30-year investment portfolio which has to start before the end of the year and wants to be left alone afterwards?

December 5, 2008 8:59 AM

If you had a very strong incentive to invest money before the end of the year with a 30-year outlook, and a further strong incentive to not adjust your investment strategy over that timeframe unless absolutely necessary, what kind of portfolio would you assemble?

I live in Germany, which has an effective 0% capital gains tax on long-term capital gains from financial instruments. The government has finally decided to end this peculiar state of affairs and will start to tax long-term capital gains at 25% or more starting in 2009. Investments made before 1/1/2009 and held for more than a year will continue to be (un)taxed under the old system. But, naturally, if you redistribute the portfolio at any point, what was redistributed will come under the new law, so there is a strong incentive to leave it alone if at all possible. I don't see this as a suicide pact, and would make changes that were necessary without sweating the tax too much, but I am trying to design a portfolio to put a little money in now that has decent odds of not requiring rejiggering and having acceptable performance over the long timeframe which is available.

Personality and background: I consider good money management to be an obligation but not a pleasure of life or inherently interesting, so I believe in keeping things as simple as possible, within reason. Past experience has taught me that if the workings of a financial vehicle aren't clear to me after one good and comprehensive explanation, I'd do best to avoid it. I have invested for the (shorter) long-term before and I've had good outcomes, and I've been lucky enough to have received my lessons about active short-term trading and speculation at reasonably low prices. My general financial health is healthy and the investment seed is extra money. I'm able to purchase many (but not all) US and other international securities/ETFs/funds/bonds without too much of a markup, so let's just assume for simplicity's sake that I can purchase any of them. This will be retirement money, but not the only source of retirement money.

I've read the Scott Adams article, lots of Warren Buffett, and several good books on index fund investing, and now this is my AskMe gut-check/brainstorm request before proceeding: what would your 30-year fire-and-forget portfolio look like? I would love to hear your ideas and advice if you wouldn't mind sharing. Thank you!

posted by anonymous to work & money (15 comments total)

I'm software guy, not a financial advisor, so take this for what it is worth, but what I want for myself is two-fifths in Treasury Inflation Protected Securities, one-fifth in a non-US dollar currency fund, one-fifth in utility stocks that offer a dividend re-investment program, and one-fifth in an US dollar denominated money market account.
posted by ob1quixote at 9:44 AM on December 5, 2008

What about dividends received from stocks purchased before 1/1/2009? If they remain untaxed, I might get into some large-cap, high-yielding, stalwart, non-financials stocks. Your own Deutsche Telekom is looking pretty good as one of these. Reinvest the dividends.

Disclaimer: I know nothing about the German tax code, and this isn't investment advice for you. It's just what I might do in your situation.
posted by ikkyu2 at 9:46 AM on December 5, 2008

Banks.
posted by unSane at 9:50 AM on December 5, 2008

I am not your financial advisor.

However, here's how I would do it if I were in your situation.

I think part of it depends on how old you will be in 30 years - just on the cusp of retirement? Still with a number of years to go? This piece of info is crucial in determining how much risk you can tolerate in the later years of this strategy. If you will have some time to recover losses post-30 years, then you might want to be slightly more aggressive. If you are going to retire immediately after those 30 years, then you might want to be more conservative.

Personally, I'd put maybe 10% into bonds, maybe 60% into moderate risk index fund(s) (like an S&P 500 fund) and 30% into higher risk growth index fund(s). This will give you good earning potential, and some hedge against risk in the last years of your portfolio.

Those percentages are not precise; the basic point is that you want a little rock-solid stability (bonds), some moderate risk growth (S&P500 index fund) and a bit of high risk, but potentially high yield growth (the growth fund).
posted by sherlockt at 10:05 AM on December 5, 2008

I consider good money management to be an obligation but not a pleasure of life or inherently interesting, so I believe in keeping things as simple as possible, within reason.

Vanguard's Target Retirement Funds are perfect for you. Very low costs, very reliable company, etc.
posted by Perplexity at 10:24 AM on December 5, 2008

I think I have the same attitude about financial management that you describe: the simpler, the better. I've read lots of Buffet and mainstream investing stuff and what I've gleaned is that I can only do better than an Index fund by putting way more effort into it than I care to. Even then, most professionals don't do better than the indexes.

In sum, my investment horizon is always long-term, I don't want to fiddle with it, and I stick with Vanguard's Index funds. Gambling is more fun in Vegas.
posted by GPF at 10:30 AM on December 5, 2008

BAC and BAC-L which is a noncumulative preferred stock convertible to 20 shares of BAC at any time.

BAC-L is currently yielding 12% in noncumulative dividends. BAC common is yielding 9%. BAC may remain under pressure for the foreseeable future but on the other side of this pullback it will be a $30 stock, and in the 30 year timeframe will be $60 (in real terms).

