Expat investing simplified

Expat investing doesn’t need to be difficult. That’s probably contrary to what a lot of people would have you believe. When you first move overseas you can be forgiven for quickly becoming overwhelmed.

You are suddenly cut off from the banks and investment platforms you are familiar with and left to start again in a new world and unfortunately there’s a lot of mixed information regarding wealth management for expats out there.

A lot of it put together by people trying to sell you things. At best that might be something a little pricey that you don’t really need. Expat offshore investing products quickly come to mind. At worst you may come across one of the many unscrupulous individuals out there who whilst not being an outright crook, definitely doesn’t have your best interests at heart.

Here are three articles from the Telegraph, Bloomberg and the FT worth reading if you aren’t aware of the danger an expat investor may face:

• Exposed – the Rip-off investment advisers who cost British expats billions
• Firm targeting nest eggs of UK expats said to face SEC probe
• FCA issues fresh warning on free pension advice

In this guide to expat investing we tell you why you don’t need to give your money to people and institutions that you don’t trust.

In fact, most expats won’t need to handover their nest egg to anybody at all.

The bottom line being, it probably isn’t worth it. Especially when you can easily do everything yourself nowadays. Let me explain.

Why expats don’t need ISAs

One of the most common questions we get asked at British Expat Money is whether or not expats can open ISA accounts.

And the short answer is no. UK expat ISA products are for residents only. In some cases, a provider may let you keep your ISA if you already have one before you become an expat. However, in many cases they won’t. And the same can be said for Self-Invested Personal Pensions (SIPPs).

Though not exactly the same, they are both attractive for UK residents because they allow tax sheltered saving and investment.

And whilst that’s great for UK residents, the fact that you don’t get access to them as an expat isn’t the end of the world for you if you live overseas. Not by any means.

Expat tax 101

There are a few reasons for this. Firstly, in many cases the tax situation for expats can be beneficial anyway. We’ve gone into a lot more detail about UK expat tax here.

But here are a few points worth going over. First up, when you become non resident, except for property you aren’t liable for capital gains tax in the UK anyway.

Of course, in some instances you’ll have to pay capital gains tax in the country where you live, but in many cases you won’t or if you do it will be lower.

There are many countries that have lower capital gains tax than the UK, and there are also countries that let your expat world wide income remain totally tax free.

But even if you live in a place that will tax your investments you can still invest in a very tax efficient manner.

The way to do it is by using index tracking Exchange Traded Funds (ETFs). These make great expat investments. Let me explain.

Why ETFs are the best expat investment you can make

We’ve gone into a lot more detail about index tracking and ETFs here, but in short an index is essentially a collection of stocks meant to represent the stock market or a portion of it.

Perhaps, the most famous one of all is the S&P500 (Standard and Poor’s 500). This is an index that tracks 500 publicly traded US companies. It is considered by many to be the best indicator of US stock market performance. Similarly, the FTSE100 is the UK equivalent.

An ETF is a fund that holds a basket of stocks that trades on a stock exchange. And an index tracking ETF is a fund that holds a basket of stocks or bonds that tracks an index.

And index tracking ETFs are an expat investment with a whole host of benefits.

The benefits of index tracking ETFs

Tax Efficient
ETFs involve Authorised Participants (APs) which allow tax free in kind transactions. You don’t really need to understand this, only recognise the fact that it lowers the taxes you pay. In addition, because ETFs are traded on exchanges between investors they don’t generate capital gains events. Again this is a big win for tax efficiency.

Low Cost
As well as the cost savings you get from saving on taxes you also save because funds that track indices have very low ongoing cost figures. Essentially, that’s because they don’t need to pay a fund manager. Whereas ongoing charges of 1% are pretty common for UK funds, you can invest in a global index fund for around a quarter of that figure or even less.

Availability
Another massive bonus for expats is the fact that ETFs are widely available. Expats are often restricted from investing in many types of funds that are available to UK residents, but with ETFs that’s not the case. All you need is an investment account and you are good to go.

Diversification
If all that wasn’t enough ETFs are highly diversified. It’s not like buying a single house on a single street in a single country or even buying shares in an individual company for that matter. In both these cases you are putting all your eggs in one basket. You may have picked a winner, but equally you may have picked a looser.

