By Chad and Peggy Creveling
Many expats tend to lead event-filled lives driven by travel, new opportunities, increased social obligations, and managing the challenges of everyday expat life. This leaves little time and energy for the more mundane chores of everyday life, like managing an investment portfolio. Unfortunately, the complications of cross-border finances, multiple tax jurisdictions, currency choices, and planning for a retirement overseas, require even more attention and involvement than they would back home.
With the increased complexity and lack of time, the same types of weaknesses in expat portfolio management tend to crop up repeatedly, negatively impacting performance and ultimately the attainment of financial goals. Here are some of the top mistakes expats make with their portfolios and some ideas of how to avoid them.
Given the transitory lifestyle of the typical expat, it is far too easy to collect an excessive number of bank, brokerage, pension, and other financial accounts. Each month, the typical expat is inundated with numerous online and paper financial statements from various institutions. In some cases, they’re collecting months of financial statements at home country addresses. Other people even lose track of the accounts they own. In this situation, it’s impossible to manage finances or an investment portfolio effectively.
The solution is to rigorously rationalize accounts and get online access. Rather than splitting your investment portfolio among various banks, investment firms, and brokers, consider holding all the investment assets at one global custodian that provides online management and allows access to a global range of products and markets. This will simplify your life and make it far easier to manage your investment portfolio as a coherent whole rather than a number of neglected, disparate pieces.
Typically, the role of an investment portfolio is to preserve and accumulate wealth to achieve a specific financial goal. This can’t be done if you haven’t first identified the objective or developed a suitable investment plan for achieving it.
For many expats, financial goals tend to be only vaguely formulated, and very rarely are investment plans developed and linked to clearly articulated goals in terms of return objectives, risk tolerances, time horizons, currency exposure, and other parameters.
Start by identifying clear financial goals in terms of amounts, time frames, currency requirements, priority, and other parameters. Then develop an investment plan that is linked to the specific attainment of those goals. You will greatly increase your chances of success.
Asset allocation is the primary driver of long-run investment returns and the type of volatility you will experience in your portfolio; it has a far greater impact than stock picking or market timing strategies.
Having an asset allocation that is not appropriate for your objectives, ability to bear risk, stage of life, and other unique factors ― or perhaps worse, having none at all ― can seriously derail your financial plans.
Success in investing comes from the consistent application of a dedicated investment strategy that you can adhere to over time and through all market conditions. This allows you to capture investment returns that compound over time and leads to the accumulation of wealth.
An inappropriate or poorly constructed asset allocation strategy often results in poor risk-adjusted returns and excessive portfolio volatility that can spook investors into emotionally driven destructive cycles of buying high and selling low.
Research has repeatedly shown that the average investor consistently underperforms passively managed indexes by a wide margin. This is because he/she gets seduced into buying at market peaks and spooked into selling at market bottoms.
Devise an asset allocation strategy you can live with even in tough market conditions. If you know you are susceptible to making investment decisions that are driven by emotion, consider working with an advisor who can help keep your investment plan on track even in difficult market conditions.
Funds that may be needed for emergencies or short-term goals have no business being invested in a long-term portfolio that includes equity investments. This may seem like an obvious statement, but the global rush for cash seen in the extreme March 2020 market sell-off indicates that far too few investors understand the importance of separating funds in terms of short-term and long-term.
Strip out or exclude cash required for short-term needs (up to the next five years) from your long-term portfolio. At a minimum, set aside funds as an emergency cash reserve. Depending on your specific situation, your cash reserves should cover at least several months of living expenses, possibly more.
You may also have other specific short-term goals, such as a deposit for a property purchase, education for your kids, or moving expenses. Keep funds earmarked for each of these goals invested in cash or short-term fixed-income investments in the appropriate currency, and separate from your long-term portfolio.
If you don’t pay attention to your investment performance, you won’t know if you’re on a path to achieve your goals, nor will you be able to determine if you’re taking on too much risk or if your portfolio is delivering the type of return it should for the amount of risk you’re taking.
It’s not enough to have a vague idea of what your portfolio or an individual investment did in any given year. To achieve your financial goals, you need to take an acceptable amount of risk for your situation, and to receive an acceptable rate of return for the amount of risk you’re taking ― both in any given year, as well as throughout your entire pre- and post-retirement period.
Without measuring performance, you will not be able to tell if you’re taking too much risk, nor if you’re on track to achieve your objectives, running into trouble, or need to make adjustments.
With all the inexpensive financial software available these days, it is relatively easy to track your portfolio’s performance. A multi-currency choice could be Intuit’s Quicken program.
Many expats are not fully aware of the layers of fees that may be charged on their investment portfolios. These run the gamut from custodian fees, advisory fees, front-end loads, and back-end loads, to bid-offer spreads, fund management fees, surrender fees, and various types of commissions.
For the average expat portfolio, these fees may total from about 2 per cent on the low side to as high as 4 to 5 per cent of the underlying portfolio each year. If that does not sound like a lot, consider that the typical diversified portfolio can be expected to generate an average annualized real return (the return above inflation) of about 3 to 5 per cent over time. That means that anywhere from 40 to 100 per cent of the portfolio’s inflation-adjusted returns is being paid away in investment fees. This can make it nearly impossible to achieve your investment goals.
Summary: To learn more about how to avoid making mistakes on your portfolio, try reading an investment book. There are a number of excellent ones, but for starters check out either The Investor’s Manifesto: Preparing for Prosperity, Armageddon, and Everything in Between by William J. Bernstein or A Random Walk Down Wall Street: The Time-Tested Strategy for Successful Investing by Burton G. Malkiel. Alternatively, find a financial advisor you trust and have him/her walk through the concepts mentioned above.
Despite the demands and distractions of expat life, it can be even more important to stay on top of your finances than in your home country. Eliminating these common weaknesses in your investment plan can go a long way to helping you simplify your life, effectively manage your portfolio, and ultimately achieve your financial goals.
The Crevelings are Thailand-based CFAs who advise expats on personal financial planning and investments. To learn more visit their website www.crevelingandcreveling.com.
OT 30 May 2021
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