Buying BAC-L is buying a non-expiring call option on BAC @ $26 that yields a fixed 12% per year every year (assuming the board doesn't suspend the temporarily suspend the dividend, but I'm not aware of this happening).

BAC's loan book compares favorably to its peers as far as risk profile goes and may get further bloodied in this crisis but is far from danger.
posted by troy at 10:45 AM on December 5, 2008

Depending on your age and risk aversion, you'll probably want some percentage of your investment to be in bonds. Because of your peculiar tax situation, I'd suggest looking into zero-coupon bonds for that portion. I don't know the German tax code, but you should find out if "phantom income" from zero-coupon bonds is taxed as it sometimes is in the US. If not, then you can avoid the tax liabilities of interest payments while maintaining the diversification/protection of holding some bonds.
posted by Durin's Bane at 10:46 AM on December 5, 2008

Ack, reading BAC-L's summary a bit closer I see that after 2013 if & when BAC is trading above $65 then the BOD can force you to convert BAC-L to the 20 common shares. This is undesirable on the 30-year timeframe given the capital treatment you desire.
posted by troy at 11:01 AM on December 5, 2008

follow-up from the OP

Hi folks,

A little followup.

To answer ikkyu2's question, which I should have mentioned originally: dividends are already taxable at 50% of the individual's income tax rate, but in 2009 they will be taxable at a minimum of 25%, so dividend reinvestment doesn't bring big gains vis-a-vis the tax situation. BTW, I'd be hesitant to build a plan around German companies because I think they will most strongly manifest the results that this tax change will have on the market, which is probably going to slow down capitalization after the next four weeks of buying.

The answer to sherlockt's question is that I will want to retire in 30 years (any wiggle there is going to be in the low single digits) and I think this will have to be a little more conservative than I'd choose if I was more willing to rebalance.

Thanks for the ideas so far!

posted by jessamyn at 11:41 AM on December 5, 2008

Another thing I just remembered. . .there are actually "target date" funds being marketed here in the US. You basically pick a fund with a target date to your liking, in your case 30 years from now, and then the fund manager rebalances the risk exposure of the portfolio based on the number of years remaining to the target date. It seems like the quintessential "set it and forget it" investing strategy. I'm not sure of the tax implications of the fund, and in my brief googling I've read some criticisms of them, but it might be something you're interested in.
posted by sherlockt at 12:09 PM on December 5, 2008

This would probably be my personal breakdown:

10% bonds/fixed income
45% equity (US and Europe)
20% equity (emerging economies)
5% Forestry
5% Infrastructure
7.5% Commodities (hard and soft)
7.5% Property

The US/European (inc UK) exposure I would get primarily from index trackers and ETF's, with maybe one or two managed funds thrown in. The emerging economies I would probably have a split between index/ETF's and active funds - possibly a bit heavier on the active management. I think forestry, infrastructure and property are good long term holds that won't neccesarily be correlated to equities. Same with commodities, which I think will continue to see growth supported by the growth of India and China. If I were loooking at a 30 year timeframe, I would probably be willing to take on more risk.

If you're looking for low cost index tracking you can get ETF's for all of the above. I'm more familiar with the actively-managed (with higher charges) funds for forestry, infrastructure and porperty so can't really comment on the ETF's that are offered, but if you aren't already, make sure you thoroughly familiarise yourself with ETF's and how they're constructed. Investopedia has a good (though US-centric) education section on them (scroll down).

Now is a great time to invest, with the price falls we've seen across all markets, I wish I were in your position!
posted by triggerfinger at 1:35 PM on December 5, 2008

As Perplexity pointed out above, the ideal investment for you would be the German equivalent of a Vanguard Target Retirement fund. This is a fund of funds that combines a diversified portfolio of a domestic stock fund, an international stock fund and a bond fund. Over a 30 year period the allocation gradually moves from mostly riskier stocks to mostly safer bonds. It is the ideal single fire-and-forget investment.

However, the Vanguard fund is oriented toward U.S. investors with about 75% U.S. stocks and only 20% international. All of the bonds are U.S. Assuming you are intending to retire in Germany you would be exposed to a lot of currency risk. It would be better if you could find an equivalent fund based in Europe using a higher percentage of European stocks and bonds.
posted by JackFlash at 2:04 PM on December 5, 2008

Have you read Gerhard Kommer? Best german index investment book.

Investing of course depends on the money you have available, starting from €10k you could for instance build a little worldwide index-portfolio: 30% North America, 35% Europe, 15% Japan and 20% Emerging Markets.

Pictet has nice index funds available in Germany.

Also check Moneyfruits.com.
posted by wft at 1:24 AM on December 6, 2008 [1 favorite has favorites]

Direct equities would be a poor choice, IMHO, You run the risk of a takeover forcing you to take capital gains. With your reluctance to invest in the DE market, probably a diversified international fund of index funds would be the best move, assuming you can accommodate the risk of being all in equities with this money by directing other investments to diversify this.
posted by bystander at 2:39 AM on December 6, 2008