us, which is a very very comfortable lifestyle overthere. I have assumed 4% inflation rate as inflation in my home country has historically been much higher than in Australia, and 0.62 AUD to EUR conversion rate.

I would very much appreciate if you could have a look into the spreadsheet and see if I missed anything:).

Thanks:).

Realist35

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Re: My FIRE Case Study
« Reply #1 on: July 15, 2017, 02:28:21 AM »
Anyone:)?

marty998

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Re: My FIRE Case Study
« Reply #2 on: July 15, 2017, 05:04:01 AM »
Chill out, we'll get here eventually.

I reckon you are ballsy to borrow a million bucks at 88% LVR to buy 2 properties in this current environment. Where did you buy? At that level of leverage you would have to be negatively geared yes? Have you counted for that cash shortfall you have to fund?

No one can predict what will happen in 20 years, and the assumptions in your spreadsheet are just that, assumptions. I don't even bother looking more than a few months ahead these days. Life can change so quickly.

You also haven't accounted for likely interest rate rises - what happens when they go up 1%? There's $10,000 you need to fund to service the debt....

What happens if your property is vacant at that time too? Will you start selling shares?

Start thinking about these things first, then map out 20 years ahead.

Realist35

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Re: My FIRE Case Study
« Reply #3 on: July 15, 2017, 05:59:10 AM »
Yeah, 290$ pw in the spreadsheet for loan repayments is a very generous assumption considering 6% IR and 5 weeks vacancy for each property. 50k cash buffer on the side as well.

I bought in Melbourne (500k) and in Brisbane (600k).

Shares are never to be sold:). I tried accounting for everything in the spreadsheet and tried being very conservative. But not sure if I made any silly mistakes:).

PapaBear

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Re: My FIRE Case Study
« Reply #4 on: July 15, 2017, 09:02:21 AM »
Nothing to add regarding the real estate, but regarding the investment. Your post sounded like your are only investing in Australian stocks.
If you plan to live in Europe at some point, I would add international investment.
Scratch that, I would always add international investments for diversification. Everything else would be called home bias.
Australia and NZ are ~1.75% of the total world stock exchange volume (http://money.visualcapitalist.com/all-of-the-worlds-stock-exchanges-by-size/).

EDIT: In re-reading your first post, I might have mis-interpreted the type of investments you are doing. How are the investment companies invested?
Or are you talking about exchange-traded index funds? In any way, I would keep an eye out for international diversification as well as expense ratio of any investment.
« Last Edit: July 15, 2017, 09:05:57 AM by PapaBear »

Realist35

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Re: My FIRE Case Study
« Reply #5 on: July 15, 2017, 08:02:59 PM »
Nothing to add regarding the real estate, but regarding the investment. Your post sounded like your are only investing in Australian stocks.
If you plan to live in Europe at some point, I would add international investment.
Scratch that, I would always add international investments for diversification. Everything else would be called home bias.
Australia and NZ are ~1.75% of the total world stock exchange volume (http://money.visualcapitalist.com/all-of-the-worlds-stock-exchanges-by-size/).

EDIT: In re-reading your first post, I might have mis-interpreted the type of investments you are doing. How are the investment companies invested?
Or are you talking about exchange-traded index funds? In any way, I would keep an eye out for international diversification as well as expense ratio of any investment.
Thanks mate.

Basically these companies are index huggers, very diversified (100+ ozzie companies). For example Argo, Milton.. Their fees are very low as well. And yes, you are right about the lack of diversification in my portfolio, but it's the risk I accept.

I was more interested if someone could have a look in my spreadsheet and see if I missed something obvious. I never thought about being able to retire in 15 years and this just sounds too good to be true:).

Cheers!

bigchrisb

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Re: My FIRE Case Study
« Reply #6 on: July 15, 2017, 08:23:56 PM »
I put together spreadsheets like this about 10 years ago, with a long term projection based on forecast long run inflation rates, wage growth and investment returns. 10 years later things look. Dry different to the spreadsheet, due to the difference between sequence of returns and long run averages. In hindsight, the spreadsheets were a waste of time.

What did matter was generating a surplus to invest (earn more spend less), get this invested in growth assets (shares, licks and ETFs in my case), apply a little leverage, and stick to the course.

My personal view is that you are too exposed to Australian residential real estate, and if you just own Aus lics, then underweight international.

If you haven't already done so, I'd also track your actual spend for a year, and see how it compares to your guesses in the spreadsheet. I find I consistently underestimate unless I use real data.

Good luck

Realist35

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Re: My FIRE Case Study
« Reply #7 on: July 15, 2017, 10:11:44 PM »
I put together spreadsheets like this about 10 years ago, with a long term projection based on forecast long run inflation rates, wage growth and investment returns. 10 years later things look. Dry different to the spreadsheet, due to the difference between sequence of returns and long run averages. In hindsight, the spreadsheets were a waste of time.

What did matter was generating a surplus to invest (earn more spend less), get this invested in growth assets (shares, licks and ETFs in my case), apply a little leverage, and stick to the course.

My personal view is that you are too exposed to Australian residential real estate, and if you just own Aus lics, then underweight international.

If you haven't already done so, I'd also track your actual spend for a year, and see how it compares to your guesses in the spreadsheet. I find I consistently underestimate unless I use real data.

Good luck

Thanks Chris, that was really helpful.

I would be curious to find out whether the real life outcome was better or worse than the one predicted by the spreadsheet:)?

I do track all my expenses meticulously. Good point about saving as much as possible. I do think however that both savings rate and high income are important for FIRE.

Monkey Uncle

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Re: My FIRE Case Study
« Reply #8 on: July 16, 2017, 04:59:04 AM »
Nothing to add regarding the real estate, but regarding the investment. Your post sounded like your are only investing in Australian stocks.
If you plan to live in Europe at some point, I would add international investment.
Scratch that, I would always add international investments for diversification. Everything else would be called home bias.
Australia and NZ are ~1.75% of the total world stock exchange volume (http://money.visualcapitalist.com/all-of-the-worlds-stock-exchanges-by-size/).

