PP in Hong Kong?

[YellowTip]

Hi everybody,

I just finished reading the PP book and am excited to start building my own PP. I've earned quite a bit of cash here in HK by flipping some properties since 2008, but have now divested everything back to cash as the Hong Kong property market has peaked.

So my questions are as follows:

• Are there any templates out there for a HK based PP? I couldn't find any. Also, the author mentions in the book that you should not base your PP on a very small economy (like HK).
• Since the HK$ is pegged to the US$, would it make since to simply build a US based PP? My only worry is the strong and ever increasing influence China has on the HK economy. Also, talk about depegging the HK$ from the US$ is increasing.
• In case I should be doing a broader Asian PP, I was thinking of the following distribution:
  • 25%: iShares MSCI Asia APEX 50 Index ETF - Essentially a tracker of 50 Asian large caps
  • 25%: 30-year Singapore Government Bonds. Unfortunately the HK gov doesn't issue long term bonds, so I'll run a currency risk. Perhaps just use US Treasuries for this one instead?
  • 25%: Gold with my HSBC bank account, mixed with a bit a physical gold
  • 25%: I can't buy T-Bills here in HK, so I'm guessing I'll just keep that on my HSBC savings account (earning close to 0% interest)
  [/li]

I'd greatly appreciate some input on my questions listed above.

Thanks in advance!

[LazyInvestor]

I think bond and stock parts of the portfolio should be regionally tightly related. For example, US treasuries and US stocks, not US treasuries and Asian stocks. If one is from a small economy, I think it's better to go with a typical Bogleheads portfolio such as 50% intermediate local government bonds and whole world stock market, or even better you can go with 50% US PP and 50% HK Boglehead's portfolio. If you go with 50-50, you might want to construct Bogleheads part with All World ex-US ETF rather than whole world ETF for the stock portion.

[Ad Orientem]

Hi everybody,

I just finished reading the PP book and am excited to start building my own PP. I've earned quite a bit of cash here in HK by flipping some properties since 2008, but have now divested everything back to cash as the Hong Kong property market has peaked.

So my questions are as follows:

• Are there any templates out there for a HK based PP? I couldn't find any. Also, the author mentions in the book that you should not base your PP on a very small economy (like HK).
• Since the HK$ is pegged to the US$, would it make since to simply build a US based PP? My only worry is the strong and ever increasing influence China has on the HK economy. Also, talk about depegging the HK$ from the US$ is increasing.
• In case I should be doing a broader Asian PP, I was thinking of the following distribution:
  • 25%: iShares MSCI Asia APEX 50 Index ETF - Essentially a tracker of 50 Asian large caps
  • 25%: 30-year Singapore Government Bonds. Unfortunately the HK gov doesn't issue long term bonds, so I'll run a currency risk. Perhaps just use US Treasuries for this one instead?
  • 25%: Gold with my HSBC bank account, mixed with a bit a physical gold
  • 25%: I can't buy T-Bills here in HK, so I'm guessing I'll just keep that on my HSBC savings account (earning close to 0% interest)
  [/li]

I'd greatly appreciate some input on my questions listed above.

Thanks in advance!

Hmmm. I think I broadly agree with LazyInvestor. Hong Kong is not a sufficiently large enough economy that I would be comfortable with an all HK PP. There is another issue too and that is that Hong Kong is part of the PRoC. In general it has been left alone and given a lot of autonomy. But that is entirely at the whim of a government that is neither democratic nor necessarily too concerned about the rule of law and property rights. I would suggest diversifying out of HK for safety.

If you want to do a PP you will need to consider what currency and economy you want to base it on. My gut says to go with a US PP with maybe some side money in a global stock market index fund as a VP that you can just leave alone and hope that twenty years from now it will be worth more money.

Another option is to just go with a more boglehead type portfolio. But there too I would diversify out of Hong Kong for safety. I am not sure how difficult it would be to invest via Vanguard. But if you want to go US that would be who I suggest using. If you want to stay local you can look at Singapore or Australia. Singapore has a growing reputation as an offshore banking center, with all of the advantages (privacy and good banking service) and disadvantages (often steep financial services fees) that go along with that.

