Why finance savvy Expats need to read the Talmud!

This week I’m going to explain why expat investors might want to read the Talmud.

Let’s start with a simple question:

What does the Talmud say about money and investing?

Just in case you are wondering, the Talmud is the central text of Rabbinic Judaism and the primary source of Jewish religious law and Jewish theology dating as far back as 1200 B.C.

Here’s a quote from it that should clear things up right off the bat:

Let every man divide his money into three parts, and invest a third in land, a third in business and a third let him keep by him in reserve.

Talmud

Now 1200 B.C. is a very long time, so it might not be a surprise that I didn’t get it from the Talmud. Instead I copied right out of Asset Allocation: Balancing Financial Risk by Robert Gibson.

Depending on how old you are that book may seem pretty ancient too. It was published way back in 1989.

It’s a well written book that I would recommend anybody interested in investing read but it’s definitely not perfect.

Take a simple concept…….

Gibson somehow uses this simple ‘three parts’ concept to come up with a much more complicated investment strategy where you end up splitting your money seven ways.

In other words, he takes a really simple idea and makes it really complicated.

But then again, back in ancient times (1989) when he wrote his book complex was probably in. I mean, back in the day people didn’t like anything too simple as they thought they were missing out on investment returns that could only ever by had from complex strategies.

You didn’t part with hard earned currency for simple stuff back in the day.

However, over the multiple decades that have passed since, it’s become pretty clear that wasn’t the way. The evidence has pretty much revealed that not only is simple…..well…. simpler, it’s also better. Much better.

The fact of the matter is you are more likely to get better investment returns when you keep things simple.

Should you use REITs?

Another tiny weeny ever so small issue that Gibson’s take on the Talmud portfolio has, is this: He uses real estate investment trusts or REITs to take care of the land side of things.

Now REITs sound perfect for the job. Exposure to real estate without the hassle. Simply invest in REITs and collect rent without having to get up in the middle of the night to fix a toilet.

The problem is reality is a bit different.

We’ve got a lot more REIT data to work with now and that data seems to show that REITs pretty much follow the wider stock market. When shares crash, REITs crash. When REITs go up, shares go up and so on.

It’s no surprise when you think about it because whilst land is a different beast to shares, we aren’t really talking about land investment with REITs. Let me explain.

When exposure to real estate isn’t quite what you think it is

Stick a building on some land and you get a bit closer shares. Turn that building into a business and you are closer still. Grow that business until it’s big enough to float on the stock market and you’ve moved about as far away from pure land and as close to any other large business as you are going to get.

In other words REITs are more like shares than they are like land investment. The only difference is that your money is focused on one type of business. If that business was a perfect representation of land then great, but the fact of the matter is it isn’t.

Whilst you can choose individual REITs, anybody whose not highly experienced is going to be wanting to invest in a REIT index tracker or exchange traded fund (ETF). These always cost more than broad-based index funds (ie the ones that invest in everything). And by the way, these broad based trackers always contain all the real estate companies anyway.

How we deal with land in our Talmud portfolio

So how do we express the land side of things then? Simple we use real rental property aka buy to lets in our Talmud Portfolio.

Yes, BTL will require an incy wincy tiny weeny bit of work on your behalf. But even expats can pretty much outsource the daily running of things by using a letting agent.

Now, talking about buy to let in the same breath as shares ends up dividing people in Britain faster than football. The half that think shares are the superior investment don’t want to touch property and vice versa.

Stock market aficionados won’t touch property with a barge pole, but I think that’s a big mistake. Here’s the thing.

For most people most of the time, property is going to make more money than investing in shares for the simple reason you use leverage (ie a mortgage). There’s no way around it, it’s in the maths.

• £100K increasing by 10% is £10K.
• £100K with a £300K mortgage increasing 10% is £40K.

(Fees mean you wouldn’t get all that of course, but you’d definitely get a good chunk of it).

Property is considered a relatively safe investment strategy, but there is a big elephant in the room and that’s cost.

Don’t you need more money to invest in property?

Well yes you do need some money to invest in property, but maybe not as much as you think.

While the average house price in the UK is approaching £300K that doesn’t tell the whole story.

Those numbers are pushed up by London. Look at the north west and you aren’t much above £200K. Look at the north east and it drops to near £150K.

But even then, you don’t need to buy the average house anyway. There are plenty of investable properties under £100K in just about all of the major UK cities outside London.

A £100K property bought with an 75% LTV mortgage would require £25K from you. Half if you partnered with somebody else. A quarter if there were four of you.

And that’s not to mention the fact there are houses on Rightmove starting at less than £10K. Will the vast majority of £10K properties make good buy to lets. Obviously not. But will you be able to find something very cheap that works if you put the time in? Without doubt!

