Let's say you're an emotional rock, think casinos and lotteries are for suckers, and would like to stick it to the Wall Street types. If so, you could make more money building your own indexed portfolio, rather than paying an advisor to do it for you.

It's simple. And if you're doing it right, you'll spend more time on the toilet in a week (especially if you read) than you'll spend managing your portfolio in an entire year.

That said, it's not emotionally easy. You'll need to stick to your game plan.

The world's largest index fund provider is Pennsylvania‐based Vanguard. It has more assets under management than any fund company in the world. Vanguard doesn't charge annual account fees, nor does it charge fees to enter or exit the funds.

Unfortunately, Vanguard hasn't allowed expatriates to open accounts since 2006. Since then, the only American expats who have done so have lied about their residency. Instead of naming an employer on the online application form, they've listed “retired.” They've provided a US address. They've also strategically failed to reveal their location when speaking on the phone to a Vanguard rep. They haven't broken any laws. But it's not exactly James Dean cool.

Vanguard isn't alone in its discrimination. In the Wall Street Journal on July 1, 2014, Laura Saunders wrote, “Fidelity Bans US Investors Overseas from Buying Mutual Funds.” She reports that a growing number of American firms are closing doors to US expats.¹ Schwab has also closed doors to many American expats. For example, when I wrote this book's first edition, Americans in Singapore could open accounts with Schwab. But Schwab now says no to Americans in Singapore. The firm has also added other countries to its can't‐serve list.

If you already had an account with Vanguard before moving overseas, you're luckier than a gecko without a house cat. You can maintain the account as long as the firm has a US address on record. Otherwise, you'll require a different investment brokerage.

Do You Currently Invest with Vanguard?

Vanguard's investors own the company.² No, I'm not blowing smoke up a dark crevice. If you own shares in a Vanguard mutual fund, whether it's an index fund or one of Vanguard's low‐cost actively managed products, you're a company owner. It's much like a nonprofit. Owners are the people who purchase the funds. The same can't be said for folks owning funds with Fidelity, Goldman Sachs, T. Rowe Price, Wells Fargo, American Funds, or Morgan Stanley. In every other case (exceptions being nonprofits Teachers Insurance and Annuity Association–College Retirement Equities Fund [TIAA‐CREF] for educators and the Thrift Savings Plan for federal employees), American mutual fund companies have a conflict of interest.

Their first priority is making profits for their firm. Fund investors come second. Mutual fund companies earn profits from the expenses they charge clients, generating much of their business from misleading advertisements. They showcase top‐performing funds du jour, while ignoring their laggards (many of which were yesterday's funds du jour).

In 2016 Forbes reported that the Johnson family (owners of the fund giant Fidelity) was worth $28.5 billion. Either way you slice it, they've made a colossal living.³ While Fidelity is privately held, many fund companies trade on the public market.

As economics Nobel Prize winner Paul Samuelson said back in 1967:

I decided there was only one place to make money in the mutual fund business as there is only one place for a temperate man to be in a saloon, behind the bar and not in front of it…so I invested in a management company.⁴

In contrast, Vanguard doesn't have any third‐party overlords. The company makes money from its fund expenses, using proceeds to pay employees and business expenses. That's it. Over time, when profits mount, Vanguard lowers its fund costs. And it does so with impressive regularity. Most of their funds charge even lower expense ratios than they did when I wrote this book's first edition. Every couple of years, Vanguard lowers costs.

The same can't be said for the average US mutual fund company. On an unweighted basis, the average US mutual fund cost 0.77 percent per year in 1951. By 2010, costs were up to 1.54 percent.⁵

If you're considering moving overseas but have yet to take the plunge, open a Vanguard account online before leaving the United States at www.vanguard.com. (Remember that you can maintain the account as long as the firm has a US address on record.)

Couch Potato Investing with Vanguard

The simplest way to own a hands‐free Couch Potato–like portfolio (see Chapter 7) is with Vanguard's Target Retirement funds. They're cheap, costing roughly 0.15 percent per year. Each target fund is a fully diversified portfolio that gets automatically rebalanced. As fund investors age, bond allocations (as a percentage of each fund) increase.

Let's look under the hood of Vanguard's Target Retirement 2030 fund (see Table 11.1).

It comprises four indexes in a single fund: two stock indexes representing the US and international markets and two bond indexes representing both US and international government bonds. If US stocks soar and international stocks sink, the fund shifts some money from US to international stocks.

When both stock indexes fall, Vanguard takes money from the bond component, adding it to the stock indexes. Classic Couch Potato. No speculation. Vanguard rebalances the fund back to its original allocation.

