Expatriate Portfolio Part 1; Building An Expat Investment Portfolio - Smart Money Today

Expatriate Portfolio Part 1; Building An Expat Investment Portfolio - Smart Money Today

Guide To Investing For Expatriate

Learn how you can invest your money in easy steps, safely and with the best results

This is the first of a multi-guide series for expatriate working and living abroad. I will explain how to build a solid portfolio for your retirement, avoid common mistakes and create a clear investment strategy.

Starting investing your saving is a daunting experience and most of financial’s institutions aren’t helpful for the task. I would like to add, you better stay at large from banks and insurance companies that are on a hunt for you and your money.

These corporations employ directly or indirectly sell people which called themselves “financial planner”.  They think or pretend to be the experts in subjects live retirement planning or investing, but in reality, they are a bunch of crooked. The most notorious companies are based in Isle of Men or some other offshore countries home of Zurich, Royal Skandia, Friend

The most notorious companies are based in Isle of Men or some other offshore countries home of Zurich, Royal Skandia, Friend Provident and Generali. Yes, big names and big once big companies (not anymore, they are losing clients at record speed).

An example is the chief executive of Continental Financial Services in UAE is proposing a ban for 25 years saving policies. These are the favorite policies “financial planners” love to sell. The reason is the massive commission the financial planner gets once you sign the policy. The cost is passed on you over a period of 25 years. They hook you up.

Some plans charge a hefty 6% plus a 1-3% of the fund. Just to break even in your investments, you should make a 9% yearly return. I didn’t take into consideration the inflation rate.

Just to put facts in perspective, the S&P 500 index over a period of 30 years in average has a return of 7.8%. We are talking about the best and biggest corporations in the world such Apple, Microsoft and Caterpillar just to name few.

So, what are the chances of active mutual funds to beat the S&P 500?

It’s been reported that 66% of fund managers can’t match S&P results, and they get a huge salary too.

Again, who pays for all are the people who signed into expensive policies sold by the previously mention companies.

Now the good new; not all the financial planners are bad.

How To Recognize A Bad Financial Planner 

First, we need to understand there are two types of financial advisors:

1. Stockbrokers; also known as Registered Representatives, who sell you investments for a commission.
2. Fee-only Advisor;  they either manage your money for a yearly fee (must be below 1% of assets) or charge you one-time fee to build up your plan.

In my personal experience, the advisor in the first group, also know as stockbrokers, are the worst to deal with.

They work for a commission base salary paid by the policy issuer which creates a conflict of interest.

Usually, these policies pay out a significant part of the fee to the adviser within the six months from the date the policy has been issued.

The question is: “Does he care about helping you to achieve financial freedom or to get his commission?”.

In most cases the latter.

Usually, these “financial planners” will call cold you or pass by your office to sell their “retirement plans”.

The countries which they operate are popular with foreign workers like Middle East, Singapore and Hong Kong.

In my first years of investing, at the young age of 23, I was a victim by the so-called “financial advisers”. Back then I was naive; I thought people would do their job with passion and genuinely help others to succeed. In most cases people do, but the financial sector is a big pool with many sharks. I fall

I used to save 80% of my tax-free salary while working in Dubai and needed help to invest for my retirement. I was a victim of these companies selling expensive investments vehicles which not only didn’t perform but made a hole in my savings.

My “naive” decision set me back few years from retiring earlier and I was left with a bitter feeling. I learn the hard way about investing money on my own, today I can say the bitter experience have made me a better investor.

If you can’t bother to invest on your own, the fee-only advisors are more suitable to do a decent job in helping you to manage your money. Fee-only advisor has little incentive to serve you only one time, consider the small percentage they get to advise you on your investments. To be successful in their business, they need returning customers, not only that but while growing your wealth over the years, they get higher commissions.

Make sense?

A good question to ask anyone willing to manage your money is; “what is your fee structure”? Don’t ask verbally but by email, so you’ll have his statement on record. By law, they have to disclose this information or they might be faced with fraud.

The bad news is most of these professionals required a minum of Us$50,000 to accept a client.

Should you be careful whenever a Mr. Tom offer his services to manage your money?

Absolutely, YES.

They are expert in planning how to take most of your money and pay themselves an excellent commission first.

Some company pays them up to your first year equal to premium. So, if your premium is US$1.000 per month, they will get a check of US$12.000 as a commission after having locked you in an expensive retirement plan for 25 years with substantial penalties if you decide to pull the plug before the term.

Guess who is paying for that commission, your savings.

Of course, when they will present them self to you, they will never mention about their hefty fee if they manage to convince you to sing up.

I just want to remind those infamous institutions:

• Friend Provident
• Zurich International
• Royal Skandia
• Generali

Andrew Hallam is helping hundreds of victims and warning expatriate to stay away from these organizations which sell offshore pensions.

I don’t need to say that with these products, you will never retire.

Now that I warn you of the risks, let’s move on to create the best possible portfolio for you.

You Are Smart!