As to your specific questions...

* I have not run across an HK PP. And for the reasons mentioned above I don't think you should go that route.
*Yes, I would consider a USD based PP. See  my comments above. Another option would be to do an all China PP. But I think that is risky in a country that again is not democratic and the rule of law is dicey.
*This will depend very heavily on your investment options if you live in Hong Kong. But at a minimum I would ABSOLUTELY make sure I had my gold physical and outside of the reach of the PRoC in case something goes wrong. For the gold I would look at the Perth Mint. It's in that part of the world (more or less) and Australia is a very safe country.

[YellowTip]

Thanks everybody for the great input so far. It's much appreciated.

I have since analyzed and reanalyzed your input, reread several chapters of the book, and .... am still stuck 

I'll elaborate a bit below:

• I did some research on the US based PP for my situation here in HK and discovered a few serious drawbacks:
  • I pay 30% tax on all my dividends to uncle Sam. They'll be withheld automatically from whatever I'm supposed to receive. Since HK has no dividend tax or capital gains taxes, that puts me at a serious disadvantage.
  • Even more concerning is the 30% estate tax. So should something happen to me, my wife will lose again 30% from our lifesavings. At least over the US stocks and bonds we have invested. Again, HK has no estate tax.
  [/li]
• Also, I reread some chapters in the book and the author very clearly recommends basing the PP on the country or area where you live. So even though the HK economy is affected by the US economy, they're not linked in any way.

So I therefor prefer to stick to an Asian based PP, preferably based on HK held ETF's, Bonds, etc.

For the ETF's, I'm covered well with HK iShares and HK ETFs from Deutsche Bank. Cash and gold are also not a problem. My CORE problem is on long term government bonds.

While the HK government has a AAA credit rating and a ridiculously high budget surplus every year, they only issue short-term bonds (5 years max).

Could someone please provide some advise on how to deal with the bonds? I understand that US treasuries might not be a good pair with Asain based stocks, so what else could I use?

Also, to the previous posters, what is a boglehead portfolio?

Thanks in advance.

[LazyInvestor]

As a foreigner, if there is no treaty with your country, you pay 30% on dividends and 0% on interest and capital gains. This is not a bad deal since you cannot avoid paying dividend tax on US stocks even if you own for example a world ETF located in HK. There is no estate tax on treasuries and bank deposits. If you hold US stocks through for example S&P 500 ETF domiciled in US and gold somewhere else but in US, you can have US PP without having to worry about estate tax and you pay only 30% on dividends or less if there is a treaty with HK. Even if you own a broad Asian ETF, I'm sure some of the countries impose some tax on dividends before they are even distributed to you.

Anyhow, if you want just US treasuries there's no need to worry about interest tax, capital gains tax, and estate tax for you as a foreigner.

[Ad Orientem]

Sometimes in life Plan A is not a viable option, or it would be such a pain in the @$$ that it's not worth it. Non-US PPs are frequently on that list.

In order to run a viable PP based in a given country or on a currency you need a few things.

1. An economy that is good sized and fairly robust with more than a few things generating wealth and productivity. That by its self eliminates at least 2/3 of the countries in the world.
2. A government that is democratic. stable and has a good record of respect for the rule of law and property rights. Scratch off a few more countries.
3. The ability to buy long term sovereign bonds backed by the state and it's printing press. That eliminates a lot of Europe since the Euro zone expressly DOES NOT back their bonds with the printing press. It also eliminates a lot of countries that don't issue long term bonds to the general public.

If you happen to live somewhere where you just can't meet those conditions then you can always try setting up a PP based on the US Dollar.. But that may be impractical for various reasons. You have indicated some issues that I don't see a lot of ways around that would not involve financial contortions or extreme compromises.

But at the end of the day, if you come to the sad conclusion that a PP is just not doable right now, then just go with Plan B. There is nothing really wrong with a conservative Boglehead type portfolio. In someways it might be a better choice given your situation. Consider creating a simple bond heavy portfolio and throw in a slug of gold for insurance.

