r2i forum

I have read several AAP's here and a lot of the documents here. I have been thinking if there can be a broad AAP suggestion for a typical mid 30"s USC R2Ier, which represents a big chunk of this group under the following assumptions. I have posted my thoughts here and want the experts and others to chime in. If this is worthless then this thread can be discarded.

Assumptions:
1. Both spouses USC R2I
2. PFIC issues avoided or taken care of by investing in parents name
3. The R2Ier can possibly come back at some point for career or other reasons, hence the 50% US exposure.
4. real estate exposure is current cash value It can mean one house or three houses with 50K down payment each. which means in future AAP will skew towards real estate.
5. R2Ier is going to work to at least cover expenses. One spouse working.
6. Has 2 kids hitting college in 10-15 years
7. the indian rupee savings will be invested in india and US
8. Net worth is between 250-750K
9. Risk tolerance is medium, would not be willing to lose more than 20% of portfolio overnight.
10. future savings will be funnelled into this AAP but with greater skew towards India
11. this will not apply to someone who is dead sure of never r2a'ing ever.


Assume you have 500K in net worth, then
US: India = 40:60 or 200K:300K (the actual US:International is 25-75)

India
India stock (nifty replication or MINDX or indl stocks) - 15% - 75K USD
India fixed income/bond/debt MF - 15% - 75K USD
India real estate - 30% - 150K USD

US
stock (equally divided 5% between large, mid, small cap indexes) - 15% - 75K USD
international (VEU or VGTSX or equivalent) - 15% - 75K USD
bond/fixed income/cash - 10% - 50K USD


I am not sure if this is correct. I am just exploring to see if given these assumptions, which I think fits a lot of typical people in this forum, can we develop a one size fits all, buy and hold long term simple AAP. What I am hoping for is that this get tweaked so that we can reach a reasonable solution.

bump. nobody is interested?

Nand,

I will comment tomorrow as time permits.

One typical rule of thumb is that amount of money in fixed income shoud be what your age is. Hence a 40 year old will have an AAP pf 60:40 and a do year old willhave an AAP of 30:70.

The above seems well and good in general, however here we are dealing with R2Iers and for R2Iers when they go to India even at age 35 and have amassed some tidy sum, for them to take risk as a 35 year old in USA does not seem right to me. This is because their savings power in India in relationship to the total asset base has changed and hence their replenishment capacity in case of a loss. Hence a lower risk.

An argument might be made that their cost of living has also gone lower, but then I argue that their income is correspondigly lower so their net savings still remain lower as a percentage of total assets and their R2I probably took their existing asset total into account as a factor to R2I decision and hence a risk in that area is perhaps not necessary.

Another fact to couple with this is that in India fixed income returns net of inflation are greater than fixed income returns net of inflation in USA.

The above make a case for a reduced risk for an R2Ier especially after R2I, hence a modification to the rule of thumb stated above.

Desi - I am glad you took the time to reply. Your sage advice on this is spot on. I did not consider the diminishing of saving potential post r2i that much. In your opinion, given the points you have made, what is your suggested allocation:

Assume you have 500K in net worth, then
US: India = __:__ or __K:__K (the actual US:International is __-__)

India
India stock (nifty replication or MINDX or indl stocks) - __% - __K USD
India fixed income/bond/debt MF - __% - __K USD
India real estate - __% - __K USD

US
stock (equally divided between large, mid, small cap or all in vtsmx/equivalent) - __% - __K
international (VEU or VGTSX or equivalent) - __% - __K USD
bond/fixed income/cash - __% - __K USD

Also at:
40, assuming still r2i, the AAP balance between US:India is __:__ and stock:fixed inc is __:__
45, assuming still r2i, the AAP balance between US:India is __:__ and stock:fixed inc is __:__
50, assuming still r2i, the AAP balance between US:India is __:__ and stock:fixed inc is __:__

On this in my opinion I would reduce by 5 points everey 5 years from US to India and stock to fixed inc so go from say 35:65 to 30 to 60 etc.

Note that real estate component is the current market value of all real estate minus the current remaining debt obligation on them in my calc. So you could have bought a house for 50 lacs, its market vaue is say 80 lacs and you have an outstanding loan on it for 40 lacs, then the RE component of investment is 80-40 = 40 lacs etc.

All other assumptions remain the same as in the OP. mid 30 yr old, working in india 20 - 30 lac salary growing at a rate of inflation, single income, reduced saving potential (maybe 50% of US or say 10KUSD per year, college going kids in 10-15 yrs etc.)

