Ten timeless rules for expat financial planning

As we head into the second half of 2022, in a year of volatile markets, it is a good point in time to revisit some core principles when it comes to investment management.

We discuss ten timeless rules for expats when it comes to managing their investments. Irrespective of the stage in the investment market cycle, where the economy is at, or the type of investments you are holding, these rules can apply to you and help you when it comes to managing your money.

1. Start with the end in mind

It helps to manage your investments when you are clear on what you want to achieve and by when. Having a target can guide you in how to invest, where to invest and what to do when you incur the inevitable market volatility. It allows you to consider over time whether your investments remain aligned to your objectives and therefore if they are still appropriate.

2. Diversify

Many people have a bias around what they are comfortable with or what may have worked in the past. This can lead us to being too concentrated in one asset type, one particular asset or one market. As the saying goes, don’t put all your eggs in one basket. The technical rationale is called negative correlation. That means you should hold a mix of assets, so that if something happens to one part of your portfolio, your other assets won’t be as impacted. This leads to smoother and more consistent returns. Aim to hold a portfolio of assets that are diversified across types of assets, markets, currencies and risk levels, as appropriate for your specific circumstances.

3. If it seems too good to be true, it probably is

A new investment opportunity can be appealing and some investors feel the pressures of not wanting to miss out, being enticed by promises of large returns. This is why we always apply this question as a test. It pays to apply critical thinking to new investment opportunities, especially ones that focus on large returns and/or that have limited detail about how they will generate the returns, or on who is behind the offer. It pays to be cautious.

4. Market downturns can equal opportunities…but don’t try to time the market

We can often seek false safety in prior returns. Seeing an investment that has recently performed well can make it appear attractive. What it may mean though is that we are buying it at an expensive price, rather than when it is on sale. In that sense, market downturns can be a good opportunity to evaluate your investments and take the opportunity of buying in when markets are cheaper. Markets are always cyclical; the long term trend is up but it is not in a straight line. It is also a good idea, therefore, to be cautious about selling when markets are falling. Remember though, in a link to point 7 below, that it is time in the market and not timing of the market that will generate the long-term returns that you want. Timing the market is difficult if not impossible, in fact in investment management academia there has been extensive research to support this, under the phrase the efficient market hypothesis.

5. Foundations before rooftops

Investing can be more interesting than the boring basics when it comes to putting a comprehensive financial plan in place, but the basics are fundamental and can provide the stability that allows your other investments to perform unimpeded by the distractions of short term personal needs. The foundations include having an emergency cash reserve in place, having appropriate insurances, and ensuring your estate planning is in order. Start with these foundations and then move onto investments.

6. Understand risk and return

Understanding risk and return is a critical point that overlaps several of the key points here. It is wise to remind yourself that there is a direct relationship between risk and return. That means, the higher the potential risk of an investment at a point in time, the larger the potential return in the long term. In addition, cumulative risk tends to reduce over time. This means, for example, the risk of a negative return over a day is much higher than the risk of a negative return over 10 years. It also means if you are seeking a return that is above the cash rate, a degree of risk must be applied. Risk can often be managed and reduced through diversification, but it cannot be eliminated. In relation to point 3 above, there is no such thing as a high return at low or no risk.

7. Time is money

When you make an investment and are checking the performance, it is less important how that investment is doing over a week or a month, than how it is trending long term. If your goals are longer term so your focus should be as well- look to the medium to long term and not overnight successes. Long term returns are driven by time in the market as we state in point 4 above.

Time in the market allows compound interest, what Albert Einstein reputedly called the 8th wonder of the world, to perform its magic as your investment grows over time.

8. Look out for the hype

One of the important lessons we always remind people to be aware of market hype. This can be at the level of a specific stock, a market, a sector, or the whole economy. There are some phrases we advise you to look out for: “This time it’s different”; “The market/this stock is going to go up/ go down forever”; “Normal economic principles don’t apply to this investment”. When market commentators, the press, or even your friends make comments like this it is time to take notice. The best courses of action are often to either do nothing or do the exact opposite of what they are proclaiming. If in doubt speak with your adviser.

9. Be careful who you choose to manage your financial life

Engage independent professionals.

There are two important factors to consider:

• One is to make sure you are speaking with a financial professional that is qualified, licensed, experienced and that has expertise in helping people like you.

• The second is that you are comfortable working with them. Make sure you find a firm that is right for you.

Working with the right financial planner can give you the structure, the support, peace of mind, and ultimately the ability to reach your goals. There is recent research that shows that getting professional financial advice adds to clients’ bottom lines and improves their wellbeing.

10. Peace of mind

Make sure you take the time to understand your financial plan and that it is right for you. This is an ongoing process. You should aim to meet with your financial planner at least once a year to make sure your plan is on track, and that it is still in line with your goals, heading to where you want to go.

Understanding your plan, and making sure it is still right for you, can give you peace of mind and allow you to focus on the other parts of your life, and that can be an important contribution to your wellbeing.

Remember these when you are assessing your finances or looking at new investment opportunities and if you would like a second opinion, an independent analysis or professional advice, speak with us at Black Swan Capital.