Applying for Another US Brokerage Account

Today I applied for another US brokerage account. In so doing, I hit one of those pain points for US citizens living abroad.

Right now, I have two brokerage accounts: I have my main Interactive Brokers account, and I have a Robinhood account, which was actually the very first brokerage I opened. When I first opened that Robinhood account, it was years ago when Robinhood was the hot new thing. I was vacationing in the US, and it was no problem to open the account. I began my stock purchases, and when I hit the $10,000 threshold for Interactive Brokers, I moved everything over there. Interactive Brokers has thus far been pretty great.

The problem with Interactive Brokers is they are bound by the laws of the EU as well as the US. Since they have my German address, which means I'm shuffled into their Irish - previously UK - subsidiary, I'm unable to buy any funds that are US-sourced. Under the MiFID II rules, brokers in the EU can't allow EU residents access to funds that don't follow these rules. This rules out all US funds, including ETFs.

Interactive Brokers does allow the purchase of European funds, but this is where my citizenship bites me. If I buy EU ETFs, I'll have to report them as Passive Foreign Investment Companies (PFIC) in my yearly US tax return. It's unfair and ridiculous, but it's the current legal reality, so I can't go that route.

Why now? I've been happily buying individual stocks for years now, but increasingly, I feel like I'm out of my depth. I've saved enough money in these stocks that the risk is starting to feel real. I've also learned a lot about investing, and what I'm learning is that the experts are experts, and even they have a hard time doing this.

Therefore, I would like to begin indexing in some form, but all my outlets in Europe are ruled out.

I could use the Robinhood account for this purpose, but I'm concerned about Robinhood's viability as a company. They also just raised their fee for an ACATS transfer. Robinhood also doesn't offer things like automatic rebalancing. Really, the whole app is very casino-ish.

I'd also like to cut down on the chain of transfers I have to do. If I want to buy ETFs in Robinhood, I'd have to: get paid, transfer the money to Interactive Brokers, convert from euros to dollars, withdraw that money to my bank, transfer that money to Robinhood. Each step can add days of waiting, and since my US bank offers a brokerage, I hope that I could open an account with them just to simplify.

Naturally, though, my application was not instantly approved. For some reason it triggered their extra diligence check. I'm worried that their research into me will not only result in being denied the brokerage but also result in my bank account being closed, which would be bad. Not quite disastrous but definitely bad.

Citizenship Worry

And so I'm once again staring into that bottomless well of worry about my continued relationship to the United States. These rules are unjust and unfair, and citizens living abroad should not have to put up with this. We are punished for living abroad. Congress could fix this at any time: enact Residence Based Taxation (RBT), create a PFIC exception for people living outside of the United States, create a FATCA exception for citizens living outside the United States. But they choose not to out of either inertia or ill will.

What's all the more frustrating about this is that I'm forced to lie. In filling out applications for banks, credit cards, and now this brokerage, I have to use an address where I don't truly live. I also can't name my actual employer, since this employer doesn't exist in the US. So I lie. But what's the alternative?

The United States compels its citizens to use its financial system no matter where those citizens reside, but they don't provide guarantees that the companies there will allow us. We must have a financial relationship with the United States, but when we do exactly that, we're breaking the terms of service or lying on our applications, and from then on, we're worried that we'll be found out and shut down.

In any case, I'll add an update here with the result. Hopefully, my worries are unfounded, and I'll have the new account in a week.

Morgan Stanley Buying E-Trade is Ominous for Expats Abroad

I don't like dealing in FUD, but that's exactly what I felt when I read the news that Morgan Stanley would be buying the broker E-Trade.

Recently, I've been doing some research on what brokerage was best for normal American expats who want to buy securities with USD but also give their foreign residential address rather than a US address maintained by a relative. I started putting together a spreadsheet, thinking that I'd find a handful with different upsides and downsides.

But honestly, it was worse than I imagined. Nearly every broker's website I visited required a US address, and if a foreign address was allowed, many brokerages would explicitly refuse to allow US citizens living abroad onto their platform. Yes, you read that right. So as of right now, I can find two brokerages that will let an American abroad be honest about their foreign address when creating an account:

All hail Interactive Brokers and Charles Schwab. I use IB, but I'm grateful to both for sticking by us.

Because of this dearth of options, I am worried about the consolidation of online brokerages, and I hope that IB can resist being bought out by a rival who then eliminates US expats from its customer list. Some American friends of mine living in Germany starting an OptionsHouse account back in 2015. OptionsHouse was that rare unicorn who allowed US investors abroad to open an account with a foreign address while being a US citizen. In 2016, E-Trade bought OptionsHouse, and if you try to sign up for E-Trade now, they require a US address but allow a foreign mailing address.

