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 Investments for expats

If you've retired overseas, or you’re accumulating cash whilst working overseas, then you’re bound to want to make your money work as hard for you as possible. You’ll also want to know its safe and not going to disappear into financial black hole.

There are three main reasons you might want to invest your money – getting your money to grow, getting an income from your money, or perhaps a combination of the two.

So what are your options, and where do you invest it?

Bank Deposit Accounts

A bank deposit account is a great place to put money you need access to, or may need access to. In fact before you even think about putting your money anywhere else you should have some money tucked aside for a “rainy day”.

But the return on a deposit account is unlikely to be spectacular. Somewhere around 2% p.a. would be typical. If tax is payable then the net return is lower e.g. 20% tax on 2% gives a net interest of 1.6% p.a.

So in the example above you might think 2% is a good return. But what you need to consider is the real rate of interest, the return after taking into account inflation. If inflation is 1%, and you’re receiving 1.6% net interest, then in real buying power your money is only increasing by 0.6% per year.

Continuing with the example above an investment of £100,000, with the interest re-invested, would be worth in terms of buying power just £100,600 after one year!

Again using the example above if you invest £100,000 and take the interest to supplement your income, then after one year the real buying power of your £100,000 is only £99,000.

If you’re retired and taking the interest each year from a deposit account, then it won’t take many years before you begin to feel the pinch, as inflation starts reducing what you can buy with the interest!

So what are the alternatives?

Guaranteed Investments and Protected Funds

If you’re looking for your money to provide you with a better return than just a bank account, but don’t want any risk, then you might want to consider a guaranteed investment or guaranteed fund.

There are a number of different types of these investments available for expats in the offshore environment, and they can work in different ways. The underlying aim of all of them is to offer potentially better returns than a bank account, but offer the guarantee that you will get your money back.

The return may be linked to a stock market index, or a number of indices – like  the FTSE 100 or Dow Jones, or possibly even a property indices. The guarantee could state that after five years you would get at least your money back or a return linked to one of the indices.

Some funds are known as protected funds, and typically do not guarantee your initial investment in full immediately. It may for example guarantee 80% of the highest value of your investment. So if you invest £10,000 then the immediate guarantee is £8,000. If the fund grew to £15,000 then regardless of future performance you would be guaranteed £12,000. These types of funds normally offer greater flexibility.

These have proved very popular with expats because of the lower risk. If you want to find out more please get in contact us.

 

Collective Investments

A collective investment, most commonly an investment bond or a unit trust (mutual fund), are pooled investments. They will typically pool together thousands of people’s money and invest them in one or more different funds.

In turn these funds could invest in property, shares (equities), cash, or bonds, or even funds that guarantee your money back. Depending on what you want, these could be very low risk or even guaranteed investments, to very high risk. It is down to you!

Key Points

  • There are hundreds of different funds to choose from
  • There are a wide range of different fund managers to choose from
  • There are four main different types of asset
  • Even within the different asset types, the level of risk/return can vary
  • Some fund managers are better than others
  • The difference between best and worst fund can be staggering
  • There are even funds which guarantee your money back

The reality is that there are a number of different types of assets - equities (shares), fixed interest, cash and property. You can select some funds that combine all of these elements or ones that contain just one asset type.  

All funds will belong to a particular sector, and the name of the sector will generally give some sort of indication of what type asset the fund is invested in. Below are some examples.

UK All Companies

Global Emerging Markets

UK Smaller Companies

UK Equity Income

UK Gilt

Balanced Managed

Japan

Cautious Managed

Far East (ex Japan)

Money Market (Cash)

 

 

The main types of assets for collective investments

Equities (shares)

Most people view shares as being high risk. It is true they can fall and rise in value. The level of risk depends on two factors, the timescales you are investing for, and the type of shares selected.

If you are investing for 10 years, then the risk is lower than for investing for 1 year. If you have a fund that invests in large UK companies then the risk is lower than investing in new companies in China, or India or new technology companies. But the new companies in Emerging Markets such as China generally have a greater potential for growth than long established large UK based companies.

Government Issued Bonds

Government Issued Bonds (e.g. Gilts in the UK or Treasury Securities in the US) are in effect a government’s way of borrowing. The government issues loan stock, at a face value of £1, and will pay the holder interest each year, until a fixed point in the future, or indefinitely. This loan stock is traded on the market, and can sell for a price higher or lower than £1. Most government bonds have a redemption date at some point in the future, at which point the government will pay £1 for each one held.

The traded price of such a bond depends on  a large degree on interest rates. If a bond  pays an interest rate of 10%, and interest available elsewhere is 5%, then depending on the term until redemption, the market price could be £2. Much would depend on what the view of future interest rates was, and how long until redemption.

These are seen as one the safest type of fixed interest investment since they are backed by a government, although bonds issued by developing countries are not as safe as bonds issued by the UK or US governments.

Corporate Bonds

These work in much the same way as government bonds. The difference is that companies issue the loan, and not the government. The rate of interest payable is therefore usually higher, because there a higher risk that the company could default on payment. 

Whether or not a company is likely to default depends on the financial strength of the company. Corporate bonds are therefore given ratings, which indicate the financial strength of the company concerned. There are two categories of corporate bond, “investment grade” – the lower risk and “sub- investment grade” which used to be called junk bonds, and would carry a higher level of risk, but higher return.

Property

There are two types of property fund. Ones that actually buy property and rent it out – a “bricks and mortar” fund, or a property trust fund, which would buy shares in companies whose business is buying, renting and selling property.

All “bricks and mortar” property funds have historically invested in commercial property, although they do also invest in residential property. They would gain from the rental income and the increase in the property price.

Many retail parks and office blocks are for example owned by investment companies, who rent out the premises.

Investing in property is not risk free, and commercial property also depends to a degree on how the economy performs. If companies go out of business, then demand for commercial property could fall.

The advantages of investing in a property fund are that there is no personal involvement by the investor, and your money is effectively spread across a number of properties.

Cash Funds

A cash fund, sometimes referred to as a deposit fund or money markets fund invests in bank and building society accounts and what is deemed to be cash or “near cash” investments. These are very low risk investments and you will get a comparable return as investing directly in a bank account. However, these funds do not fall under the European Savings Tax Directive when wrapped within an investment bond.

If you want to know more about getting your money to work harder for you, then contact an independent financial advisers for expatriates, free and without obligation on +353 874 641 868 or contact us online.  

 

 

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