EDIT: In re-reading your first post, I might have mis-interpreted the type of investments you are doing. How are the investment companies invested?
Or are you talking about exchange-traded index funds? In any way, I would keep an eye out for international diversification as well as expense ratio of any investment.
Thanks mate.

Basically these companies are index huggers, very diversified (100+ ozzie companies). For example Argo, Milton.. Their fees are very low as well. And yes, you are right about the lack of diversification in my portfolio, but it's the risk I accept.

I was more interested if someone could have a look in my spreadsheet and see if I missed something obvious. I never thought about being able to retire in 15 years and this just sounds too good to be true:).

Cheers!

It is too good to be true when you are assuming a steady 7% per year return.  Bigchrisb makes a good point about such spreadsheets being of very limited utility for predicting the future.  But if you are going to do this exercise, I suggest you find some historical data for the markets in which you are invested, and substitute some of that in for your 7% return.  Pick the worst 15 year period on record and plug that in.  Then pick the best 15 year period on record and see how that shakes out.  Chances are, your actual outcome will be somewhere in between.  I know that's not the certainty you are seeking, but you need to accept the fact that that certainty doesn't exist.
"Take this job and shove it" - David Allan Coe

Realist35

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Re: My FIRE Case Study
« Reply #9 on: July 16, 2017, 05:05:22 AM »
Nothing to add regarding the real estate, but regarding the investment. Your post sounded like your are only investing in Australian stocks.
If you plan to live in Europe at some point, I would add international investment.
Scratch that, I would always add international investments for diversification. Everything else would be called home bias.
Australia and NZ are ~1.75% of the total world stock exchange volume (http://money.visualcapitalist.com/all-of-the-worlds-stock-exchanges-by-size/).

EDIT: In re-reading your first post, I might have mis-interpreted the type of investments you are doing. How are the investment companies invested?
Or are you talking about exchange-traded index funds? In any way, I would keep an eye out for international diversification as well as expense ratio of any investment.
Thanks mate.

Basically these companies are index huggers, very diversified (100+ ozzie companies). For example Argo, Milton.. Their fees are very low as well. And yes, you are right about the lack of diversification in my portfolio, but it's the risk I accept.

I was more interested if someone could have a look in my spreadsheet and see if I missed something obvious. I never thought about being able to retire in 15 years and this just sounds too good to be true:).

Cheers!

It is too good to be true when you are assuming a steady 7% per year return.  Bigchrisb makes a good point about such spreadsheets being of very limited utility for predicting the future.  But if you are going to do this exercise, I suggest you find some historical data for the markets in which you are invested, and substitute some of that in for your 7% return.  Pick the worst 15 year period on record and plug that in.  Then pick the best 15 year period on record and see how that shakes out.  Chances are, your actual outcome will be somewhere in between.  I know that's not the certainty you are seeking, but you need to accept the fact that that certainty doesn't exist.
Very reasonable reply, thanks mate:).

Well long run historical return for ozzie shares has been 10%. The worst 20y rolling return has been 7.1%. I found the attached document quite interesting.

havregryn

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Re: My FIRE Case Study
« Reply #10 on: July 16, 2017, 05:49:46 AM »
Do you mind sharing which country you'd be retiring to? And have you done thorough research to confirm that 2000 a month buys a very comfortable lifestyle?

I'm asking because I am from Croatia and I am guessing you are targeting a country in the similar COL range. I think that any local would say that 2000 buys a very comfortable lifestyle for two over there but I am not so sure that the same applies to someone who is used to living in a developed country. Costs really skyrocket if you want western standard housing, heathcare, food, pretty much anything. I have a feeling that unlike all these popular cheap retirement destinations in Asia and Latin America, the poorer countries in Europe offer way too little quality of life for way too much money. It is definitely possible to be comfortable by local standards with 2000 but I am not sure it is possible to be comfortable by western standards. I get it that Mustachians are less spoiled on average but still, it's a concern I would have if I considered retiring there.

Realist35

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Re: My FIRE Case Study
« Reply #11 on: July 16, 2017, 06:09:23 AM »
Do you mind sharing which country you'd be retiring to? And have you done thorough research to confirm that 2000 a month buys a very comfortable lifestyle?

I'm asking because I am from Croatia and I am guessing you are targeting a country in the similar COL range. I think that any local would say that 2000 buys a very comfortable lifestyle for two over there but I am not so sure that the same applies to someone who is used to living in a developed country. Costs really skyrocket if you want western standard housing, heathcare, food, pretty much anything. I have a feeling that unlike all these popular cheap retirement destinations in Asia and Latin America, the poorer countries in Europe offer way too little quality of life for way too much money. It is definitely possible to be comfortable by local standards with 2000 but I am not sure it is possible to be comfortable by western standards. I get it that Mustachians are less spoiled on average but still, it's a concern I would have if I considered retiring there.
Zdravo kako si haha

I was talking about Montenegro:). I suppose living costs would be similar to Croatia?

It would be very interesting to hear what you'd consider comfortable to retire on in those countries. I thought about it quite a lot lately. Me and my partner spend close to $45k py in Australia (that includes rent), and that is a very modest lifestyle including very basic things (almost Moustachian lifestyle:)). So my goal is to replace 45k with a passive income from shares.

When I get to that point, I have a choice of living on cca 40k in Australia or cca 2k euro in Montenegro (40k AUD converted to euros and after paying 9% tax on dividends) where I have already my family home so wouldn't need to pay rent. My rough calculations say that the two of us would be able to live very well overthere and plus go on 1 week holidays almost everywhere around Europe every month:).

Happy to hear your thoughts.

havregryn

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Re: My FIRE Case Study
« Reply #12 on: July 16, 2017, 06:41:15 AM »
Haha, dobro, hvala, a ti?

