Expat Investment Management is a vast topic. At its heart is one simple idea. There are people with money (you) and there are those who want to use your money (them). For using your money, they either give you interest or a share of the profits of their project or company. The greater the risk, the higher the return you will demand. Identifying and valuing risk is a key component of expat investment management. I will cover the following points in this article:
You will have your own reasons to invest. They are very important you should have them clearly defined in your own mind, preferably written down. However, the objective is usually either: growth, income, or capital preservation. Each of these objectives requires a different strategy. Growth and Income strategies may be self-evident. Capital preservation is a strategy in which the investor seeks to maintain the purchasing power of the capital they have accumulated. This is because over the long-term inflation is the greatest enemy of investors.
There are four elements to most investment portfolios: cash, fixed income (debt), real estate (property) and equities (shares). Each of these elements has different characteristics which are advantageous to investors. For example, cash is quick to access, often pays interest and the nominal (face) value does not go down. Equities (shares) provide the potential for capital gains and an income in the form of dividends.
Blending these elements (or asset types) can create many different portfolios of varying benefits and levels of risk.
When structuring a portfolio, you may hear the phrases ‘top-down’ and ‘bottom-up‘. The top-down approach allocates an amount to each of the 4 different types of asset or building blocks. Next, the sectors are chosen and finally the individual stocks. Most private investors adopt a ‘bottom-up’ approach. This is the reverse of the ‘top-down’ strategy and starts with choosing individual stocks or bonds.
Within the ‘bottom-up’ approach there are different styles: Value, Growth at a reasonable Price (GAARP) and Momentum. Value investors seek to identify undervalued stocks. They invest in them, and wait until the market recognises their value and the price rises. GAARP investors look for companies with long term strategic benefits such as patents. Unlike value investors, GAARP investors believe it is worth paying more for these companies due to their protected positions. Momentum investors look to the recent performance of a stock and assume they will continue to go up or down. The least sophisticated investment strategy is momentum investing. It requires a crystal ball to know when the market is turning against a particular stock.
As long as it is legal and profitable, most investors have no other parameters. However, there is a growing movement of expat investors who want investments aligned with their beliefs.
When investing in this way, there are 3 main approaches. Negative screening strategy is to avoid companies who are active in a particular area. e.g. mining companies which extract fossil fuels. Negative screening is the original form of ethical investment.
An alternative (positive screening) is to invest in companies which are leaders in their field. Investors choose criteria and match investments against them.
The final, more nuanced approach is Sustainability Investing. Sustainability investing evaluates based on a set of criteria and given a score. For example, an energy company which is investing heavily in renewables may be held whilst a weapons manufacturer or companies employing child labour would probably not be considered.
There has been a lot of academic research into predicting the returns on the stock market. Unfortunately, no-one has discovered a guaranteed way of predicting returns. However, there is consensus on a few points which will lead to better returns and as expat investors we should use them:
This chart ranks the returns on real estate, shares, fixed interest, and cash between 2010 and 2019 in the USA.
The relative performance is random. Therefore, attempting to predict the following year’s winner is more like gambling than investing. The approach which reduces risk is to diversify investment across the various asset classes.
The amount in each investment class will depend on your investment criteria. This will include the level of risk you are comfortable with and can afford to take.
The adage goes, it is not timing the markets but time in the markets. Historical data shows that the longer you are invested the more likely you are to make a profit. Whilst markets are volatile in the short term, over the long-term investment pays off. Most importantly it reduces the impact of inflation. This means that the purchasing power of your money is protected over the long term.
One thing most academic articles agree on – investors rarely time the market to perfection. Therefore, they are better off accepting short-term fluctuations and remain focused on their long-term goals.
Portfolio management is risk management. When making an investment it is important to recognise there is no return without an element of risk. The key is to understand the potential risks as well as possible and have a plan of action if the risks occur. For expat investors, there are more risks to consider than most.
Whether with a professional adviser or by yourself, you should have an investment strategy written down. If it is written down, you will find it easier to remind yourself of the risk and the action you planned to take. For example, you may have a plan of what you want to do if the portfolio loses 10% in one month. The plan you have written down will be prepared at a time when you were able to think through the options and decide what would be best for your long-term goals. This will help you over-ride any short-term anxiety you may experience.
When managing your portfolio, you should return the percentage of assets in each asset class back to the original values about once a year. This is called ‘rebalancing’. Rebalancing is counter-intuitive, as you will be selling assets that have done well and buying those which have not performed so well. However, it is a risk management strategy. If that is too painful, look at the table above, it is possible those undervalued assets may be top-performers next year and those which performed well this year may now be overpriced.
Over the last few years, the level of transparency of charges in international investment markets has improved. This has been to the advantages of expat investment managers. However, there are still some places where shady dealing does occur. It is essential you know the cost investing into and selling your investments before you take any action. If this cannot be explained to you clearly by the stockbroker, online platform, or investment adviser this is a ‘red-flag’.
Whilst we are in the UAE, we do not have to worry about tax. However, at some point, we all leave, and tax will be an issue again. If possible, plan your exit at least 18 months before you want to leave to reduce the impact of taxes as far as possible.
Everyone needs to plan their finances. Some people will choose to plan their own finances whilst others will delegate. See my article on financial planning for more information on this topic.
Clear communication is essential when delegating investment decisions. Expats using specialist expat investment management companies must make sure the company and adviser hold the correct licenses. For more information on choosing an adviser see this page.
Portfolios provide growth, income, or capital preservation and are built from fours basic asset types: cash, fixed interest, real estate (property) and shares (equities).
The amount of each of the assets held in a portfolio will depend on the level of risk the investor can tolerate both psychologically and economically. There are different strategies and styles of putting a portfolio together such as ‘top-down’ and ‘bottom-up’. Investors are becoming increasingly aware of environmental, social and governance issues. This type of investing has grown in popularity over the last 20 years.
The best returns are achieved through diversification and remaining invested, even through the tough times. Portfolio management is about managing risk and sometimes requires counter-intuitive action to manage the risks associated with investing.
Tax and charges are important factors in most parts of the world and expats leaving the UAE should plan well in advance to minimise the effect of these certainties. Whether investors manage their own portfolio or decide to delegate to a professional, it is essential that the portfolio is managed.
If you would like to discuss any of the points raised, please contact me on 00 971 50 594 5217 or via e-mail firstname.lastname@example.org Alternatively, if you would like a free initial planning consultation please book it here.