60% Total bond market index fund in any country or currency you think is safe and stable. Add 25% in the cheapest global stock market index fund you can find. and put the rest in physical gold somewhere very safe. I like the Perth Mint but you probably know the options in that part of the world better than I do.

And just rebalance annually or whenever you think things are drifting too far from assigned allocations. Is it a PP? No. But I would sleep pretty well with that kind of portfolio. If you wanted to lean a little more on the growth side you could even go 60-30-10. But I wouldn't hold less than 10% in gold.

[melveyr]

Personally, I would focus on taking balanced risks between bonds, stocks, and gold. That is basically what the PP attempts to do but with some cash tossed in.

If I were in your boat I would look at the volatility of stocks, a 5 year Treasury fund, and gold over a decade long period and weight them so that they had the same weighted volatility. That gets to the heart of the PP strategy. Just try to internalize that the PP is about taking balanced risks across the major macroeconomic factors and there are many ways to execute that core philosophy.

[YellowTip]

Some real solid advise coming in here. Thanks a lot LazyInvestor and Ad Orientem (EDIT: and melveyr who posted while I posted this).

My apologies for all the followup questions, but I plan to sink a rather substantial amount into this PP, so I want to carefully weigh all the different options. Please bear with me   

I read some older posts on this forum where people create 2 different PPs based on different markets. Does that make any sense?

Based on my location (Hong Kong) I can see that 2 markets are most suitable for my PP:

• USA: Pros: HKD-USD currency peg, easy to trade US based ETFs from HK.
  Cons: 30% tax on dividend, Half way across the world from where I live.
• Singapore: Pros: Very wealthy (AAA) and stable government. Access to 30-year government bonds, plenty of documented Singapore based PPs online, it's relatively close to Hong Kong.
  Cons: Singapore is still a small economy, although many regional companies are listed on their stock exchange, somewhat of a currency risk as the Sing dollar is pegged to a basket of currencies.

So, my idea was, instead of picking one market over the other, why not do both?

• 12,5%: USA Total Stock market index tracker ETF (likely Vanguard in US$)
• 12,5%: Singapore Stock market index tracker ETF (likely iShares in S$)
• 12,5%: USA 30-year treasuries ETF (likely Vanguard in US$)
• 12,5%: Singapore 30-year treasuries (directly from gov in S$)
• 25%: Gold, mixed between HSBC HK paper service and physical gold coins in HK
• 25%: Cash on HSBC HK savings account

My idea here is that I have my assets spread across USA, Singapore and Hong Kong and at the same time have stock/bond diversification between USA and Asia.

Does the above make sense, or am I breaking some key rules here?

Your input would be much appreciated.

[Ad Orientem]

Some real solid advise coming in here. Thanks a lot LazyInvestor and Ad Orientem (EDIT: and melveyr who posted while I posted this).

My apologies for all the followup questions, but I plan to sink a rather substantial amount into this PP, so I want to carefully weigh all the different options. Please bear with me   

I read some older posts on this forum where people create 2 different PPs based on different markets. Does that make any sense?

Based on my location (Hong Kong) I can see that 2 markets are most suitable for my PP:

• USA: Pros: HKD-USD currency peg, easy to trade US based ETFs from HK.
  Cons: 30% tax on dividend, Half way across the world from where I live.
• Singapore: Pros: Very wealthy (AAA) and stable government. Access to 30-year government bonds, plenty of documented Singapore based PPs online, it's relatively close to Hong Kong.
  Cons: Singapore is still a small economy, although many regional companies are listed on their stock exchange, somewhat of a currency risk as the Sing dollar is pegged to a basket of currencies.

So, my idea was, instead of picking one market over the other, why not do both?

• 12,5%: USA Total Stock market index tracker ETF (likely Vanguard in US$)
• 12,5%: Singapore Stock market index tracker ETF (likely iShares in S$)
• 12,5%: USA 30-year treasuries ETF (likely Vanguard in US$)
• 12,5%: Singapore 30-year treasuries (directly from gov in S$)
• 25%: Gold, mixed between HSBC HK paper service and physical gold coins in HK
• 25%: Cash on HSBC HK savings account

My idea here is that I have my assets spread across USA, Singapore and Hong Kong and at the same time have stock/bond diversification between USA and Asia.

