Author Topic: Case Study: Newbie Peruvian Asset Allocation  (Read 1252 times)

alfimon

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Case Study: Newbie Peruvian Asset Allocation
« on: August 10, 2016, 10:20:01 AM »
Hi, everyone. I've been lurking this forum since last year but this is my first post. My wife and I are taking the next step in our FIRE plan and I realized I need some investment advice.

Here's my short summary of our lives:
We are Peruvians couple (31 and 33 yrs) and live in Peru. We don't have kids yet, but we plan to in the next year. We have been frugal since childhood. In 2013, I discovered MMM and decided we could FIRE if we tried hard. The first thing we did was pay our mortgage debt (~US$ 120k) aggresively since it was costing us 10% yearly. We finished in Jan 2016. Since then, I have tried to convince my wife to invest in index ETFs (as Peruvians, we don't have access to Vanguard mutual funds). She doesn't have experience investing so obviously she is afraid and my track record doesn't help: after leaving college, I have invested ~US$ 60k in Peruvian and Canadian mining stocks, making some money initially but then losing a lot (not all, the rest was used to pay for our wedding and prepaying our debt).

So, now she has accepted to invest and we have an investment plan:
  • Yearly combined income of ~US$ 82k
  • Yearly expenses of ~US$ 38k (saving rate 54%) but expected to grow with children
  • Initial investment contribution of ~US$ 12k
  • Monthly investment contribution of ~US$ 3k
  • Yearly investment contribution of ~US$ 12k (with performance bonuses and other extras)
  • I am opening an investment account in TD Ameritrade to buy 0% commision ETFs

Our financial situation is the following:
  • Cash ~US$ 4k (not including the initial investment contribution)
  • Emergency Fund ~US$ 18k (in a 1Y Time Deposit @ 6%)
  • Unemployment Account ~US$ 37k (in Peru, we don't have an unemployment insurance. What we have is an account in a financial institution where our employer   deposits one monthly wage yearly and it earns interests [currently @ 7%]. It's of restricted availability until you lose or change your job)
  • Pension Fund ~US$ 50k (in Peru we don't have 401k or other retirement plans. There is four pension companies that you have to choose from. They take 10% of your monthly wage and invest it [current asset allocation of our moderate fund: 37% Fixed Income Peru, 11% Fixed Income Global,  27% Equity Developed, 7% Equity Emerging, 6% Cash and Time Deposits]. We can't take the money until we are 65.).
  • No debt now but I'm beginning an MBA program in october and takin a student loan of US$ 40k with my employer @ 6.5%

So, after the long introduction, here is my question:
Should I go with a simple asset allocation (100% VTI [Total Market]) or should I go with a diversified one (something like 50% VOO [Large Cap Blend], 20% VBR [Small Cap Value], 20% VXUS [International] and 10% VNQ [REITs])?

I am not a good investor (too much emotion) so a simple rule like 100% VTI sounds really attractive to automate the proccess and have no regrets (like "why did I choose that weight in this asset class?"). What I don't like is that is have too much exposure to the largest companies in USA. After rereading the Investor Manifesto by William Bernstein, I found the example of the Japanese investor in the 90s who invested all in Japan equities and it sounded similar to my first asset allocation. What I don't like about the second one is that there is a lot of discretion left to me (should I invest in Fixed Income also? Gold? why REITs? should I dissagregate International in Europe, Pacific, etc.?) and I don't trust my judgment so much.

Thanks for reading me and for any advice you have for me.

alfimon

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Re: Case Study: Newbie Peruvian Asset Allocation
« Reply #1 on: August 11, 2016, 10:07:24 AM »
Waiting for a reply, I found an answer to my question: don't fret about Asset Allocation too much, just start!

This discussion helped me a lot:

http://forum.mrmoneymustache.com/investor-alley/meb-faber-which-asset-allocation-model-is-best/msg1091087/#msg1091087

Rubic

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Re: Case Study: Newbie Peruvian Asset Allocation
« Reply #2 on: August 21, 2016, 09:06:26 AM »
Sorry you haven't been provided with any replies yet.  It may be that there aren't
enough MMM'ers who feel comfortable responding to your situation, being unfamiliar
with how things work in Peru.

It seems like you are off to a good start, especially since you got burned by investing
in mining stocks and will now focus on index funds (or their equivalent EFTs).

Best wishes!