On the other hand, because index tracking ETFs contain lots of shares you don’t have this problem. A FTSE100 ETF spreads your money over the UK’s top 100 companies. An S&P 500 ETF spreads your money over America’s top 500 companies.

That’s a lot of a companies, but you can take it even further these days and simply invest in a global index tracking ETF.

This kind of fund gives you little pieces of thousands of businesses around the world.

And if you are worried about investing in some troubled companies. Don’t be.

Growth potential

Sure, some of your money will have gone to a few stinkers but you’ll also have the winners and they’ll more than make up for the losers. That’s because whereas a business can only loose 100% of its value, it has the potential to grow infinitely. 500%, 2000%, 5000%, take your pick!

Picture yourself investing £10K in the stock market 25 years ago. To ensure you didn’t put all your eggs in one basket, you divided your cash equally between the shares of ten companies. Unfortunately for you 9 of the 10 companies went bankrupt and your shares became worthless, but one managed to stay in business.

If that one was Amazon your original £1K investment in Amazon would now be worth around £2 million. 90% of the companies you invested in went to zero but you still became a multimillionaire. Nice work if you can get it!

Now, in reality for the average person 10 companies won’t be enough to ensure you invest in the next Amazon but funds that invest in thousands will have you covered.

ETFs give you fingers in every pie

These global index tracking ETFs typically cover 90% of the investable market. Basically, you’ll be investing in all the companies that matter. And when you invest in a company you are a partial owner of that business. In a way, everybody who works for those companies will be working for you.

Imagine how good you’ll feel knowing the world is operating on your behest. Sat in Starbucks sipping a latte knowing a tiny piece of the price you paid for that latte is winging its way into your investment account.

But not only that, tiny pieces of all the profits from all the other customers drinks are on their way too. And we are not just talking about the ones you can see in the store. Those that came yesterday, those that will come tomorrow. Those in Europe, those in the US, and those in China too.

Perhaps, you don’t go to Starbucks, perhaps you prefer a nice cup of tea in Costa. Don’t worry, Costa’s parent company Coca Cola is in all the big global indices. You’ll still get your share. Even if you go to your friend’s local shop around the corner, there will still be plenty of businesses that you own in your ETF that benefit. Lumber companies that provide the wood for the furniture or paper cups. Chemical companies that provide the ingredients for the cleaning products. Hell, in all likelihood the company that provides the water will be in the index your ETF is tracking. You get the picture.

You’ll own shares in most of the companies that you transact with everyday and even the companies you don’t own a piece of will be doing business with the ones you do.

If the world is operational, your investment account will benefit!

A typical portfolio of investments suitable for expats

Before you open an investment account and start buying shares in a global index tracking ETF, there are a couple more pieces of the puzzle you need to put together to ensure you have the perfect investment portfolio. Namely, Bonds and Asset Allocation.

And that’s because a typical portfolio of investments for expats would comprise two ETFs. One for shares in companies (stocks) and another one for government bonds.

Historically, the US and UK stock markets have returned an average of about 10% per year, and in recent times the global stock market hasn’t been far off that figure. Bonds have been more like 2-3%.

Whilst there is no guarantee that will be the case in the future, what we can be pretty confident about is that over the long term stocks tend to do better than most other options. So I guess the question becomes why don’t we just put all our money in stocks?

Stock volatility

It comes down to volatility. There’s no way around it. Stocks are volatile, which means stock prices change.

10% drops happen all the time. 20% drops are common and from time to time you may encounter 40-50% drops. Maybe more if you are really unlucky and whilst the global stock market has always recovered to reach new highs in the past, and (unless the world ends), you’d also expect them to reach new highs in the future, a drop in the value of your investments doesn’t feel good when you are in the middle of it.

The overwhelming feeling you get in your stomach is to sell now before the prices drop any lower. The problem is nobody knows what the future holds. The prices might start going back up tomorrow and even if they did continue to go down, you have to pick a point to start investing again. This is next to impossible to do. It’s called market timing and it calls for a quote from the late John Bogle (Founder of Vanguard and the Index Fund).

I’ve never met anybody who can time the markets. In fact, I’ve never met anybody who’s met anybody who can time the markets.