If you are reading this article, I believe you are investing in your self-education first, that is SMART.

You shouldn’t risk your hard earned money for the sake of learning. You can learn from the mistakes of other investors and prosper by their wisdom.

I have invested for the last ten years in most classes, besides property which I never had a good feeling about it.

I’ve worked and invested in Middle East/Asia during this period, and I can help you to create a sound portfolio in the best financial jurisdictions in the world.

Making the proper net worth allocation, deciding on how often to rebalance, and running different growth scenarios matters, but setting up the structure to enable you to invest your saving with ease and low fees is the key to successful retire early.

How many people do you know which have retired in their 30’s or 40’s?

If you have, make an effort to learn from their success. They must have done something right to be able to retire early. If you don’t have, no worries, I’ve got you covered.

Let’s go back to your first steps in creating a sound portfolio.

This is what my favorite investment company, Vanguard, have to say about portfolio creation:

Vanguard believes that the asset allocation decision—which takes into account each investor’s risk tolerance, time horizon, and financial goals—is the most important decision in the portfolio-construction process.

Contributions Add Value To Your Portfolio Over The Years

As you can see from the chart below, contributions add up quickly over time.

In this case, I contribute US$ 1.500 per month over a period of 10 years with an average return of 8%. Just before the fifth year, my yearly interest had outstripped my annual contribution of US$ 18.000 thanks to the power of compounding.

It’s my belief that once you reach somewhere around US$200,000 in your portfolio, you’ll start caring less about your contributions and focusing on the growth and protection of your principle.

Your saved money will start to work hard for you, and the magical US$1 million is within reach if you don’t blow up.

The first few years of your portfolio strategy will be saving as much money as possible and pay monthly contributions regularly. During this period, I hope you’ll become a very savvy investor because when your pot reaches US$ 200.000, your investment decisions and rebalancing strategy will play a bigger role than your contributions.

Imagine your portfolio of US$ 200.000 will return 10% yearly = US$ 20.000 | Your contribution is only US$ 18.000.

And the years will pass, your pot will grow bigger and bigger till you will retire financial free.

Your Money Strength

Making money through work is easy compared to having your money work for you. Not only require a fundamental knowledge of investment principles but during these years of low inflation, bonds, and saving accounts aren’t keeping up with inflation.

In my case it was a smooth ride till I reach the US$ 200.000 mark, then I start to notice that currency exchange and markets up and down were moving my net worth sometimes as far as US$ 13.000 in a single month.

When the money is up, it feels good but when down, I have to drink some whiskey to get it over my emotional depression. However, it is part of investing, and you will get used to it over time.

What is the money strength?

As your portfolio grow larger, your money will work harder for you so will be your money strength. It is a simple calculation:

US$ 100.000 at 10% return = US$ 10.000but
US$ 1.000.000 at 10% return = US$ 100.000

You see the real strength of money. And when you get to the 1 million mark, it is all about strategy. With the right strategy, you will work 10 hours per month and get a salary of US$ 100.000. Sweet.

Excited?

Let’s get started.

How To Create A Beginner Portfolio For Your First 5 Years

First, you need to focus on your savings, the more you save in the early years, the faster you will get to the US$ 200.000 mark when your yearly return accelerate.

Let’s call it, breaking point.

I used to save 80% of my income in the first five years of my investment journey, and today I’m glad I did it because now I can take life with ease and peace of mind.

The hard task of saving is crucial in the early days, it’s the builder of your wealth and only late the power of compounding will take over so your contributions will be less significant.

Saving can be hard at first, but eventually, it will become a habit and will not be harder than brush your teeth three times per day.

Are you ready for a journey of financial freedom and peace of mind? Let’s go.

1# Open A Brokerage Account

First, you need to open a brokerage account so you can buy your small army of investments with your savings. Open a brokerage account is free and easy.

Go with the most popular one like Vanguard, ScottTrade, Fidelity or even your bank should have some option.

For Expatriate, I recommend three brokerages that have access to the main exchanges;

• Boom Securities HK
• TD Direct Investing
• IOCBC in Singapore

If you plan to look into a broker by yourself, few things you should consider:

• Low fees; All brokers offer the same services, so the cheaper the better.
• Sound broker; it’s been around for decades and is financial sound.
• Easy platform; test drive their internet platform before sign up. It must be easy to use and intuitive.
• Many markets; The more markets available, the better.
• Currency exchange; in the future will be important for you to exchange the base of currency you hold in the brokerage account.

If you are located in Asia or Middle East, I would recommend you open an account withBoom in Hong Kong or IOCBC in Singapore. They offer a wide range of regional markets online, multi-currency accounts and it’s easy to apply and use.

These two state cities are financially sound and allow free movement of capital in any currency. Plus, if you are an expatriate, you will not have capital gain taxes by investing in Asia, only 10% on dividends. Pretty sweet.

If you want to trade in Europe, TD Direct Investing is the best solution for you.