So far, my friends have been allowed to maintain their accounts with their foreign address, but with Morgan Stanley now buying E-Trade, I wonder how long that will last. In 2015/2016, there was a wave of account closings for expats who held their assets at some online brokerages, and with our reliance on the goodwill of a few companies, I'm waiting for the day when another wave starts.

Hopefully that never happens, but our dependence on a dwindling number of companies willing to have us as customers is, bottom line, a risk.

December, 2018 Net Worth Update and Year End Review

UPDATE: I made a mistake when I initially posted this. In my spreadsheet, I double counted one of our credit card liabilities. We were still down for the month, but not quite as much as I originally wrote here. The updated numbers are $37,014.97 and €32,497.78 respectively. I'll leave the post as-is though since from a high level it remains correct.

Our net worth dropped in December to $36,153.59 or €31,741.52. That's a one month change of about -4.75%.

Since the majority of whatever wealth we have is in the form of stocks, we were hit hard by the sell-off in equities. Anyone paying attention to the markets this past month would have seen the kind of fast paced elevator down that market pundits have been scaring us about for years. Our savings rate didn't spare us from the damage.

We're still well up from a year ago though, and that's the perspective I want to keep in mind. Equities are for long-terms positions. I'm not a trader, and month to month moves whether up or down can only cause heartbreak if you get too emotionally invested in them.

This month had a few novel transactions worth mentioning. I got my Christmas bonus, which I always appreciate. At the same time, we had to pay our estimated taxes to the German government for the fourth quarter, so it was basically a wash. We also received a bit of Christmas money from relatives and a larger sum from a relative specifically earmarked to support a hobby of my wife's.

Year-End Review

So how'd we do this year? Our net worth is up around 33% in dollars from one year ago. That's entirely savings-rate based since our equity positions have been all over the place. As that net worth number grows, any year over year growth is going to come increasingly from investment performance.

Investment Performance

And my investment performance this year was bad at a YTD drop of 13% (I'm only considering my taxable brokerage account). Some of it was just the way the markets moved. For people following the US markets, it was a volatile year with big drops in February and then the last months of the year, but if you were invested in just about anything outside of the US, ho ho ho, you had a rough year.

How could I have known that at the exact moment I'd begin investing in German companies, it was at the peak of the German market? I began buying in October 2017, and this chart is the daily chart of the DAX from the past year:

It's actually uncanny how some of my German purchases happened at the exact tops of their cycles. The companies seemed cheap when I bought them, and they seem cheaper now, but that doesn't mean anything in the near term. The German companies were a drag on my performance over the whole year, even when I was doing well in other parts of the portfolio.

Some of the bad performance was from me trying things and discovering I don't have the temperament for them. I tried shorting some stocks, and I tried day-trading a few times. They're not my thing, and I'll avoid those activities in the future. Doing either triggers too much adrenaline and fear in me. Regardless of investment performance, I just don't want to live like that.

I also changed investment strategies in the middle of the year. I did a lot of backtesting and research to come up with a reasonable strategy, and I implemented it. I'm trying to control risk as best I can with smart position sizing and clear sell rules, but I do recognize that this strategy can be extremely volatile. As we get older, I have some ideas for how to reduce risk further within this current strategy, but for now, I'm being aggressive within my rules.

Recognizing my previous mistakes, I wrote a long document explaining the strategy and the rules. I've already referred to this document at times when I doubted my current approach, which makes this one of the best decisions I've made all year money-wise.

Savings

For our savings, we were somewhere around 25%. It's not exceptional, but it's not horrible either. I'd like to get this number up in 2019, but there are some genuinely life-improving expenses that may need to take priority if they become a possibility.

In 2018, the big overarching expenses were our rent as well as a trip we took to the US. Moving doesn't feel worth it. Rents are going up in Germany, and by staying put, we get to keep our rent stable while prices rise around us. I've looked at smaller apartments in our neighborhood, and their prices are approaching ours despite their smaller size. We could move further away, but our life satisfaction would plunge. Plus, my wife doesn't want to move, and neither do I.

After deliberation, I am going to the US this summer. I bought tickets using credit card points, and my wife and I will take our trips separately. I'm not thrilled about that entirely, to be honest, but the cost savings are enormous to having more focused trips back rather than larger multi-family tours. She can also work while I'm in the US and vice versa, so there's less opportunity cost.

