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Would this be a good plan to semi-retire?

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  1. #1

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    Would this be a good plan to semi-retire?

    I just sold my flat, and I am planning to leave in 1 1/2 years, and semi-retire somewhere nice and cheaper. I have two small children and I plan to spend more time with them, while doing a part-time job I enjoy. My ability to retire will depend on me not losing my money by buying the wrong shares. I am fine with some ups and downs (I don't need to buy treasury bonds), as long as I keep receiving a regular, fairly predictable dividend.

    I recently came across LON:IEMB, which is a etf with "Direct investment in emerging market government and quasi-government bonds" issued in USD. The etf has a dividend currently of about 4.9%, distribution monthly (so I could treat it similarly as a regular income from work) and relatively stable price. In 2009 it did drop, but "only" by 30%, compared to SPY that dropped by 50%, and it recovered in less than a year, as opposed to SPY that recovered in 2 years. And when the price of the etf dropped in 2009, it kept paying the regular dividend, so I would still have had my income.

    The price of the etf seems to have by about 5% from the average over the last 10 years, so it seems to have a very stable price. Although I can't become billionaire with it, I think the risk of losing all my money is quite small.

    The credit rating of the bonds it buys is 52% BBB or above, and 48% below BBB. The etf is made up of about 480 government or quasi-government bonds, which I think make it safer and more stable. It is unlikely that so many government and quasi-government entities would suddenly go bankrupt.

    Looking at the last 11 years, I think this etf did very well. If it continues like this, it's what I am looking for. But is this due to the very low interest rate during these years? Would one expect the etf to do less well if interest rates increase over the years to come? What do you reckon? Unfortunately I am not smart enough to answer this question.

    I think I would invest about 40% of my money in this etf, 25% in a municipal bond index, 30% in SPY, and 5% in REITs (such as STOR, O, OHI, etc.). Any comment and advise is very welcome.


  2. #2

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    Take a look at this thread: https://geoexpat.com/forum/155/thread347971-2.html discusses USD bonds by EM govts.

    I would personally not dedicate as significant a portion to IEMB as you are planning (for sake of disclosure, my allocated amount for IEMB is 5%). I do like the fact that IEMB distributes monthly as does MUB.

    For any US. Bond ETFs. I'd seriously recommend you consider buying and holding for a little bit. There is a debate that has not concluded - for example MUB distributes monthly with no WHT. SHY distributes monthly but with a couple of banks I've tested with, I see a 30% WHT. Now, folks tell me I'll get a refund sooner or later - I'm going to hold this one for a bit to see if I actually get the refund or if it "gets lost".

    The 30% WHT might affect what you buy and where you buy it (SPY - US v/s SPY5 - UK)...

    Last edited by shri; 27-03-2019 at 08:59 AM.
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  3. #3

    This product reminds me of bundled mortgage investments prior to the GFC in the US. Risky when held individually, deemed safe when bundled together.


  4. #4

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    @civil_servant - well, thats what all ETFs are, bundled risks averaged out.

    FYI - Here's a decent explainer on sovereign risks...

    https://medium.com/fintechexplained/...s-b6c74e07ffce

    https://www.stlouisfed.org/timely-to...n-debt-default

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  5. #5

    Another point to consider is inflation - with most bonds, your income is fixed for the life of the bond. If you want your income to increase to keep up with rising living costs you have to reinvest a portion of your income - which, in turn, means you need a bigger investment to begin with.

    Between 40% in this ETF and 25% in a municipal bond index, you've got 65% in fixed income - whether this is the right amount will depend on a number of factors including your age/expected retirement duration.

    I haven't looked at the ETF you mention but as far as bond ETFs are concerned, if my priority was a steady flow of income I would be more concerned about interest rates dropping than rising - lower interest rates means that new money/principal repayments will be reinvested at lower rates which (usually) means lower income to the ETF.

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  6. #6

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    Another point to consider is inflation - with most bonds, your income is fixed for the life of the bond.
    Not perfect but most of the ETFs do have varied maturity schedules. I guess that sort of averages out the inflationary issue, perhaps with some lag?

    IEMB in particular, has > 50% is 10+ year maturity - so while the dividends are good, I would not put a large chunk into it.
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  7. #7

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    Considering you want to semi retire and have children, I would keep the money mostly liquid. Buy a property in a cheaper country and put your money in short term time deposits. You can get at least 2.15%-3% playing around with time deposits. It's safer too and allows you to have access to your money should you need it.

    The world is due for some economic situation soon so putting everything in right now at the peak is not a great idea. In my opinion. Having available cash to buy great deals later on is a better idea.

    I could be wrong of course.


  8. #8

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    Thank you all for your comments. These are very useful ideas to consider. I didn't want to go too much into specifics, but I will have 12.5 M HKD in a couple of months, and I have two children who I have to look after for another 15 years. So the money is a bit tight, we won't be able to live a life of luxury, but it should cover living expenses, and I can continue working part time (Uber driver comes to ming). As long as I don't loose much in the coming recession I think we will be fine. At 4%, I would get an income of 40,000 HKD a month, which is more than the average household income in Australia, Europe, and HK for example.

    The best thing might be to put the money into something not very risky but still offering a small interest rate, like MUB, until the share market drops by 20% or so (maybe in one year from now), and then buy income producing etfs. I like etfs with a stable income, because I don't need to worry about the price. Perhaps a combination of SPY, USRT, IEMB, HYD, SDY (more or less with the same proportion) could give me a return of almost 4%, while still accounting for growth (through SPY and USRT)? Inflation (I did consider it) might be taken care by SPY and USRT, and I could sell some SPY and buy more IEMB and HYD when SPY grows.

    Until the end of the coming recession (considering it could easily be 1 1/2 years away) would you suggest something like FLRN? The interest rate doesn't even cover inflation, after taxes. MUB seems better, but more unstable? Is there anything very safe and offering a similar interest rate in HKD, so I don't lose when I change to HKD?


  9. #9

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    Are people trying to time the market here? Do you know something we don't know?

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  10. #10

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    Quote Originally Posted by pin:
    Are people trying to time the market here? Do you know something we don't know?
    Well, everybody in cyberspace is talking about an impending recession, and how they are selling shares and buying bonds. Or are you selling all your bonds and buying shares right now?

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