Vanguard's Target Retirement 2030 Fund has 28 percent allocated to bonds (19.8 percent US bonds, 8.2 percent international bonds) and 72 percent allocated to stocks (43.1 percent US stocks, 28.9 percent international stocks). Despite its name, it may not necessarily be suitable for expats wanting to retire in 2030. Conservative investors or those who won't earn Social Security payments (nor any other form of retirement income) might prefer a more conservative portfolio, such as Vanguard's Target Retirement 2020 Fund.

Likewise, somebody who wants to retire in 2030 might choose Vanguard's Target Retirement 2040 fund if they want the possibility of higher returns, and they wouldn't mind the added volatility.

Don't by fooled by the year in the fund's name. It's not a carton of milk with an expiration date. In 2018, investors could still purchase a Vanguard Target Retirement 2015 fund. It's just a name, not a “best before” warning.

Table 11.2 lists seven of Vanguard's Target Retirement funds, along with their identifying ticker symbols and respective allocations to stocks and bonds.

Couch Potato Investing with a Vanguard Stick Shift

Investors who want to build a Couch Potato portfolio without a Vanguard Target Retirement fund can purchase individual indexes instead. Such a process comes with benefits and drawbacks. The upside is that you can build the portfolio at an even lower cost, especially once you qualify for Vanguard's Admiral Shares (more on that later).

And when managed with discipline, taxable turnover can be lower. Take Vanguard's Target Retirement 2020 fund as an example. According to Morningstar, its taxable turnover is about 15 percent per year. When investing in taxable accounts, the lower the turnover, the better. Turnover is a percentage of the holdings traded within a fund during a given year. Each index within a target fund trades a very small number of its stocks annually. If an S&P 500 company goes bankrupt, for example, Standard & Poor's would likely give it the boot. In this case, a newly eligible stock would replace it. The low turnover of index funds makes them especially efficient in taxable accounts.

A Target Retirement fund generates turnover based on the trading occurring within each individual index coupled with the target fund's rebalancing. An investor purchasing his or her own indexes instead can buy the lagging index each month or quarter. By purchasing the lagging index, the investor might be able to keep the portfolio aligned within their goal allocation without selling anything. This decreases turnover. It might frustrate Uncle Sam's tax collectors. But it leaves you legally richer.

The biggest risk to a DIY investor isn't the percentages they choose to invest in stocks versus bonds. It's the tendency to speculate.

When Investors Binge on Speculation

Norman Rothery, reporting for the Globe and Mail, showed returns for a variety of Vanguard funds during the 15‐year period ending 2013.⁶ The purpose of his article was to show what the funds earned, compared to what investors in those same funds made (see Table 11.3).

Fear, greed, and an unhealthy reliance on expert tips put fat around the organs.

The average investor in the S&P 500 earned only half of what he or she should have earned between 1998 and 2013. This is what I call a screwball.

Many such investors followed so‐called sophisticated strategies, listening to CNBC, their gut, or their brother‐in‐law when committing their unfortunate market timing.

Investors in the European stock index did even worse. Thanks to the same silly behavior, their personal profits underperformed the funds they owned by nearly 85 percent over 15 years. Even those investing in bonds relinquished 30 percent, buying and selling strategically.

Note, however, that the average investor in Vanguard's Total International Stock Index fund actually outperformed the fund itself. More of these investors may have deposited regular monthly sums, a process called dollar‐cost averaging. They would have bought more units when prices were low and fewer units when prices were high. Perhaps they shunned Twinkies too.

This is one of the reasons I love Vanguard's Target Retirement funds. Table 11.4 is one that I introduced in Chapter 8. But it's worth showing again. It demonstrates the benefits of investing in one of Vanguard's Target Retirement funds. They have the magical ability to make investors smarter. Such investors don't need to look at the performance of their funds. They don't have to manually rebalance. Many of them add money every month, dollar‐cost averaging. This allows them to buy fewer units when the fund prices rise and a greater number of units when fund prices drop. By paying a lower‐than‐average price, the average investor in Vanguard's Target Retirement funds outperforms the posted returns of the funds they own.

For example, between May 31, 2007, and May 31, 2017, Vanguard's Target Retirement 2035 fund earned an average compound return of 5.07 percent per year. That might not look impressive. But keep in mind that this time period began on the eve of history's second‐biggest stock market crash. The average investor in this fund, however, didn't average 5.07 percent per year. By dollar‐cost averaging and ignoring speculation, the average investor in this fund averaged 7.16 percent per year.⁷

Investors who build Couch Potato portfolios with individual index funds might also outperform the funds they own if they have the discipline to add money every month or quarter, while dispassionately rebalancing their portfolios. When rebalancing, they always buy a little low and sell a little high, guaranteeing they never underperform their funds. I've listed sample portfolios in Table 11.5.