Hard to say, Montenegro could be more expensive since it's so small and touristy all over, whereas when I talk about Croatia, I refer to the continental part as I am from Zagreb. I love Montenegro, I spent one summer vacation there and were it not so inconveniently far away I'd want to do it again.

But to clarify what I meant, I find that at least 95% of apartments available to rent in Zagreb are substandard by all western European definitions (I own one, I would know lol) and the remaining 5% are just as expensive as renting would be in, I don't know, Vienna.
Or for example that the public transport available there is of so poor quality and unreliable that I would end up using taxis and similar services (I hear now they have Uber) way more than I would probably plan for in my imaginary retirement (I'd never retire there because my Swedish husband would rather die but I think about it as a sort of a mental exercise). Food too I'd want to be buying directly from the people growing it (because the supermarkets have been caught selling trash discarded elsewhere in the EU) and while that would surely be significantly cheaper than buying an identical product in western Europe, it would still be more expensive than buying food in a supermarket in Sweden/Luxembourg/Australia, meaning that I'd need to budget more for food than I need to here.
I simply have this feeling that because the level of social and human development is so significantly lower there than in any of the places I've lived since leaving it, it would take large amounts of money to compensate for that in day to day life.

But yeah, if you already own a place to live I think that would make 2000 a much larger stash of money for sure. I don't own anything livable in Croatia so that would be a huge issue for me.
Also having close family compensates a lot, I am not really close with anyone back home so there is really no pull factor whatsoever and the cost of life vs. quality of life simply disqualifies Croatia right away if all countries in the world are equal.

PapaBear

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Re: My FIRE Case Study
« Reply #13 on: July 16, 2017, 07:08:30 AM »
I was more interested if someone could have a look in my spreadsheet and see if I missed something obvious.

I guess, when looking at the spreadsheet, I  end up with the same conclusions pointing to missing diversification.
You are calculating with a fixed exchange rate. If you look at historical exchange rates of AUD to EUR, you will see a very different picture (http://www.xe.com/currencycharts/?from=AUD&to=EUR&view=10Y): In the last ten years, it was fluctuating between ~0.48 to ~0.85. Why should it be different in your retirement?

Therefore, even if you want to invest mainly in Australian stock, I would strongly suggest to add EUR income streams at the time you want to retire in Europe, as a way of hedging currency risks. Otherwise your monthly budget and your safe withdrawal rate is not only linked to the stock market but to serious exchange rate volatility. Even better would be to steadily increase your EUR exposure until you retire, then you would not be dependent on the AUD/EUR rate at the time you are retiring.

---

On a different note: Regarding your retirement budget, how are healthcare cost factored in in your budget? Usually, healthcare cost is one of the three largest "bare-bone" items in any retirement budget, together with housing/rent and food. If I remember correctly, Montenegro has a public healthcare system similar to a lot of other European countries.

- First question would be: Are the services of the public system sufficient for your needs or do you need additional coverage? When I typed in "public healthcare system in montenegro" in google, already the third result pointed out some difficulties in funding and service levels (http://www.balkaninsight.com/en/article/financial-crisis-threatens-health-care-in-montenegro-04-11-2016). But due to your family ties to Montenegro, you might have a better view on the current situation.

- Second question would be: Will realized capital gains influence your healthcare cost? I'm asking this because it is the case in multiple other European countries.
If you are not working and below the official retirement age, the public healthcare system is using your capital income (e.g. realized capital gains, rental income) as your income and levy another x% of healthcare contributions on top of the capital gains tax.

At least in some countries, there is a bit of a workaround: If you are working, even only a few hours a week, then only the income of your job will be used for the calculation of the public healthcare contributions. Thus, some early retirees choose to pursue a small job linked to one of their hobbies (like sports coach or similar) to reduce their healthcare cost.
« Last Edit: July 16, 2017, 07:13:17 AM by PapaBear »

Realist35

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Re: My FIRE Case Study
« Reply #14 on: July 16, 2017, 07:26:14 AM »
Haha, dobro, hvala, a ti?

Hard to say, Montenegro could be more expensive since it's so small and touristy all over, whereas when I talk about Croatia, I refer to the continental part as I am from Zagreb. I love Montenegro, I spent one summer vacation there and were it not so inconveniently far away I'd want to do it again.

But to clarify what I meant, I find that at least 95% of apartments available to rent in Zagreb are substandard by all western European definitions (I own one, I would know lol) and the remaining 5% are just as expensive as renting would be in, I don't know, Vienna.
Or for example that the public transport available there is of so poor quality and unreliable that I would end up using taxis and similar services (I hear now they have Uber) way more than I would probably plan for in my imaginary retirement (I'd never retire there because my Swedish husband would rather die but I think about it as a sort of a mental exercise). Food too I'd want to be buying directly from the people growing it (because the supermarkets have been caught selling trash discarded elsewhere in the EU) and while that would surely be significantly cheaper than buying an identical product in western Europe, it would still be more expensive than buying food in a supermarket in Sweden/Luxembourg/Australia, meaning that I'd need to budget more for food than I need to here.
I simply have this feeling that because the level of social and human development is so significantly lower there than in any of the places I've lived since leaving it, it would take large amounts of money to compensate for that in day to day life.

But yeah, if you already own a place to live I think that would make 2000 a much larger stash of money for sure. I don't own anything livable in Croatia so that would be a huge issue for me.
Also having close family compensates a lot, I am not really close with anyone back home so there is really no pull factor whatsoever and the cost of life vs. quality of life simply disqualifies Croatia right away if all countries in the world are equal.
I only went do Zagreb and Dubrovnik (especially with Dubrovnik being close to my home town) and I loved them both. Especially Dubrovnik, I love the coast. I've only seen other Croatian coastal cities on picture and they just look amazing. Croatia is actually getting popular among Australians, several of my friends went on a Kontiki tour.

Interesting point about the apartments. What's actually wrong with them?

