Managing Portfolios for Investors with Multi-National Needs
In today's global economy, individuals commonly live, work, and even retire in different countries over the course of their lifetime. Investors with a globally mobile lifestyle belong to different categories, each with distinct immigration, legal, and tax consequences such as:
- U.S. or Foreign expatriates working in another country under a short-term assignment and temporary work visa. These individuals typically remain on the payroll of their home country employer and do not change tax residence.
- Immigrants making a longer-term move to the U.S. and establishing a tax residence in their new country.
- Retirees spending a few months of the year in a 2nd home located in a foreign country.
- Retirees making a permanent move overseas to save money, get better healthcare, or be closer to family.
These examples don't cover every possible motivation for living a global lifestyle. Frequently, people don't know how long they will work in a specific country or where in the world they might eventually retire. Such investors have unique financial planning needs compared to those who work and retire in the U.S.
This post will be limited to a broad overview of investment and currency issues in retirement planning. What is most important here is to make sure that your investment holdings' prospects and economic characteristics match those of your liabilities (your future retirement expenses).
Investing and Managing Currency Risk for the Globally Mobile
On average, U.S. investors hold only 15% of their stock portfolio in foreign investments, and have nearly no foreign currency exposure in their bond or cash allocations. This is called home bias, and while it may suit a U.S. retiree, it is likely inappropriate for someone currently living in the U.S. who plans to retire in Europe for instance.
Why? There are two reasons, the most important of which is currency risk. If your portfolio is currently invested at 85% or more in dollar-denominated assets and the Euro appreciates by 25% between now and the day you retire, your portfolio and retirement income would be reduced by 21% as well (assuming no other changes). If you've made up your mind and will live in Tuscany 10 months out of 12, we recommend investing a high proportion of your portfolio in assets denominated in the same currency (Euro). Your conservative income-oriented investments such as bonds, cash, and saving accounts should be almost entirely invested in that same currency as your spending (Note that there are exceptions to this rule if you live in a country with a history of economic instability, high inflation, and devaluation).
Keeping with our Italian retirement example, the 2nd reason for increasing the proportion of your holdings in European stocks or real estate is that you want a significant portion of your portfolio to track the economic cycles of the region you live in. For instance, let's imagine that the U.S. enters a recession while Europe is enjoying a period of expansion. A US-based portfolio in this situation would be very likely to see declining asset values and yields. It could come up short in providing you with your income needs. Prices, rents, and cost of living in one area would diverge from income-producing characteristics of the portfolio in the other.
A Financial Advisor Experienced with Global Clients Can Help
Investors planning to retire in a different country need to start building a global portfolio years before moving. Unfortunately, it is not always as easy as picking funds labeled "international" or "foreign." Realize that such funds are frequently managed for U.S. based investors and often hedge the non-U.S. currency exposure. In other words, they would not benefit our globe-trotting retiree who planned to spend Euros in retirement. Moreover, the selection of international stock and bond fund options tends to be rather limited in U.S.-based 401k plans. . Therefore, building a portfolio outside of your employer-based retirement plan may be crucial.
Understanding the currency denomination and geographic diversification of the underlying holdings in their total portfolio is paramount to expatriates’ investment success. Because information is scarce, and the issues can be tricky, having a knowledgeable professional financial advisor on your side is a good idea. At least get a 2nd opinion well in advance.
THINKING ABOUT MOVING OVERSEAS?
One of Bristlecone Value Partners’ principles is to communicate frequently, openly and honestly. We believe that our clients benefit from understanding our investment philosophy and process. Our views and opinions regarding investment prospects are "forward looking statements," which may or may not be accurate over the long term. While we believe we have a reasonable basis for our appraisals, and we have confidence in our opinions, actual results may differ materially from those we anticipate. Information provided in this blog should not be considered as a recommendation to purchase or sell any particular security. You can identify forward looking statements by words like "believe," "expect," "anticipate," or similar expressions when discussing particular portfolio holdings. We cannot assure future results and achievements. You should not place undue reliance on forward looking statements, which speak only as of the date of the blog entry. We disclaim any obligation to update or alter any forward-looking statements, whether as a result of new information, future events, or otherwise. Our comments are intended to reflect trading activity in a mature, unrestricted portfolio and might not be representative of actual activity in all portfolios. Portfolio holdings are subject to change without notice. Current and future performance may be lower or higher than the performance quoted in this blog.
References to indexes and benchmarks are hypothetical illustrations of aggregate returns and do not reflect the performance of any actual investment. Investors cannot invest in an index and returns do not reflect the deduction of advisory fees or other trading expenses. There can be no assurance that current investments will be profitable. Actual realized returns will depend on, among other factors, the value of assets and market conditions at the time of disposition, any related transaction costs, and the timing of the purchase.
Economic factors, market conditions, and investment strategies will affect the performance of any portfolio and there can be no assurance that a portfolio will match or outperform any particular index or benchmark. Past Performance is not indicative of future results. All investment strategies have the potential for profit or loss; changes in investment strategies, contributions or withdrawals may materially alter the performance and results of a portfolio. Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment will be suitable or profitable for a client's investment portfolio.
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