So is property the winner?

Enter stage left all the die hard property investors. So shouldn’t you just stick all your money in property then?

The simple answer is no you shouldn’t. Just like the Talmud says, you should split your money up into different baskets. That way if one hits the skids you won’t loose everything.

Whilst, history suggests that property is a good investment over the long term, nobody knows what it has in store over the short term. Housing has a nasty habit of bubbles followed by bursts just like the stock market.

Not only that, but different types of property can produce different kinds of investment returns. It’s not beyond the realms of possibility that you pick a clanger or that you buy right before some government legislation puts the kibosh on that kind of property’s money making ability.

And let’s face it, there’s always a risk the market crashes the day after you exchange keys.

There are all kinds of things that can go wrong with property and the fact you have to use a mortgage to get the big gains adds an additional layer of risk.

Putting all your money into it, is too risky.

Safe as houses

Spreading your bets across different investment assets is considered to be a safe portfolio strategy.

Enter stage left: Shares (aka stocks aka equities).

Just as property is tried and tested. So are shares. These days you can easily and cheaply invest in all the global shares that matter though an index fund. Preferably one in ETF format.

We like Vanguard’s All World ETF, but there are plenty of other options out there. Anybody with an investment account can invest in one.

Practically no work on your end will spread your money throughout global business in a cheap simple and tax efficient way.

When global business makes money you will too. And your money will be working for you 24/7 across the globe.

Historically stock market returns have been pretty impressive with next to no work on your behalf (circa 10%).

As long as you don’t panic when markets crash, are in it for the long term and don’t mess around with your investments shares are a pretty safe bet to give you strong investment returns.

So shouldn’t we just stick all our hard earned savings into property and shares then?

A safe portfolio

The only problem with dividing our money between rental property and shares is that now and again they both hit the skids together.

In other words, the stock market crashes at the same time as real estate. Think 2007/8.

You can expect at least a couple of those mega crashes in your investing life time so it pays to be prepared for them.

You see, when they both go down together it tends to indicate major stresses in the wider economy.

And these major stresses don’t just impact house and share prices, they can cause all kinds of financial damage.

Lots of people in safe jobs suddenly find themselves unemployed. Banks go belly up and governments crumble.

And here’s the thing, even if you don’t lose your job, it’s hard not to panic when the world is going to hell in a hand basket in double quick time. The psychology of markets says, you need an iron stomach not to panic sell all your stocks and property when the world is collapsing and the value of your portfolio is cratering.

Hence we need a little something to help us through the storm.

We need some of our money stored in a medium that doesn’t drop double digits when the proverbial hits the fan.

Cash is trash most of the time due to a little concept called inflation. This nasty critter eats away at the value of money over time.

I mean, it’s not that long ago that Mr average Brit paid £2K for a house and earned £100 a year. (Early 1950s).

Which is precisely why we put most of our money in shares and property that beat inflation. But having some cash on hand for the bad times is essential if we want to stay in the game to reap the fruits of our long term investing.

And not panic sell our property and shares at the worst possible time.

So we stick a third of our money in shares. A third in rental property and leave the rest in cash.

What does the Talmud say about cash?

Now, you could keep cash under the bed. A bank vault would probably be better, but anybody who wants to maximise their returns probably wants to think more in terms of a fund.

There is a school of thought out there that suggests mid to long term bonds for cash, but I beg to differ.

You see, whilst I don’t have an issue with them per se, I’m not sure they will maximise our diverse portfolio investment strategy.

It’s like this. You are kind of getting something similar to a long term bond with real estate anyway. They both provide income. Rent from property and interest from bonds. The difference is that real estate goes up in value. It’s like a bond with bells on.

Not only that but it’s worth thinking about interest rates and how they move because this can damage returns now and again.

Essentially, when interest rates go down the value of mid to long term bonds, stocks and real estate tends to go up and vice versa.

In other words, they all move together in the same direction.

It makes sense then, to have at least some of our money protected from that situation to help even out the ride.

And for this, most people are going to be better with short term bonds or money market funds (MMFs).

You can read more about these here (bonds) and here (MMFs), but suffice to say very short bonds and money market funds don’t really loose value and the interest they pay will increase as central bank interest rates increase.

Sure it will work in reverse too, but only slightly and when that happens you’d expect our stocks and real estate to increase in value.

The bottom line

So there you have it.

If you want a diverse portfolio investment strategy that’s been tried and tested over a thousand years look no further than the Talmud Portfolio.

Just split your money three ways. One third in shares, one third in BTL and one third in cash.