We saved a bit on our tax preparation costs too. There are some tax people recommended to expats like us who speak English, but ouch they can charge a lot. They're very good, so don't get me wrong, but at some point you have to ask if what you're getting is worth the unusually high price. In our case, we were getting our taxes back in two weeks (fast) and we could communicate in English. But we speak German, so why not find someone less expensive who's good enough?

We could also do our own taxes, but for now I'm more comfortable with a professional in Germany on our side, and I'll keep doing my own US tax return.

So there's a wrap-up of the year for this abroad saver. I've learned a lot this year, and here's hoping for a more effective and smarter 2019. Cheers and have a happy new year.

Margin

I sold some positions yesterday in my brokerage account. They passed my selling rules and on the whole I made a small profit with those positions, but I wouldn't have sold them except I wanted to close out my use of margin.

I used margin in my brokerage for the past year, and although my timing was shit, and its use probably amplified the loss I'm sitting on now, the loss isn't what bothered me about it. Instead, it was the mental games it played with me that forced me finally to shut it down.

Dangerous Thinking and Actions

I don't write this blog to give anyone else advice. I'm not a money professional, and I don't want anyone to think my word is correct or actionable. But I do want to point out a few of the dangerous lines of thinking and risks that margin use exposed me to, and maybe someone else will find this helpful.

Careless Security Selection

When it's borrowed money, I found it easier to buy stuff that I otherwise might not have bought. It was easier to say, I'll buy a bit more here on this pullback. I'll buy this security just 'cause. The dividend is higher than the interest I'd be paying. I'll day-trade just this once... twice... three times....

Looking at some of the stuff I'm still holding, all of that thinking was stupid. I have stuff I shouldn't have bought. I took risks that were unnecessary. I'm sitting on losses that will take several years to recover from. It's not the end of the world, but it was a mistake.

Constant Desire to Close Out my Margin Use

This is more stressful than financially destructive, but I thought a lot about my margin use, and I was always itching to sell to close it out. That's just stressful, and I don't want to live my life worrying about that. And speaking of stress...

Constant Need to Check the Portfolio

Because I was using margin, there was always the risk of a margin call. I never borrowed all that much, but the possibility was always there, and so I told myself I needed to regularly check the portfolio.

Well, if you constantly checked your portfolio this past year, you were probably pretty stressed out by it with all the volatility. Checking the portfolio probably contributed to some of the buying and selling that I regret in the past year because I got worried about a big crash wiping me out.

Playing Russian Roulette with Risk

As Nassim Taleb says, some risks are like playing Russian roulette with a gun that has hundreds of chambers. The likelihood of the bullet going off is low, and because it doesn't go off, you forget that there's a bullet in the gun.

I backtested the percentage of margin that I used, and the margin call bullet never went off in my tests. But it doesn't mean that it couldn't have. Especially because so much trading is done by computers, there's always the possibility that something crazy happens that causes a major after hours fall in prices that triggers the margin call. Because my broker insta-liquidates once that point has been reached, there was always the possibility of being forced to sell at crazy low prices even if the prices quickly recover.

That's an unacceptable risk. Last June, my broker had a glitch and sent out an email to many of its customers that their maintenance margin limit had been reached and their portfolio was liquidated. I literally woke up to read this email, and I'll never forget that feeling. The first thoughts were how I was going to discuss this with my wife. Perhaps World War III had started while we were sleeping and the world market crashed.

Eventually, I figured out that it was a glitch, but the fact that it was even a possibility that I could have considered hasn't sat well with me since.

This is Hard Enough

I buy individual stocks, and that's hard enough. Some of them may go bankrupt. I've sold a few for losses, which sucks, but on the whole, I believe that the portfolio will march higher as a group, despite some individual losers.

But using margin exposes me to something else entirely. It exposes me to permanent loss of capital based on price swings alone. It exposes me to risk that takes me out of the game entirely. My wife and I earned and saved this money by sacrificing pleasure now for gains later, and taking permanent capital loss risk with that is stupid and foolish.

Some instruments, such as shorting or options use, force you to use some kind of margin. I don't want to say that no one should do those things because they're useful. I respect smart short sellers. I respect that people can figure out options and appreciate the kind of insurance they can provide a portfolio.

But I don't have to. No one has to do that kind of stuff because just buying securities at reasonable prices in reasonable amounts and holding is hard enough without worrying whether I get to be in the game another day.