John Bogle

Investment losses

In other words it’s impossible. What usually happens is people panic sell all their stocks when they’ve dropped in price and never dare invest again crystallising large financial losses.

Particularly devastating, when they realise later all they needed to do was sit back with patience until the markets have recovered.

The bottom line being we need a way to reduce volatility.

The tried and tested way of doing this, and in turn minimising the chance of panic selling and thus loosing money is actually quite simple in the end.

Just invest some of your money in bonds.

When you invest in a bond, you are essentially lending some organisation money and they pay you interest for the privilege. You can lend companies money of course, but your safest bets for getting your money back are governments, particularly those of developed markets. Think the US, UK, Germany and Japan.

Home is where the heart is

Typically, you invest in your home countries government bonds. A UK resident would invest in UK government bonds, whereas a US resident would invest in US government bonds.

The same would true for expats that plan on retiring back in their home countries. We’ve written about investing as an expat if you don’t know where you are going to retire here.

Essentially, government bonds are a bit like a savings account, but with a better interest rate.

Now bonds don’t go up as much as stocks but equally they don’t go down as much either. They act like breaks, preventing your balance from dropping too much. They also make sure you’ve got some cash available when stocks go on sale. Let me explain.

Stocks go on sale

When stock markets crash, stocks are essentially on sale. Though people don’t think twice about buying cars, food and clothing when they go on sale, they tend to have a problem buying stocks because they fear the prices will drop even further.

They may do, but they may not. Nobody can time when markets are going to go up or down. If prices have dropped you’d do well to take advantage of that fact. Easily said than done due to the fear that prices may fall further which takes us nicely to asset allocation.

Asset allocation

Basically everybody should have an asset allocation. You can read more about that here, but for most investors it basically means a split between stocks and bonds.

Now, it is important to have a good old think about this. Do your research before you take any action because this is one of the most important decisions you can make.

That said, I like the 4% rule. The 4% rules dictates that you invest 4% of your money in stocks for every year you plan to invest.

So investing for 10 years? 40% of your money should be in stocks and the rest in bonds. Investing for 20 years? That’s 80% in stocks and 20% in bonds.

Now, your job is simply to maintain your particular asset mix whatever that maybe. This usually means adding fresh money to the laggard, but from time to time will mean selling some of your investments.

So let’s say your asset allocation was 80/20 and you are adding £1K this month. You see that you currently have £8K in stocks and £1K in bonds, so this month you buy bonds. You don’t need to sell anything as this juncture.

But if the stock market suddenly crashed you might find your 80/20 (stocks/bonds) split was more like 60/40. In that situation you’d simply sell some of your bonds and buy some stocks until you were back to your 80/20 split. The magic of this is that you end up buying when things are cheap! You don’t need to even think about it. Stocks crash, you allocation to stocks drops, you have to buy more stocks (when they are nice and cheap)!

This is not an exact science by the way. As long as you are roughly maintaining your allocation at some regular interval, you’ll be OK. Monthly/quarterly or yearly all work fine.

The magic of maintaining an asset allocation is that you don’t need to think about what’s going on in the market or pay attention to any financial news. All you do is maintain your allocation and in doing so you’ll automatically buy stocks (or bonds) when they go on sale.

Example ETFs suitable for expats

Here are some ETF examples suitable for expatriate investors. Simply, pair a stock ETF with one for bonds and you are off.

Stocks
iShares MSCI ACWI ETF (SSAC) OCF 0.20%
Vanguard FTSE All-World ETF (VWRL) OCF 0.22%

Intermediate duration UK bonds
Vanguard UK Gilt ETF (VGVA) OCF 0.07%
iShares Core UK Gilts ETF (IGLT) OCF 0.07%

Short duration UK bonds
iShares UK Gilts 0-5 ETF (IGLS) OCF 0.07%
Invesco UK Gilt 1-5 Year ETF (GLT5) OCF 0.06%

Global bonds
iShares Core Global Aggregate Bond ETF (AGBP) OCF 0.1%
Vanguard Global Aggregate Bond ETF (VAGS) OCF 0.1%

There’s a couple of options for each type, usually Vanguard or iShares because they are biggest providers, but I’ve also slipped in an Invesco for good measure. Whichever was available at your investment platform would be fine.