Interestingly enough, my Australian missus is actually very keen on retiring in Montenegro. Much more so then in Australia lol. Hope she doesn't change her mind after spending some time there haha.

Realist35

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Re: My FIRE Case Study
« Reply #15 on: July 16, 2017, 07:43:14 AM »
I was more interested if someone could have a look in my spreadsheet and see if I missed something obvious.

I guess, when looking at the spreadsheet, I  end up with the same conclusions pointing to missing diversification.
You are calculating with a fixed exchange rate. If you look at historical exchange rates of AUD to EUR, you will see a very different picture (http://www.xe.com/currencycharts/?from=AUD&to=EUR&view=10Y): In the last ten years, it was fluctuating between ~0.48 to ~0.85. Why should it be different in your retirement?

Therefore, even if you want to invest mainly in Australian stock, I would strongly suggest to add EUR income streams at the time you want to retire in Europe, as a way of hedging currency risks. Otherwise your monthly budget and your safe withdrawal rate is not only linked to the stock market but to serious exchange rate volatility. Even better would be to steadily increase your EUR exposure until you retire, then you would not be dependent on the AUD/EUR rate at the time you are retiring.

---

On a different note: Regarding your retirement budget, how are healthcare cost factored in in your budget? Usually, healthcare cost is one of the three largest "bare-bone" items in any retirement budget, together with housing/rent and food. If I remember correctly, Montenegro has a public healthcare system similar to a lot of other European countries.

- First question would be: Are the services of the public system sufficient for your needs or do you need additional coverage? When I typed in "public healthcare system in montenegro" in google, already the third result pointed out some difficulties in funding and service levels (http://www.balkaninsight.com/en/article/financial-crisis-threatens-health-care-in-montenegro-04-11-2016). But due to your family ties to Montenegro, you might have a better view on the current situation.

- Second question would be: Will realized capital gains influence your healthcare cost? I'm asking this because it is the case in multiple other European countries.
If you are not working and below the official retirement age, the public healthcare system is using your capital income (e.g. realized capital gains, rental income) as your income and levy another x% of healthcare contributions on top of the capital gains tax.

At least in some countries, there is a bit of a workaround: If you are working, even only a few hours a week, then only the income of your job will be used for the calculation of the public healthcare contributions. Thus, some early retirees choose to pursue a small job linked to one of their hobbies (like sports coach or similar) to reduce their healthcare cost.
Cheers for such a comprehensive reply mate!

I'll be honest - I haven't thought about any of those issues you mentioned. I'll definitely have to do some more reading. With regards to the currency risk, how would you suggest increasing the exposure to European shares? Would you add global shares as well? Or maybe I can just move back to Australia when euro is weak lol

What I like with Australian shares is a very high dividend yield and they are fully franked (around 6% grossed up yield). Historically total return has been great as well, around 10%. I assume yield would be much lower for a diversified basket of euro shares? And hence wouldn't the low yield cancel out the benefits of diversification (currency risk)?

From my memory, when I used to live back home, health care services were free for everyone. It probably sounds very unusual:). I'll have to check this but I  remember never having to pay anything for these services.

Monkey Uncle

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Re: My FIRE Case Study
« Reply #16 on: July 16, 2017, 07:52:22 AM »
Nothing to add regarding the real estate, but regarding the investment. Your post sounded like your are only investing in Australian stocks.
If you plan to live in Europe at some point, I would add international investment.
Scratch that, I would always add international investments for diversification. Everything else would be called home bias.
Australia and NZ are ~1.75% of the total world stock exchange volume (http://money.visualcapitalist.com/all-of-the-worlds-stock-exchanges-by-size/).

EDIT: In re-reading your first post, I might have mis-interpreted the type of investments you are doing. How are the investment companies invested?
Or are you talking about exchange-traded index funds? In any way, I would keep an eye out for international diversification as well as expense ratio of any investment.
Thanks mate.

Basically these companies are index huggers, very diversified (100+ ozzie companies). For example Argo, Milton.. Their fees are very low as well. And yes, you are right about the lack of diversification in my portfolio, but it's the risk I accept.

I was more interested if someone could have a look in my spreadsheet and see if I missed something obvious. I never thought about being able to retire in 15 years and this just sounds too good to be true:).

Cheers!

It is too good to be true when you are assuming a steady 7% per year return.  Bigchrisb makes a good point about such spreadsheets being of very limited utility for predicting the future.  But if you are going to do this exercise, I suggest you find some historical data for the markets in which you are invested, and substitute some of that in for your 7% return.  Pick the worst 15 year period on record and plug that in.  Then pick the best 15 year period on record and see how that shakes out.  Chances are, your actual outcome will be somewhere in between.  I know that's not the certainty you are seeking, but you need to accept the fact that that certainty doesn't exist.
Very reasonable reply, thanks mate:).

Well long run historical return for ozzie shares has been 10%. The worst 20y rolling return has been 7.1%. I found the attached document quite interesting.

Looks like the Australian stock market has been one of the better performing markets in the world since the Great Depression.  If that holds out, you should be golden.  But I do agree with the other posters that some diversification is probably in order.  No telling when that hot streak might end.
"Take this job and shove it" - David Allan Coe

PapaBear

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Re: My FIRE Case Study
« Reply #17 on: July 16, 2017, 10:42:19 AM »
I'll be honest - I haven't thought about any of those issues you mentioned. I'll definitely have to do some more reading. With regards to the currency risk, how would you suggest increasing the exposure to European shares? Would you add global shares as well? Or maybe I can just move back to Australia when euro is weak lol

What I like with Australian shares is a very high dividend yield and they are fully franked (around 6% grossed up yield). Historically total return has been great as well, around 10%. I assume yield would be much lower for a diversified basket of euro shares? And hence wouldn't the low yield cancel out the benefits of diversification (currency risk)?