Your suggestion on these blanks will be extremely valuable to manyon this forum. eagerly awaiting your response.

My motivation to do this is that I have seen several AAP's and I saw some common elements and wanted to distill it into a simple buy and hold, long term AAP strategy.

Desi;81828Nand,

I will comment tomorrow as time permits.

One typical rule of thumb is that amount of money in fixed income shoud be what your age is. Hence a 40 year old will have an AAP pf 60:40 and a do year old willhave an AAP of 30:70.

The above seems well and good in general, however here we are dealing with R2Iers and for R2Iers when they go to India even at age 35 and have amassed some tidy sum, for them to take risk as a 35 year old in USA does not seem right to me. This is because their savings power in India in relationship to the total asset base has changed and hence their replenishment capacity in case of a loss. Hence a lower risk.

An argument might be made that their cost of living has also gone lower, but then I argue that their income is correspondigly lower so their net savings still remain lower as a percentage of total assets and their R2I probably took their existing asset total into account as a factor to R2I decision and hence a risk in that area is perhaps not necessary.

Another fact to couple with this is that in India fixed income returns net of inflation are greater than fixed income returns net of inflation in USA.

The above make a case for a reduced risk for an R2Ier especially after R2I, hence a modification to the rule of thumb stated above.[/quote]

bump. desi - gently pinging you that I am eagerly awaiting your expert advice on this template AAP.

Other experts, gurus and others - please also chime in with your thoughts. I was hoping this would be of interest to a broader audience.

Not an expert, but AAP is a very personal thing and cannot be generalized. Infact it could do more harm than good to comeup with a template. I guess thats the reason Vinod and RRK stopped doing AAPs.

Most important thing in an AAP is the risk tolerance, which is a very hard thing to figure out unless you know the person very well. Success of AAP depends on sticking to it in all markets and for that you need to get the risk tolerance right.

I would say just fill out the AAP questionnaire or come up with your own using existing AAPs and experts like Desi or Bobus can give suggestions.

My 2c

good point. thanks for your observations. I do agree. The thing is templates are not new. Several experts suggest simple portfolio. Google Paul Farrell, Scott Burns "margaritaville portfolio", and look at

http://www.fundadvice.com/portfolio.html etc. These are boilerplate simple buy and hold long term portfolio suggestions. The problem with these is that they are US focused. I was trying to get to something for the peculiar financial animal that an R2I is.

And regarding risk, one of my assumptions is a medium risk - meaning willing to lose 10-20% of portfolio max at any given time, no more. That catches a large enough basket. And the disclaimer is that this is just a exercise in thinking about AAP's in general and one must do theie own exercise.

As for me I am re-doing my own AAP due to impending r2i, I have read the documents here and am a pretty active reader in financial planning literature. On top of that I do have a finance MBA and have taken courses in investment management etc. That said I have learned as much or more from this forum than the MBA about investing for the common man.

laks0;82585Not an expert, but AAP is a very personal thing and cannot be generalized. Infact it could do more harm than good to comeup with a template. I guess thats the reason Vinod and RRK stopped doing AAPs.

Most important thing in an AAP is the risk tolerance, which is a very hard thing to figure out unless you know the person very well. Success of AAP depends on sticking to it in all markets and for that you need to get the risk tolerance right.

I would say just fill out the AAP questionnaire or come up with your own using existing AAPs and experts like Desi or Bobus can give suggestions.

My 2c[/quote]

nand, noble effort here.

I think the large cap represents 75% of total US stock market. Hence one should not divide US stock market $ equally among large , mid & small cap.

Also you said PFIC issues are avoided by investing in parents name. But the US investments are under your name. So you'll be paying PFIC to GOI on US accruals. Am I correct?

The key question how does one determines how much he needs to leave in USA. Without to answer to that question, it's impossible to come up with %s within US & India investments.

nand, indeed your efforts will be useful for many. My thoughts.

Perhaps, for longer term, in my opinion, India RE portion should be swapped with fixed income/debt portion, or even more like this.

India fixed income/bond/debt MF - 35%
India real estate - 10%

My current RE portion is about 25%, thanks to its recent appreciation. But I will be adjusting it for longer term and swap some with senior citizen schemes (in parents name).

nand;81522

India
India stock (nifty replication or MINDX or indl stocks) - 15% - 75K USD
India fixed income/bond/debt MF - 15% - 75K USD
India real estate - 30% - 150K USD