Once the portfolio has at least $10,000 in one of these funds, that particular fund will convert to Vanguard's lower‐cost Admiral series. This would slash costs. For example, Vanguard's Total Stock Market Index (VTSMX) costs 0.15 percent per year. Vanguard's Total Stock Market Index Admiral Series (VTSAX) costs just 0.04 percent per year. Table 11.6 shows portfolios using Vanguard's Admiral Series funds.

Alternatively, investors could purchase Vanguard's Total World Stock Index for the stock component. It simply combines the holdings in the US and international stock index funds. Table 11.7 shows sample portfolios that include Vanguard's Total World Stock Market Index. With fewer moving parts, it would be easier to manage and rebalance.

As of this writing, no Admiral Shares equivalent exists for Vanguard's Total World Stock Index. But based on Vanguard's mandate to keep lowering costs, the company will probably introduce one soon. When it does, investors with Vanguard's Total World Stock Index (VTWSX) will see it converted to the Admiral series equivalent if they have more than $10,000 invested in the fund.

Investors who qualify for Admiral series funds might select one of the two‐fund solutions in Table 11.8.

Socially Responsible Investing

Vanguard doesn't have a full lineup of socially responsible (SRI) funds. But SRI investors could choose Vanguard's FTSE Social Index Fund Investors Shares (VFTSX). It costs 0.22 percent per year. The fund's holdings are screened for social, human rights, and environmental criteria. It excludes companies involved with weapons, tobacco, gambling, alcohol, adult entertainment, and nuclear power. It also has very low exposure to oil and gas companies.

But the fund contains only US stocks.

Vanguard doesn't yet have an international stock market index equivalent. But SRI investors might still sleep better knowing that they're making a social effort. Table 11.9 shows portfolio options that include Vanguard's FTSE Social Index Fund Investors Shares (VFTSX).

Interactive Brokers Offers a Great Deal

Interactive Brokers' online trading platform is tailor‐made for US expats. It accepts more American expats than any other brokerage. In fact, FATCA (The US Foreign Account Tax Compliance Act) was a boon to their business. While other brokerages have shut their doors to American expats, Interactive Brokers complied with the new regulations and put up a flag. It practically screamed, “Expats, We Want You!”⁸

Barron's rated Interactive Brokers (IB) a top online brokerage in 2017.⁹ It was the seventh year in a row that they won this award. The company website lists more than 200 countries from which people can invest. While many brokerages don't allow expatriates from such countries as Japan, Bangladesh, and Indonesia, for example, Interactive Brokers shows no such prejudice. They allow Americans and non‐Americans to open accounts from almost every country in the world.

Investors can open accounts online, requiring a minimum of US $10,000 (or equivalent) to start. Unlike Vanguard, IB doesn't have its in‐house brand of commission‐free index funds. Investors would have to buy ETFs instead (see Chapter 10 for an explanation of ETFs). Interactive Brokers aims for $10 to be generated in monthly trading commissions. The firm charges investors extra if they don't generate at least this sum.

For example, investors paying $5 in commissions for a given month would be charged an extra $5, providing the brokerage with a minimum $10 for the month. But such extra fees are waived for investors with more than $100,000 in their account.

Doing the Couch Potato with Interactive Brokers

Table 11.10 shows sample portfolios for an ETF investor using Interactive Brokers. I selected Schwab's ETFs. Vanguard and iShares also offer low‐cost ETFs. But at the time of this writing, Schwab's were infinitesimally cheaper. The five funds average costs of just 0.06 percent per year, representing the world's cheapest investment deal. Note that investors could select Schwab's US Aggregate Bond ETF (SCHZ) as a replacement for Schwab's Short‐Term US Treasury ETF if they wish. Both bond indexes are great. SCHO will be more stable than SCHZ. But its returns won't be as strong.

Charles Schwab's International Equity ETF comprises developed foreign markets only. That's why I added Schwab's Emerging Markets Equity ETF to the portfolios above.

Don't get carried away, however, by dreams of emerging‐market potential. Sure, I dream of every Chinese man, woman, and child buying a copy of this book (realistically, they'd get a photocopied version). But investors should remember that emerging markets are small—making up less than 13 percent of global market capitalization.