If I compare the gross yield of the MSCI Australia and the MSCI Europe index since 1994 in USD, it is 8.82%/p.a. vs. 7.70%/p.a. - investing in the MSCI World with worldwide coverage of industrialized countries would have been 7.41%/p.a. in the same period. So all long-term gross yields are somewhat in the same ballpark.
All three yields are in USD, so somewhat comparable. In the respective home currency the yield could be different, of course.
(Source: https://www.msci.com/documents/10199/db217f4c-cc8c-4e21-9fac-60eb6a47faf0 and https://www.msci.com/documents/10199/ec1e0308-fb1a-42b7-baa3-756cab1a9de1)

However, you never know how the future will develop. For me personally, ~100 companies would be too little diversification, if I can have the ~3000 companies covered in the MSCI World or in a similar, worldwide index.

If you firmly believe that the Australian stock market will continue to outperform the worldwide counterparts, but still want to retire in Europe, then you could think of something like a glidepath, with your Australian exposure reducing every year and your European/Worldwide coverage increasing every year.

If you are not sure about which market will outperform, I would think about an asset allocation (https://www.bogleheads.org/wiki/Asset_allocation) that works in all situations - with Australian stocks, US stocks, European stocks and maybe also Emerging markets - you can weight them according to your preferences and your view on the future development of these markets.

For the non-Australian exposure, you can look for ETFs/index trackers covering broad market indices in the given region, e.g. S&P 500 for US, MSCI Europe or Stoxx 600 for Europe and MSCI Emerging Markets for the Emerging Markets. Your broker might offer other broad market alternatives, these usually differ from broker to broker.
Maybe a visit in the Australian investment thread is also worthwhile to compare how other Australians are investing: https://forum.mrmoneymustache.com/investor-alley/australian-investing-thread/

havregryn

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Re: My FIRE Case Study
« Reply #18 on: July 16, 2017, 11:15:14 AM »
Interesting point about the apartments. What's actually wrong with them?

I think the problem is that the entire market of renters is divided between very poor people and students on one end and business expats on the other. Regular middle income people simply don't want to rent (there is a strong ownership fetish in all of these post-communist countries which I'm sure you're familiar with) and there is not much of a market to cater to such people...the whole market is either dumps or high end residences.
Apartments are usually furnished (also illustrates the kind of market we have - people either too poor to buy furniture or too short term to bother), which makes it difficult to customize anything to fit you.
I mean, OK places can be found but they will inevitably go out of what people think is a realistic budget for Croatia.
Recently a friend back home was looking to rent a place and she documented her plight on Facebook. And I can really relate to some degree because my old apartment is now a rental and it is by all means a total dump. I am begging them to sell it (it's in my mother's name as they bought it for me when I went to university but the mortgage had to be in her name) as it's not really making any money and it's just a liability but that being Croatia they are irrationally attached to the idea of owning property and completely unrealistic about what kind of money they should expect to get for it. But anyway, listening to my mother is like listening to any landlord out there lol so yeah, I feel for the poor suckers looking for an affordable place to rent.
I at least managed to scare her into servicing the heater by planting an image of her tenants dying of carbon monoxide poisoning into her head.
It's just a different kind of culture and economy and it doesn't really abide by the rules we learn to depend on in the first world. For some I guess it's exciting, I find it unbearable.

I sometimes think about buying a vacation house there because yes, the coast is lovely but I always chicken out on the fact I really hate the thought of having to deal with some administration back there. Plus for the amount of time we'd actually spend there it would make no economic sense.

SwordGuy

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Re: My FIRE Case Study
« Reply #19 on: July 16, 2017, 01:45:57 PM »
Will you qualify for EU citizenship?   Will you be able to keep your Australian citizenship?   Could you leave everything behind in Montenegro and skedaddle in 5 minutes without harming your FIRE status, and without having to depend upon being accepted into another country as a refugee?

I ask because the Balkans are occasionally a very unhealthy place to be.


havregryn

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Re: My FIRE Case Study
« Reply #20 on: July 16, 2017, 11:35:07 PM »
Montenegro is not in the EU right now but 15 years could be a realistic timeframe for them to join if further expansions happen (obviously there is some skepticism to that now that countries started leaving).
They're probably the first in line to join next.

But I don't think it's possible to lose Australian citizenship just like that so he should be fine.

Being only a citizen of a Balkans (albeit EU) country makes me a bit uneasy, but I get 16% extra on my salary because I am an expat which I would no longer be if I took local citizenship. I will qualify for Swedish in 7 years (as it takes a very long time to qualify for citizenship based on marriage if you don't actually live in Sweden) so hopefully Croatia can stay in check until then.

Bee21

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Re: My FIRE Case Study
« Reply #21 on: July 17, 2017, 03:23:46 AM »

2k should be enough. What is the median income in Montenegro? I wouldn't worry too much about apartments at this stage, there is plenty of time.

Check out healthcare costs. Not sure about Montenegro, It might not be free for you and your wife if you weren't part of the system for a while(ie not contributing to the local social security), lot of people get caught in this when they return. Plus the quality of healthcare can also be interesting. So definitely calculate extea for healthcare.

Also, check how your australian income gets taxed if you are non resident, a friend of mine got a very nasty surprise lately.

It's good to have good old Europe as a backup plan, as Australia is so ridiculously expensive, this is my plan B too (though my Australian husband is more keen on retiring there than me. I guess he sees only the cheap beer and the romantic countryside and not the corruption and the hopelessness of life in Eastern Europe).

havregryn

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Re: My FIRE Case Study
« Reply #22 on: July 17, 2017, 05:14:30 AM »
I guess he sees only the cheap beer and the romantic countryside and not the corruption and the hopelessness of life in Eastern Europe).