Don’t worry about the paperwork; it is super easy. To get your account open, these brokerages will accept an online application with a scanned copy of your passport and proof of billing address (electric bill, credit card statement, etc.) The copies must be notarized.

Wire transfer your savings every 3 or 6 months to reduce costs, and finally,  you are ready to invest.

2# What You Should Invest In?

In the first years of your investment journey, allocation strategy isn’t much important as regular saving flowing into your account.

To get started, I suggest looking into ETF funds because they are cheap, reliable and track an index offering an excellent return over the years.

Understanding ETFs

ETFs are “Exchange Traded Funds”. Not Clear? Let me try again.

They are funds which are traded on public exchanges. So you can buy/sell every day when the market is open.

The beauty of this product is:

~ Increased liquidity of the funds; you can buy and sell easily with a small spread of the price.

~ No minimal investment; buy as little as one unit.

~ They follow an index or a basket of under underlying securities; This allows you to invest in a broad area and hold a well-diversified basket of investments in your target investment.

For most passive retail investors, ETFs are the holy grail that makes up the bulk portion of an investment portfolio.

It’s important to diversify in different sectors, sometimes few geographical areas to minimize risks.

There are hundreds of ETFs, so to make your life easy at first with a good return, theVanguard 500 ETF is the best place to park your money in.

This index fund follows the trend of the top 500 companies in the USA; these companies are rock solid with steady yearly returns. This index in the last 50 years has delivered an average of 8.3% return.

However, if you are an adventurer and want to speculate in some undervalue sector, read my Best ETF Buys For The Next 10 Years article where you will have my selection of ETFs where I will park some of my personal capital.

A portfolio with only stocks isn’t going to work well, might scare you off once a recession eat the market and you’ll see your savings evaporating. To defend your portfolio, add some ETFs bonds to minimize risks and take advantage of market cycles.

Let’s talk about investment’s cost

In the long run, costs related to investments will have a huge impact on your ROI (return on investments). So, the lower the cost, the better your return.

If you build a responsible portfolio blending low-cost stock indexes with bond indexes, you’ll beat more than 90% of the professionals (active mutual funds) over the long haul. That’s a proven fact. Gamble if you want. But the academic data on the statistical superiority of index funds is irrefutable.

And it’s what brokers and advisors (and others in the industry) don’t want you knowing.

I took inspiration to follow the below allocation for investment by the world famouspermanent portfolio by Harry Brown.

Harry’s system have returned 9% per year during the last 40 years. No bad, considering you don’t have to invest any of your time, or study companies balance sheets or pray to God for a healthy return.

However what I do like is his basic premise:

– 25% of portfolio does amazing in Inflation (Gold)
– 25% of portfolio does amazing in Deflation (Cash)
– 25% of portfolio does amazing in Bull Market (Equities)
– 25% of portfolio does amazing in Bear Market (bonds)

The theory is that each category compensates for each other during any economic times, bad or good keeping your portfolio in positive territory.

What got my attention was that this portfolio lost only 4% during the crash in 2008, if you have invested money in the stock market, you would know that losses were at 35% for most investors.

Portfolio For Every Age

Your age and goals are going to determine the mix of your investments between bonds (safer but lower returns) and stocks (riskier but higher returns).

A rule of thumbs suggests a bond allocation that’s equivalent to your age. If you want to be slightly riskier, you could have a bond element representing your age minus 10 (for high risks make a minus 20).

For example, if you’re a 30 years old, you might want a bond allocation of 20% to 30% of your total portfolio.

So, a balanced portfolio for an international investor on his 30’s, would look like this:

• 30% Vanguard’s Total Stock Market ETF (VTI) ( 0,05% expense ratio)
• 25% IShares MSCI Glbl Metals & Mining Prdcrs (PICK) ( 0,39% expense ratio)
• 30% Energy Select Sector SPDR ETF (XLE) ( 0,21% expense ratio)
• 15% iShares 3-7 Year Treasury Bond (IEI) ( 0,15% expense ratio)

Just log in your broker account and search for the ETF with the lowest expense ratio. Why pay more when you can pay less for the same return.

The above is my portfolio, but you can buy whatever suit you best. This year, I’m buying mining and energy index because they are down badly, so over the next 10 years, I’m confident they will perform very well.

It is like going for shopping during sale season, and you can buy the same jacket you saw few weeks before for half the price. Can you see the value?

You are investing for the long term, so buy with a vision of at least 10/20 years.

LEARN MORE

~ Bond; A Defensive Strategy To Grow Your Wealth

~ Best ETF Buys For The Next 10 Years – Easy Investing

Search For ETFs

In boom (my broker), the online search for ETF look like this:

Other broker investment software have similar functions and if you can’t find the ETFs, just call your agent for assistance.

To close this first chapter, keep in mind that saving as much money as possible is the first essential step to financial freedom.

To make your strategy successful, you will need to re-balance your portfolio periodically, so let’s move to the second part of this guide to plan your rebalancing strategy.