Using Vanguard's Total World Stock Index ETF (containing US stocks, developed world international stocks, and emerging‐market stocks) allows for an even simpler way to gain global stock exposure. Table 11.11 shows some sample portfolios. With just two moving parts, it would be a dream to manage.

As always, younger investors or those with a higher risk tolerance might choose a lower bond allocation. Older investors, or those who are risk averse, may prefer a higher allocation to bonds.

Socially Responsible Couch Potato Portfolio

As I mentioned in Chapter 10, socially responsible investing can be tricky. After all, who determines the set of values for each fund? Most SRI funds (such as Vanguard's FTSE Social Index Fund) exclude companies involved with weapons, tobacco, gambling, alcohol, adult entertainment, and nuclear power.

Table 11.12 lists some socially responsible portfolios that follow the same criteria.

Don't Contribute Illegally to Your IRA

In February 2014, my wife and I met an American expatriate who had been living in Spain for the past eight years. I'll call her Mary. In a casual conversation, she said she had been investing the maximum allowable ($5,500 per year) into her individual retirement account (IRA). Unfortunately, by doing so, she poked a sleeping giant.

The giant (also known as the US government) didn't allow expatriates in 2013 to invest in an IRA if they earned less than $97,600 per year. Mary earned just $50,000.

All of her income qualified for the IRS foreign earned income exclusion. This dull legal label simply means (in her case) she didn't have to pay US income taxes because her Spanish income wasn't high enough. If she had earned more than $97,600, things would have been different.¹⁰

What Exactly Is an IRA?

An IRA is a tax‐sheltered investment account. It isn't a portfolio itself. Instead, it's like a special classification. Many Americans have two types of accounts: a tax‐advantaged IRA account and a non‐IRA taxable account.

If Mary were living in the United States, she could invest a maximum of $5,500 in an IRA and receive some kind of tax‐associated benefit. By depositing into a traditional IRA, the government says, “Good for you, Mary. We'll give you a discount on your taxes this year. You can watch your investment grow. And we won't tax you on its growth until you pull it out.”

Mary could withdraw the money without penalty once she reaches 59½. And she must start withdrawing money by the time she's 70½. This would all be fine—if she were living in the United States or making more money as an expat.

The foreign earned income exclusion was $99,200 in 2014. If Mary earned $120,000 while living in Spain, she probably would be eligible to add money to a traditional IRA. In 2014, allowable contribution limits were $5,500 per year for investors under the age of 50, and $6,500 for investors over the age of 50.¹¹

If her foreign earned income above $99,200 were taxable (check online IRS updates) and Mary's earnings exceeded $120,000 for the year, she would have to pay US income taxes on the $20,800 difference. However, if she made a $5,500 traditional IRA contribution, she could reduce her taxable income by $5,500, thus reducing her tax bill.

Once investors start withdrawing from their traditional IRAs, withdrawals are taxed at ordinary income tax rates.

Roth IRAs Are Different

There are, however, two types of IRAs: traditional and Roth. Unlike investing in a traditional IRA, Roth IRA contributions aren't tax deductible. However, the Roth IRA grows tax free. When the money is withdrawn during retirement, the principal and the investment gains aren't taxed. There's also added flexibility, considering investors don't have to start liquidating their Roth IRAs at 70½.

As with the traditional IRA, you can't contribute to a Roth IRA as an expatriate unless you make enough money. Ineligible contributions to an IRA are known as “excess contributions.” Excess contributions suffer a 6 percent penalty each year the excess money remains in the account.¹² In Mary's case, she earned $50,000 annually in Spain during 2012 and 2013. She shouldn't have contributed to an IRA because she didn't earn enough money.

Because Mary contributed to her IRA in 2012 and 2013, the government can penalize her. Assume that when we met Mary in February 2014 she hadn't yet filed her 2013 taxes. She would owe 6 percent on her 2012 contribution, but for the excess contribution in 2013 she would still have time to take the money out before filing her 2013 taxes. With such a withdrawal, she could avoid the 6 percent penalty.¹³ However, she would still owe taxes and penalties for any profits those contributions earned, determined by an IRS‐provided formula.

Keep in mind, however, that taxable situations differ among individuals. An expatriate tax specialist may be worth the money. Many exist, including firms like Greenback Expat Tax Services, American Tax Service, and American Expat Tax Services.

While Americans may moan about paying US taxes on worldwide income, their expat plight isn't all doom and gloom. American expats have access to the lowest‐cost financial services companies in the world. Most of the planet's cheapest ETFs are also US based. With discipline, American expats can use such products to slowly grow wealthy.