This is well said. I get clinically depressed after reading from the Croatian media for 20 minutes. But most people who don't speak the local language and are not involved in the local community only see the beautiful scenery and think it's heaven. I don't think I could ever live there again after having lived in places like Sweden and Luxembourg and having had kids.
I honestly feel that living on welfare in Sweden still leaves one with higher quality of life than being rather wealthy in Croatia.
I remember my years there with a certain nostalgia but I really think it's something that works only for 20somethings humanities students who are kind of into all this social and individual suffering, for a 30+ professional with a family, gaah, never. Can't comment for other generations since I haven't been there yet, maybe I change my mind in my fifties. Healthcare is actually not so bad in these places, especially if you have the money to pay for private. So if you are kind of a loner and don't really want to involve with anything local it could be a great place to retire.

Realist35

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Re: My FIRE Case Study
« Reply #23 on: July 17, 2017, 05:19:50 AM »
I'll be honest - I haven't thought about any of those issues you mentioned. I'll definitely have to do some more reading. With regards to the currency risk, how would you suggest increasing the exposure to European shares? Would you add global shares as well? Or maybe I can just move back to Australia when euro is weak lol

What I like with Australian shares is a very high dividend yield and they are fully franked (around 6% grossed up yield). Historically total return has been great as well, around 10%. I assume yield would be much lower for a diversified basket of euro shares? And hence wouldn't the low yield cancel out the benefits of diversification (currency risk)?

If I compare the gross yield of the MSCI Australia and the MSCI Europe index since 1994 in USD, it is 8.82%/p.a. vs. 7.70%/p.a. - investing in the MSCI World with worldwide coverage of industrialized countries would have been 7.41%/p.a. in the same period. So all long-term gross yields are somewhat in the same ballpark.
All three yields are in USD, so somewhat comparable. In the respective home currency the yield could be different, of course.
(Source: https://www.msci.com/documents/10199/db217f4c-cc8c-4e21-9fac-60eb6a47faf0 and https://www.msci.com/documents/10199/ec1e0308-fb1a-42b7-baa3-756cab1a9de1)

However, you never know how the future will develop. For me personally, ~100 companies would be too little diversification, if I can have the ~3000 companies covered in the MSCI World or in a similar, worldwide index.

If you firmly believe that the Australian stock market will continue to outperform the worldwide counterparts, but still want to retire in Europe, then you could think of something like a glidepath, with your Australian exposure reducing every year and your European/Worldwide coverage increasing every year.

If you are not sure about which market will outperform, I would think about an asset allocation (https://www.bogleheads.org/wiki/Asset_allocation) that works in all situations - with Australian stocks, US stocks, European stocks and maybe also Emerging markets - you can weight them according to your preferences and your view on the future development of these markets.

For the non-Australian exposure, you can look for ETFs/index trackers covering broad market indices in the given region, e.g. S&P 500 for US, MSCI Europe or Stoxx 600 for Europe and MSCI Emerging Markets for the Emerging Markets. Your broker might offer other broad market alternatives, these usually differ from broker to broker.
Maybe a visit in the Australian investment thread is also worthwhile to compare how other Australians are investing: https://forum.mrmoneymustache.com/investor-alley/australian-investing-thread/
Thanks again for such a knowledgeable reply! I need to read a lot to improve my understanding of the markets:).

Just a quick one if you don't mind. I had a quick look at the MSCI Europe index. The dividend yield is only 3.34%. Dividend yield for Australian LICs is 4.2% and they are 100% franked, which gives the grossed up yield of 6%. That's almost double the yield of MSCI Europe, which makes retiring on ozzie LICs so much easier. Unless I'm missing something?

I have attached another document showing comparative performance of Australian Vs other markets.

Realist35

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Re: My FIRE Case Study
« Reply #24 on: July 17, 2017, 05:26:17 AM »

2k should be enough. What is the median income in Montenegro? I wouldn't worry too much about apartments at this stage, there is plenty of time.

Check out healthcare costs. Not sure about Montenegro, It might not be free for you and your wife if you weren't part of the system for a while(ie not contributing to the local social security), lot of people get caught in this when they return. Plus the quality of healthcare can also be interesting. So definitely calculate extea for healthcare.

Also, check how your australian income gets taxed if you are non resident, a friend of mine got a very nasty surprise lately.

It's good to have good old Europe as a backup plan, as Australia is so ridiculously expensive, this is my plan B too (though my Australian husband is more keen on retiring there than me. I guess he sees only the cheap beer and the romantic countryside and not the corruption and the hopelessness of life in Eastern Europe).
Does the corruption really matter that much to you if you have money to blow and travel every other month:)? I'm not saying I'm gonna make loads of money, just comparing what 40k buys you in australia Vs montenegro.

Average income there is 500e per month. So an average household would probably have less than 1k, and that's with kids. Average basket of goods  (basically it's an indicator over there to measure how much a family of 4 needs to cover basic monthly costs, including rent) is 800e.

Realist35

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Re: My FIRE Case Study
« Reply #25 on: July 17, 2017, 05:33:18 AM »
Just wanted to thank everyone for your awesome comments and ideas!! I've been flat out today so didn't get a chance to reply to individual comments. Basically I've learnt from you guys:

- that I need to think more seriously about the currency risk,
- healthcare costs,
- corruption and any other issues that might arise in over there (God forbidden war),
- possible diversification.

And yes, I can keep both citizenship if we move there.

Cheers:)!

havregryn

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Re: My FIRE Case Study
« Reply #26 on: July 17, 2017, 05:54:56 AM »
Does the corruption really matter that much to you if you have money to blow and travel every other month:)? I'm not saying I'm gonna make loads of money, just comparing what 40k buys you in australia Vs montenegro.