Does the above make sense, or am I breaking some key rules here?

Your input would be much appreciated.

Hmmm. I am a fan of the KISS rule (keep it simple stupid). In the military we learned that the more complicated something is, the less likely it is to work. Let's tackle the US PP problem first. The main issue is taxes on dividends if I am reading this right. Those taxes are not that onerous and we need to remember that dividends are pretty much gravy where the PP is concerned. The PP works because of the volatility of the asset classes. That's where our gains come from. So I would not sweat the dividend tax too heavily. And also I think it only applies to the stock part right?

That's not enough to make me move away from a US based PP. And of course you also have the advantage of the currency peg. That adds stability.

Gold... It is your call but remember that gold is disaster insurance. It sounds like you are planning on keeping your gold in HK. I would not do that. Maybe it's my American prejudice showing through,or maybe I am just being paranoid. But I do not trust the PRoC enough to not have an escape fund somewhere out of their reach. And even if I am paranoid, that doesn't mean they're not out to get me.

[LazyInvestor]

It looks fine to me although I'd try to keep clean and clearly separated PPs. You can even make it 1/3 US, 1/3 HK, 1/3 Singapore. But remember once you invest in a PP there is no way out, you have to stick with it and it's rebalancing rules.

You have another very nice thread on this forum about the Singapore PP and some discussions about Israeli PP which might be useful too. Check them out...

I'd keep half of gold in HK and half in Singapore or even more in Singapore if you think there is lower chance it would be confiscated there for you as a HK resident. I'd keep it all physical given the nice gold market in HK and Singapore with good storage facilities. Although recently I was reading somewhere that it's getting harder to buy and sell gold in HK due to shortages and some new regulations.

Also note, you must buy US treasuries directly and not through an ETF such as TLT. If you buy them directly you receive interest which is not taxed, but if you buy them as an ETF you get dividends which are taxed.

You cannot open Vanguard account as a foreigner. Go with one of the other big brokerages in US such as Etrade, Fidelity, Schwab, Schottrade.. which will let you buy and sell treasuries without fees... I think Fidelity might be the best for this.

Here you have very good brokerage reviews for all countries you are mentioning http://the-international-investor.com/

[YellowTip]

Thanks again for the responses. Very helpful.

I don't quite understand everybody's fear of holding gold in Hong Kong. Why would the PRC confiscate gold... ever? In China, a large majority of the population saves physical gold their entire life. It's their way of life and it's a very old tradition. Family gold is passed down from generation to generation and even during weddings gold is exchanged between families. In short, the Chinese LOVE gold.

Now imagine some idiot in the China government deciding to start confiscating gold (even as a small scale experiment ...like they just did in Europe with bank deposits), that government wouldn't last for a single day as you'd have a billion people on the streets ready to overthrow the government.

The China government might not be the most honest or transparent government in the world, but I think they've shown well (at least for the past 20 years) how to keep their citizens in a relative state of happiness. Small pockets of unhappiness are usually dealt with some showing of authority (not force) and money/property/licenses/gold/concessions/benefits under the table.

So from my POV, I don't see that risk, but am open to being corrected on this point    ...BTW... I''m Dutch, not Chinese... 

As for my PP, I have decided to start with a Singapore based PP and see how that goes. I travel to Singapore quite often for business, so am very familiar with the place and their economic/political environment. Also, I have they impression that the Singapore stock market is much more reflective of the Asian economy than the US stock market. In the long run, I might mix my Singapore stocks with some Hong Kong stocks, but I'll keep things simple at the start.

I'm meeting my account manager at HSBC in 2 hours, who will help me set up a trading account for Singapore stocks and bonds. I'll likely split my gold holding between Hong Kong (HSBC) and Perth Mint (unallocated deposits ...to escape the 1% annual fee).

I'll keep everybody updated on my progress.