Hallmark movies have a recipe for success
Here’s a recipe for setting up your investment portfolio
The Hallmark recipe
If you’ve ever watched more than one Hallmark Christmas movie you know that it follows a well-tested recipe.
A successful, vaguely unhappy professional woman living in the big city returns to her small hometown for Christmas. There she accidentally meets a grounded, handsome guy who works at the tree farm or hardware store.
Despite their best intentions they fall in love, quickly solve some local problem and slowly realize that they were meant for each other. The movie closes when they finally kiss.
Based on how many of them exist, Hallmark movies’ simple repeatable recipe clearly works. Simple recipes work in other contexts, and there’s one for American expat investing.
I’ve argued in other newsletters that middle-class American expats have a big investment problem. In brief, US tax laws make it too expensive for expats to use effective investment tools like exchange traded funds (ETFs).
However, there’s a simple work-around recipe for expat investing that’s inspired by ETFs without the negative tax consequences.
Diversification’s virtue
Most investment advisors recommend diversification, a one-word summary of Grandma’s advice: “Don’t put your eggs in one basket.”
Instead of betting all your investment money in one or two companies, you spread smaller bets across many companies. This is best practice because it ensures that no single company has too much influence over the value of one’s holdings.
There is still risk. If the entire market drops in value, a diversified portfolio will decline too. That said, if you believe the long-term trend of the market is positive, a diversified portfolio is a rational choice.
Diversification’s difficulty
How many companies should you own to be diversified? There’s no single answer, but 10 is a good start, and 20 is a good target. A major drawback of such diversification is the time required to manage that many stocks.
Exchange traded funds (ETFs) were developed to address this very problem. An ETF is a single stock that represents the pooling of stocks from dozens to hundreds of companies. The investor can buy shares of a single ETF stock and own part of many companies with no management hassles.
Alas, the IRS penalizes Americans living abroad for owning non-US ETFs. They must annually file an onerous US tax form for every ETF they own. As a result the positives of ETF ownership for expats are outweighed by their excessive tax preparation costs.
An expat alternative to ETFs
The expat alternative hinges on a critical detail of US tax rules: the IRS treats direct foreign stock ownership better than foreign ETF ownership. Owning individual foreign stocks doesn’t trigger the dreaded IRS Form 8621 and its attendant costs. But owning an ETF does.
As I explained in more detail recently, it’s procedurally simpler to buy stocks directly than it once was. It’s also inexpensive: the cost of direct stock ownership is now very low – or free with some discount brokers. More importantly, you can easily get an updated list of almost any ETF’s top 10 favorite stocks with an internet search.
But there’s a catch
So you can clone an ETF by buying their top stock picks and avoid tax prep costs. That still leaves a problem, the time it takes to manage the ownership of multiple stocks. There are two sides to this, buying and selling.
Below I describe a tool for managing the purchase of stocks. In a future newsletter I’ll discuss selling.
Spreadsheet magic
Follow my advice in How to Steal and Cook an ETF Recipe, and you will have a list of 10 companies favored by an ETF. Your goal would be to invest 10% of your investment funds in each company.
Cautionary note: In North America, there are some stocks that are treated by the IRS as if they are ETFs. Unlike other stocks, they have a special designation, .UN (for Unit Trust) or .REIT (for Real Estate Investment Trust). Don’t buy them.
After dividing your available funds by 10, you would first need to look up the most recent price for each company. You’d then divide that result by the share price, while rounding down to an integer (you can rarely buy a fractional share). It's a simple but tedious task better left to a computer spreadsheet.
Because I dislike tedium I developed that spreadsheet that does the math. More importantly, it automatically goes to the web and finds the latest trading price (delayed by 10-20 minutes). All you have to do is complete the yellow cells (see a screenshot from a completed spreadsheet below),
Do the above work when the market is closed. Place your 10 buy orders to execute when the market next opens. Such orders are likely to be filled when the market opens because you’re offering to buy at the latest market price.
You’ll then have an investment portfolio of 10 stocks, and the IRS won’t blink an eye.
The expat investment recipe:
Like the recipe for Hallmark movies, the expat investment recipe is pretty simple:
• Find a suitable EFT and get a list of their top ten stocks.
• Watch this space to get a copy of the Dynamic Stock Purchase Calculator spreadsheet soon.
• On it enter the total amount available for your investment portfolio.
• Enter the price your broker charges for a buy or sell transaction.
• Enter each stock’s ticker symbol & see how many shares you should buy.
• Refresh your screen when the market is closed.
• Place your order to execute when the market opens.
Hallmark movies have a recipe for success
Dear SC, thanks so much for your encouraging comments. I've never been to Portugal, but I can see why it's so attractive to many (thanks to Carol Wilcox and others' posts about it). I found them because I did a substack search for American expats. Good luck with your plans. I have some more posts in the works that might be of interest.
Warren! Just discovered your amazing substack... I think you commented on one of Carol Wilcox’s posts, that’s how I found you. This post in particular is impressive. Thank you for all the hard work that I know went into it.
We are Americans in our early/mid 60s, retired educators, still working part time. We are thinking about running away to Portugal. Your blog looks like it will be very helpful in considering some of the financial implications. Thank you again !!