It probably doesn't matter unless you get somehow directly affected but here is a short list of things I found difficult to be around during a 3 month stay in Croatia in 2013:
- incredibly reckless driving anywhere you go
- loads of racist/sexist remarks in casual conversations that everyone thinks are funny
- a lot of poverty all around you that you can do very little about
- next to no public transport outside of Zagreb (less of an issue when you drive, I don't so I am handicapped)
- speaking of handicaps there is a lot of stigma and absolutely no support for special needs kids/adults and while I am not in any way personally affected by that having seen the kind of stuff done in Sweden I started feeling really bad about the way this is in Croatia and since I can't really do much about it it bothers me to think about it and especially to witness it
- random people giving you advice you never asked for that are terribly ignorant or just plain wtf (like telling you you need to tie a red string around your kid's wrist to ward off demons and stuff like that)
- a lot of ostentatious displays of wealth among people who often acquired it in very dubious ways and rather common admiration for those individuals among the more common folk
- a high level of distrust of other people (everyone is bad and out to get you, always assume the worse of people)
- utter lack of any kind of customer service mentality anywhere mostly also because most customer service staff is working for 200-300 max and struggling to make ends meet
- difficult and expensive to buy any kind of less common food in a given region, like fish in continental Croatia
- a lot of animal abuse everywhere
- incredibly low standard trains and buses
- in general a lot of negativity, people love to complain and whine
- it's completely legal and rather mainstream by now to openly support fascism

I lived in Vienna 2010-2012, Stockholm 2013-2015 and in Luxembourg ever since so obviously I got used to a much different experience of day to day life and this is now getting more and more difficult every time I visit.


PapaBear

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Re: My FIRE Case Study
« Reply #27 on: July 17, 2017, 06:15:11 AM »
Thanks again for such a knowledgeable reply! I need to read a lot to improve my understanding of the markets:).

Just a quick one if you don't mind. I had a quick look at the MSCI Europe index. The dividend yield is only 3.34%. Dividend yield for Australian LICs is 4.2% and they are 100% franked, which gives the grossed up yield of 6%. That's almost double the yield of MSCI Europe, which makes retiring on ozzie LICs so much easier. Unless I'm missing something?

I have attached another document showing comparative performance of Australian Vs other markets.

I couldn't see a document attached to the post, maybe the upload didn't work.

However, first things first: Dividend yield alone is not sufficient to evaluate the performance of an index or market. It is always the total return (consisting of dividends and ticker price growth), that is important, as you can always sell shares to get your money out. Everything else is a common investment trap: Mental accounting, where one stream of income, dividends, are higher valued then other streams of income (https://en.wikipedia.org/wiki/Mental_accounting).
Simple example: Look at Google or Facebook, as far as I know, these companies have never paid dividends so far. However, I guess it is fair to say that their early investors had great returns, despite a dividend yield of 0.0%.

A company's dividend policy is linked to many factors. Usually one says that well-established, matured industries pay higher dividends then growth companies (since growth companies need the money for investments to grow further). However, you would not want to miss the next Facebook or Google. Also Apple just started paying dividends in 2012. Additionally, the local tax system sometimes favors and sometimes discourages dividend payments. It might be the case that in Australia dividends are a bit encouraged by the tax authorities.

Therefore, I would usually not look at the dividend yield specifically when evaluating the performance of a market/stock.
Total gross yield and especially net yield after tax is far more telling, as it includes all types of income streams and compares the yield that ends up in the investor's pockets.
It might be the case that the Australian stock market has a better performance, however, dividend yield alone is not the right measure to evaluate that.
« Last Edit: July 17, 2017, 06:18:24 AM by PapaBear »

PapaBear

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Re: My FIRE Case Study
« Reply #28 on: July 17, 2017, 06:35:19 AM »
As a bonus on top:
If you want to compare the long-term performance of different portfolios, I can highly recommend the calculators at www.portfoliocharts.com
The author of the site is also active here in this forum.

Take the long-term returns calculator for example: https://portfoliocharts.com/portfolio/long-term-returns/
You can switch to your home market by pressing the black box with "United States" and selecting "Australia" in the drop-down.
Then you can test different asset allocations and compare the results. I just compared a 100% domestic Australian stock allocation with a 50% domestic Australian, 20% US, 20% Europe, 10% Emerging markets allocation. The real CAGR (inflation already considered) since 1970 is 3.9% for the 100% domestic and 5.4% for the mixed allocation. When Australia is selected, the performance is calculated in AUD.

In another calculator (https://portfoliocharts.com/portfolio/benchmark/), you can compare two different portfolios side-by-side.

Bee21

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Re: My FIRE Case Study
« Reply #29 on: July 18, 2017, 03:27:28 AM »
Does the corruption really matter that much to you if you have money to blow and travel every other month:)? I'm not saying I'm gonna make loads of money, just comparing what 40k buys you in australia Vs montenegro.

It probably doesn't matter unless you get somehow directly affected but here is a short list of things I found difficult to be around during a 3 month stay in Croatia in 2013:
- incredibly reckless driving anywhere you go
- loads of racist/sexist remarks in casual conversations that everyone thinks are funny
- a lot of poverty all around you that you can do very little about
- next to no public transport outside of Zagreb (less of an issue when you drive, I don't so I am handicapped)
- speaking of handicaps there is a lot of stigma and absolutely no support for special needs kids/adults and while I am not in any way personally affected by that having seen the kind of stuff done in Sweden I started feeling really bad about the way this is in Croatia and since I can't really do much about it it bothers me to think about it and especially to witness it
- random people giving you advice you never asked for that are terribly ignorant or just plain wtf (like telling you you need to tie a red string around your kid's wrist to ward off demons and stuff like that)
- a lot of ostentatious displays of wealth among people who often acquired it in very dubious ways and rather common admiration for those individuals among the more common folk
- a high level of distrust of other people (everyone is bad and out to get you, always assume the worse of people)
- utter lack of any kind of customer service mentality anywhere mostly also because most customer service staff is working for 200-300 max and struggling to make ends meet
- difficult and expensive to buy any kind of less common food in a given region, like fish in continental Croatia
- a lot of animal abuse everywhere
- incredibly low standard trains and buses
- in general a lot of negativity, people love to complain and whine
- it's completely legal and rather mainstream by now to openly support fascism

Oh wow. Your description of Croatia applies well for the other Eastern European places I know. What can I say, there is a reason we ended up at the other side of the world.