There are lots of equally good alternatives out there.

You may have noticed that there are three types of bond fund to suit different kinds of investor. It’s worth doing a bit of reading around this topic.

Choosing bonds

In short, bonds have two risks. One is currency and the other is duration.

Currency is usually pretty easy for most. Picking your home market bonds i.e. a UK resident choosing UK government bonds gets rid of currency risk.

Duration is a bit more tricky. Bonds pay interest like a saving account. The longer the duration the greater the interest rate, but the greater the risk that you could actually loose money.

Most investors compromise halfway and go with an intermediate duration UK bond fund. However, if you want to minimise volatility you may want to choose a short duration fund. Similarly, if you don’t know where you are going to retire, or are likely to retire in developing country you might want to opt for global bonds. (You can read about that here.)

By the way, you probably can’t go far wrong with either of the three options.

What kind of person makes the best investor?

There’s a story in finance that may or may not be true. Lots of famous financial professionals refer to it, but none link to the original source. Whether it is true or not, it makes a lot of sense so let’s just go with it.

So the story goes, Fidelity did a study to see which of their clients had the best investment returns. The results were striking. Dead people came in first and they were closely followed by those who had forgotten they even had an investment portfolio.

It makes sense because both these groups would be unlikely to tinker with their portfolios and they certainly wouldn’t be in a position to panic sell when the markets crash.

The moral of the story being, don’t mess around with your portfolio. Stick to whatever asset allocation plan you have come rain or shine. Add fresh money whenever you have some free and one day in the future you’ll be shocked by how much money you have.

Should you invest in the UK?

These days UK expats don’t need to invest in the UK unless they particularly want to. A global index ETF paired with a developed market government bond ETF should suit the majority of non resident investors. However, if for some reason you want to invest in UK assets specifically, that’s not difficult to do these days.

There’s nothing to stop you choosing to invest in a UK focused ETF. FTSE 100 trackers from iShares (ISF) and Vanguard (VUKE) are a good start. Or you could even invest in the shares of an individual company. Not to mention the fact that there are plenty of UK corporate bond funds to choose from.

And if that’s not enough there’s always property.

Can expats buy property in the UK?

UK expats and other non residents alike can buy UK property. You don’t even need to visit the UK these days. Property portals, virtual viewings, online solicitors and international courier services make buying property pretty straight forward more or less wherever you are these days. It wouldn’t surprise me if property was the number one expat investment.

Just be prepared to pay a little more stamp duty than you would if you were resident. We’ve covered that in more detail here. Talked about the steps involved for buying a house here and have gone into a lot of detail about buy to let for expats here.

Why property might not be one of the best investments for UK expats

We’ve also compared investing in ETFs to property investment here. The headline being, you will probably make a little bit more in property but only if you use a mortgage, get some tenants and put a lot more work into it that you would do with ETFs.

If you are new to property investing, it’s worth doing your research. Done right, you’ll almost certainly make money. The problem is you’ll have plenty of things to do. So you need to make sure it’s the right choice for you, when the main alternative is so appealing these days.

What are the simplest expat investment options?

I’m pretty sure that most people are going to come to the conclusion that index tracking ETFs are the simplest expat investment options.

They are easy to access, tax efficient, low-cost and provide great returns. What more can you ask for?

How to invest as expat?

When you are ready to take the plunge simply choose an investment platform (see below). Choose your ETFs. Determine your asset allocation and then simply add money whenever you have some free.

How to choose an expat investment platform?

The best expat investment platform for you will depend on exactly what you want and where you are located. We’ve looked as some great investment platforms open to expats here.

All of them are low cost, available to expats and provide a decent level of service for people living abroad.

Where can I find help

Whilst I’m pretty sure most expats will be able to take the DIY approach and handle things themselves, I appreciate that doesn’t apply to everyone. If you don’t have time, don’t feel comfortable or simply aren’t interested in doing things yourself you may want to speak to a professional.

We’ve covered the basics on that here.

Expat investing simplified – the bottom line

• Choose your investment platform.
• Choose your ETFs.
• Choose your asset allocation.
• Add money whenever you have some free.