NathanP

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Re: Case Study: Newbie Peruvian Asset Allocation
« Reply #3 on: August 22, 2016, 11:03:13 AM »
Many people reading this might suggest that you put a large portion of your investments in (safe) bank accounts that return 6%. The counter argument is that inflation is much higher in Peru than in the developed world, so 6% might drop to near zero when that is considered.

Are you wanting to stay in Peru long term, or travel in retirement? If travel is desired, then I would invest a significant portion of your wealth in an international index fund (total world index). This will help to reduce currency risk as your investment mix won't drop if Peru elects a terrible leader and the Nuevo Sol drops.

If you are likely to remain in Peru then I would consider investing in real estate around Lima. Owning apartments in nice areas of Lima should yield a nice stream of rental income and grow at least as fast as Peru's inflation rate and/or GDP. Since borrowing costs are high, consider buying apartments in cash once your savings is large enough.

I think that Peru has a bright future and would not fear hold assets in the country. Do consider an international mix of stocks to protect against country specific events.

Source: My wife in Peruvian and has family around the Lima area. Property seems to be the preferred asset to beat inflation and capitalize on the countries developing wealth.

alfimon

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Re: Case Study: Newbie Peruvian Asset Allocation
« Reply #4 on: August 22, 2016, 02:49:51 PM »
Sorry you haven't been provided with any replies yet.  It may be that there aren't
enough MMM'ers who feel comfortable responding to your situation, being unfamiliar
with how things work in Peru.

Thanks, Rubic!
Yeah, I know it is kind of difficult finding people of Peru in these forums. I am thinking of starting a Journal so that I can share a little more about life in an Emerging Market.

It seems like you are off to a good start, especially since you got burned by investing
in mining stocks and will now focus on index funds (or their equivalent EFTs).

Best wishes!

Yes, lesson learned in trying to pick stocks. At first, I thought I was a genius (having bought a share at US$ 0.45 that one year later was at US$ 4.50) but then reality hit (basically price of metals declining) and I begun to lose a lot of money. Best education of my life, because I didn't have a lot of money yet.

alfimon

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Re: Case Study: Newbie Peruvian Asset Allocation
« Reply #5 on: August 22, 2016, 03:07:01 PM »
Many people reading this might suggest that you put a large portion of your investments in (safe) bank accounts that return 6%. The counter argument is that inflation is much higher in Peru than in the developed world, so 6% might drop to near zero when that is considered.

Yes, that's the case. A lot of people here have all their money in time deposits earning 6-8% yearly. Inflation is between 3-5% so you have positive real return. But you could have periods of higher inflation and we depend a lot of imports, so even if there is no inflation you have the risk of Nuevo Sol losing value against other currencies.

Are you wanting to stay in Peru long term, or travel in retirement? If travel is desired, then I would invest a significant portion of your wealth in an international index fund (total world index). This will help to reduce currency risk as your investment mix won't drop if Peru elects a terrible leader and the Nuevo Sol drops.
If you are likely to remain in Peru then I would consider investing in real estate around Lima. Owning apartments in nice areas of Lima should yield a nice stream of rental income and grow at least as fast as Peru's inflation rate and/or GDP. Since borrowing costs are high, consider buying apartments in cash once your savings is large enough.

The original plan is staying in Lima as we have both our parents living nearby and are very family-centered. Also, an additional benefit is that when we have kids we can rely on them to help raising them. Also, we think Peru has a lot of growth opportunity and specially there is a lot of help needed (one of the reasons I want to FIRE is to help people not in Lima get better education and health).

Yeah, I still hit my head against the wall because I had the opportunity to buy at least one apartment for investment since 2008 and didn't because of the hassle I thought it would involved (searching for renters, contacting them, collecting money, doing mantenaince). Since that year, apartments in Lima have tripled in value. So buying one in cash is for now a distant future (we would need like US$ 250k). The other option is going to a province that hasn't yet developed so much and trying to buy there. That's an idea that is floating in our heads.

I think that Peru has a bright future and would not fear hold assets in the country. Do consider an international mix of stocks to protect against country specific events.

Source: My wife in Peruvian and has family around the Lima area. Property seems to be the preferred asset to beat inflation and capitalize on the countries developing wealth.

Thanks for the advice and it's really nice that your wife is Peruvian. Yeah, everyone here in Lima has been buying apartments like crazy (although since last year the rise of prices has stopped a little).