I forgot to add, watch out for government regulations re banks as well. I think it was cyprus which 'nationalised' bank accounts above 100k or I remember seeing something about people losing their life savings following a crash. And not even private pension funds are safe,  eg Hungary (and maybe Poland)  'nationalised' private retirement funds (was done legally via the Parliament).So watch the kitty.

 And yes, general corruption is a big deterrent. Eg my hometown is now a dump because the local mayor (now in prison) demanded such large bribes from foreign investors that they took their business elsewhere and sort of killed off most of the local industries. Same applies to the infrastructure, hospitals, being harassed by the police and the other joys.

Sorry, don't mean to be negative, I am just back and still under the influence of the life and mentality of the old country. Personally, we could be already fire if we rented out the house and moved back, but fuck that, I'd rather work for a few more years to give my kids a decent life and to ensure that we have options.

havregryn

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Re: My FIRE Case Study
« Reply #30 on: July 18, 2017, 07:22:56 AM »
Don't think anyone in their right mind would keep any money in Eastern Europe :D
If you do, yeah, I think you have at least 15-20% chance of having it nationalized within your lifetime :D Or just magically gone or something like that. Because of that I don't really blame my utterly unMustachian friends and family...there is really no point in saving money when you have no guarantee you'd get to keep it.

But yeah, maybe we shouldn't turn this into a lament on how horrible Eastern Europe is ...but good not to be too idealistic either. I think what I said stands, if you lived most of your life in a developed, prosperous country, you need to be a special kind of a detached loner to feel comfortable in places like these. Even if you have money, no one else has any so it means you are surrounded by people who either cannot relate to you in any way nor you to them or who openly want to take your money away from you which every xy years becomes possible because a war of some sort breaks out.
And, reading news right now I'd worry about one more thing - global warming and wildfires. There seems to be a rather noticeable trend that every year it gets worse. I was reading about a disastrous one in Split yesterday and in related news I saw an article about some similar drama in Montenegro.

But with that said I definitely know returnees who are not even FIRE in the full sense of the word (but have significant buffers earned abroad and foreign properties and citizenships making life easier) who manage to thrive there. They are close to their old families and friends and don't seem to be so bothered by the broader context (it's a personality thing to some degree I guess) ..but on the other hand I think what a lot of these people have in common is that their life in the new adopted country didn't turn out as they had hoped and they clearly prefer to live in Croatia. To be brutally honest I don't know anyone who managed to return happily if things had worked out for them elsewhere, and I do know some who tried.

Realist35

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Re: My FIRE Case Study
« Reply #31 on: July 18, 2017, 08:14:37 AM »
Don't think anyone in their right mind would keep any money in Eastern Europe :D
If you do, yeah, I think you have at least 15-20% chance of having it nationalized within your lifetime :D Or just magically gone or something like that. Because of that I don't really blame my utterly unMustachian friends and family...there is really no point in saving money when you have no guarantee you'd get to keep it.

But yeah, maybe we shouldn't turn this into a lament on how horrible Eastern Europe is ...but good not to be too idealistic either. I think what I said stands, if you lived most of your life in a developed, prosperous country, you need to be a special kind of a detached loner to feel comfortable in places like these. Even if you have money, no one else has any so it means you are surrounded by people who either cannot relate to you in any way nor you to them or who openly want to take your money away from you which every xy years becomes possible because a war of some sort breaks out.
And, reading news right now I'd worry about one more thing - global warming and wildfires. There seems to be a rather noticeable trend that every year it gets worse. I was reading about a disastrous one in Split yesterday and in related news I saw an article about some similar drama in Montenegro.

But with that said I definitely know returnees who are not even FIRE in the full sense of the word (but have significant buffers earned abroad and foreign properties and citizenships making life easier) who manage to thrive there. They are close to their old families and friends and don't seem to be so bothered by the broader context (it's a personality thing to some degree I guess) ..but on the other hand I think what a lot of these people have in common is that their life in the new adopted country didn't turn out as they had hoped and they clearly prefer to live in Croatia. To be brutally honest I don't know anyone who managed to return happily if things had worked out for them elsewhere, and I do know some who tried.
Hi:),

You make a lot of good points. We seem to be frustrated by the same things. Maybe they are just a little bit more bearable for me. What I don't like the most is that people look into other people's business way too much. In saying that, purely from a financial perspective, 40k buys way more in Croatia and Montenegro than in Australia. Whether it's worth it.. I'll update in a while as I'm spending august overthere lol

I think it's great to have that flexibility, the choice. If I want to retire in 10 years, rather than maybe 20 in Australia, I can choose that. Just never dreamt in my life that I would potentially be able to retire at 46:). And what also attracts me a lot is the ability to travel all the time. Was just looking yesterday about all the travel arrangements from overthere to Spain, Italy, Germany etc. Such a bargain!

Realist35

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Re: My FIRE Case Study
« Reply #32 on: July 18, 2017, 08:18:02 AM »
As a bonus on top:
If you want to compare the long-term performance of different portfolios, I can highly recommend the calculators at www.portfoliocharts.com
The author of the site is also active here in this forum.

Take the long-term returns calculator for example: https://portfoliocharts.com/portfolio/long-term-returns/
You can switch to your home market by pressing the black box with "United States" and selecting "Australia" in the drop-down.
Then you can test different asset allocations and compare the results. I just compared a 100% domestic Australian stock allocation with a 50% domestic Australian, 20% US, 20% Europe, 10% Emerging markets allocation. The real CAGR (inflation already considered) since 1970 is 3.9% for the 100% domestic and 5.4% for the mixed allocation. When Australia is selected, the performance is calculated in AUD.

In another calculator (https://portfoliocharts.com/portfolio/benchmark/), you can compare two different portfolios side-by-side.
Wow you gave me so much info to process! Give me a bit to digest all that and I'll get back to you lol

Sorry for not attaching the document correctly. Hope it's all good now:).